Show Me The Money!: NFL Contracts 101

NFL-Draft-StageWith free agency trucking along and the NFL Draft looming ahead, we had a special request by a reader to explain how NFL contracts work, in particular, with respect to cap space.  And since we love our readers, here’s our “NFL Contracts 101”.

As a disclaimer, I am NOT a sports agent, so I’m not the be all end all on this topic.  I’m going to do my best to oversimplify all this craziness, so don’t blame me if you get into a discussion with an actual sports agent and he or she tells you you’re crazy.  First of all, they say that to everyone, so don’t worry.  Second, they’re probably right, since most “normal” people not playing in the NFL or a part of NFL team management don’t really care about NFL contracts.

With that said, here we go…

No Guarantees

Sample NFL ContractNFL contracts are convoluted instruments.  Unlike contracts in other sports, like Major League Baseball (“MLB”) and the National Basketball Association (“NBA”), NFL contracts are in large part not guaranteed.  For the MLB and NBA, contracts work like you’d expect in everyday life.  I give you a job for one year and agree to pay you $1 million, and you sign the contract and agree to work for a year.  I’ve guaranteed that I’ll pay you a set amount of money for a set amount of work.  Easy peasy.  Except for the $1 million part.  Because I’m sorry to say that this site doesn’t make $1 million.  Even if we go out a million years it wouldn’t make that much.  But I digress.

NFL contracts might have some “guaranteed” money, but most of the time that only refers to “signing bonuses”.  Once you sign the contract, I can give you a “signing bonus”, which of course is guaranteed on the signing.  The remainder of your contract is likely to made of “roster bonuses”, “base salaries” and “incentives”.  Of course, there can be a lot of other things in an NFL contract, but this is just a 101 class, so let’s keep it simple.

Show Me The Money?

AP Photo

AP Photo

“Roster bonuses” vest once you make an NFL team roster.  So you do well enough in the off season and preseason to get a spot on the 53-player roster, you get your “roster bonus” for that year.  There could be “roster bonuses” set up for several years.

“Base salaries” (also referred to as Paragraph 5 or P5 salary) are essentially your salary for playing the game.  You suit up for 16 games for my team, and I’ll pay you your “base salary”.  Of course, if I release you for some reason, you may only get a prorated portion of that salary.  So although some people refer to the first year “base salary” as guaranteed, that’s only because they’re confident that the player won’t be cut within his first year, not that the money is actually “guaranteed” like it is in the MLB and NBA.  The “base salary” can change from year to year.

Then there’s “incentives”.  Those can be basically any payment that’s premised on reaching some condition.  Like if you’re a running back and you break 1,000 yards rushing, perhaps you get an extra $1 million.  Or if you’re a linebacker and if you get 5 sacks in the regular season, you get an extra $500,000.  Teams can be creative with this part in order to hedge their bets on signing a player.  If the player does well, they’re winning so who cares how much it cost.  If the player does poorly, at least you don’t have to pay as much.

You Mean Cap Space Doesn’t Refer to Baseball Caps?

So how does this all impact cap space? 

Well, releasing someone before the season starts will essentially clear out from cap space anything the team hasn’t already paid (except in the rare instance in which some portion of future payment was actually “guaranteed”).

Let me give you a hypothetical example of how this all works with cap space:

Johnny Doe signs a contract to play for the Cleveland Browns.  It’s referred to as a $60 million three year contract.

The details are as follows:

  • Doe gets a $9 million signing bonus.
  • Doe gets an increasing base salary each year of $10 million, $15 million and $20 million.
  • Doe gets a roster bonus of $1 million each year.
  • Doe gets an incentive of $1 million dollars each year he has over 2,000 yards from scrimmage.

Let’s say after year one, the Browns (unsurprisingly) end up with 0-16 record, Doe fails to eclipse 2,000 yards, and the Browns decide it’s time to dump Johnny, so they release him.

How does this example impact their cap space?

Note that the only real “guaranteed” money here is the signing bonus.  Sure, he got his base salary of $10 million already, but that’s in the past and is no longer of consequence for the year two cap space.  He also got his roster bonus of $1 million for year one, but that also is in the past and does not impact year two cap space.  And, clearly, the incentive was never triggered.

So the only money that the Browns need to worry about is the $9 million bonus, assuming they didn’t take the entirety of that bonus against their cap space in year one.  If that’s the case, releasing John Doe basically clears everything from cap space.

Football-moneyMore than likely, though, the Browns chose to apportion equal parts of that signing bonus against cap space over the length of the anticipated contract (i.e. $9 million divided by 3 years, so $3 million per year).  But now that Johnny Doe is gone, and year one only accounted for $3 million of the singing bonus, $6 million remains to be accounted for in year two.  Of course, the Browns have the option to prorate some of bonus money for one released player each year, so they could take a $3 million hit in year two and the remaining $3 million hit in year three.  Since this counts against their cap space and they have no player to show for it, this is often referred to as “dead money”.  Clearly, having too much “dead money” is not a good thing and can inhibit a team’s ability to acquire necessary talent.

Now how much would have Johnny Doe have counted against cap space if he was kept for year two and made the roster? 

In that case, his base salary for year two ($15 million), his prorated signing bonus ($3 million), and his roster bonus ($1 million) all count against the cap space.  So if the Browns kept Johnny Doe in year two, they would need to account for $19 million in cap space.

Thus, releasing Doe saves them $16 million in cap space in year two ($19 million minus $3 million).

But Wait, What About Incentives?

Incentives can be tricky with regard to cap space, because they’re treated differently if they’re LTBE (Likely To Be Earned) or NLTBE (Not Likely To Be Earned).

An LTBE incentive is one that’s given based on past performance.  So if Johnny Doe was re-signing with the Browns and had exceeded 2,000 yards prior to re-signing, then the 2,000 yard incentive is considered LTBE and counts against cap space (and if he fails to trigger it, the Browns would get a credit for additional cap space the following year).

If Doe never exceeded 2,000 yards before, then the incentive is likely to be considered NLTBE, and will not count against the cap space (unless Doe triggers it, in which case it will count against the following year’s cap space).

OK, I think that’s enough for now.  My head hurts and I actually just wrote about it, so I can only imagine how you feel right now.  Probably a little something like this.

By Ha Kung Wong

Twitter: @FBGarbageTime

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