Rob Carr/Getty Images
Rob Carr/Getty Images

Salary Cap … Explained!

We’ll hear plenty about contract restructuring and extensions this offseason. But in their haste to get under the salary cap, teams will set themselves up for future failure. Here’s our guide to understanding the NFL’s most confusing topic

By
Andrew Brandt
· More from Andrew·

In the year-round coverage of the NFL, there is no topic more misunderstood than the salary cap.  Cap room, cap numbers and cap consequences often aren’t what they appear to be, and at times alleged “smart” cap management is merely salvaging the present to complicate the future.

It’s a heavy subject matter, so let’s divvy up the topics and dive in:

What is the salary cap?

The official NFL team salary cap number for 2014, which will be announced next week, is expected to be somewhere between $130-133 million.  If so, it would mark the first time the number has exceeded the 2009 threshold of $128 million.

That, however, is not really “the number.”  Each NFL team has an adjusted cap number modified due to: 1) cap room carryover from the previous year—a new feature of the 2011 CBA; and 2) netting out of the previous year’s earned unlikely incentives and unearned likely incentives (yes, it’s complicated). Thus, while every team theoretically will be operating under, say, a $130 million cap, no team actually will have a cap number of exactly $130 million.

Further, the announced cap number applies to negotiable dollars for player contracts, not pre-negotiated benefits that are a growing part of the CBA—health and pension benefits, the player performance pool, the minimum salary benefit, etc.  With those secured benefits as part of the cap, the true 2014 cap number might be closer to $150 million.

How do teams manage the cap?

The best-managed teams, in my opinion, operate with all three prongs of the football operation—coaching, evaluation and cap/contract management—working in sync.  All three must buy in to the team-building vision set by the decision-maker, a common example being to: draft well (scouting); develop young players (coaching); and identify and extend core performers prior to their free agency leverage points (cap/contract management).  Like any successful organization, the best-managed NFL teams have skilled people who stay in their lanes, focusing on what they do best and allowing others to do the same.

The job of managing a team’s player payroll and cap often is misperceived to be primarily about numbers.  The numbers work themselves out; a well-oiled calculator can do most of that.  The more important part of the job is the people part: professionally and tactfully handling internal and external conflicts. 

Cap/contract managers not only deal with agents and their sometimes delusional views of their clients’ worth, they also balance the present and future in assessing what is best for the organization. In my role with the Packers—I was the vice president from 1999 to 2008—I tried to be a voice of reason to those primarily worried about the present, or a voice of action to those largely worried about the future. 

In simplest terms, an NFL cap manager must serve as a calming presence to both the football and business sides of the organization.  And now is the time of year where such difficult conversations happen.

With his recent contract extension, Terrell Suggs benefitted financially not necessarily because of on-field performance but due in part to the Ravens' need for 2014 cap relief. (Patrick Smith/Getty Images)
With his recent contract extension, Terrell Suggs benefited financially not necessarily because of on-field performance, but due in part to the Ravens’ need for 2014 cap relief. (Patrick Smith/Getty Images)

Why do teams extend/restructure contracts?

One of the great myths about the NFL salary cap is that it is a hard cap. It is not; it is soft. The primary reason is allowing for the proration of signing bonuses, allocating for greater short-term cash than cap distribution while depositing the cap leftovers into the future.

Let’s use the Terrell Suggs’ recent extension with the Ravens as an example.  Suggs was in the last year of his contract and scheduled to make $7.8 million.  The Ravens increased that $7.8 million to $12 million with a completely different structure: $11 million signing bonus and $1 million salary.  With the signing bonus now prorated over this year and four additional years, Suggs’ cap number—excluding previous unamortized proration—went from $7.8 million to $3.2 million, calculated as follows: $2.2 million of proration on the new bonus and $1 million salary. 

Now, Suggs’ 2014 cash allocation is $12 million while his 2014 cap allocation is $3.2 million, a nearly $9 million “cash over cap” discrepancy on one player! This is how teams spend over the cap on a cash basis while staying under the cap. If and when Suggs is released in the next five years, which is more likely than not (he’s 32), his $2.2 million annual proration will accelerate, leaving the Ravens with a large cap charge for a player no longer there.

My sense is the Ravens would not have pursued an extension with Suggs but for their cap issues; it’s not a good reason to sink money into an older player. Facing a likely soft free agent market next year for an aging defensive end, Suggs and his agent were only too happy to take an extension with almost $8 million more in guaranteed money. The Ravens’ issues from a bloated cap made Suggs a fortunate beneficiary.

Beyond extensions like Suggs’, teams have begun the perilous annual ritual of “hide the cap,” which means converting cap charges previously “contained” in 2014 to charges now piled onto players’ future cap numbers. The Panthers converted such monies this week for Jonathan Stewart and Ryan Kalil, and the Cardinals have once again reworked Larry Fitzgerald’s contract. Fitzgerald, who has truly maximized his income from the Cardinals with three top-of-the-market wide receiver contracts, will once again be solicited to adjust his enormous cap charge at this time next year, giving him further continued leverage.

What mistakes do teams make?

Larry Fitzgerald recently restructured his contract to give Arizona cap relief in 2014. (Norm Hall/Getty Images)
Larry Fitzgerald recently restructured his contract to give Arizona cap relief in 2014. (Norm Hall/Getty Images)

When I managed the Packers cap, I felt an obligation to our shareholders to resist the continuous temptation to “push out” high cap charges of players like Brett Favre for short-term needs. I had seen teams part with franchise quarterbacks and have $10-15 million leftover cap charges as a result of stacked prorations from multiple cap conversions.  I wanted to make sure that when there was a parting with Brett, we would not be in cap jail.

I get it; teams want to go for it in their window of time, but only one team wins every year and it often leads to a vicious cycle. Short-term gain leads to long-term pain; deals that are cap friendly now are often cap unfriendly later. Players with numerous cap restructures, such as Fitzgerald and Ben Roethlisberger, might leave behind tens of millions of cap charges, limiting the teams’ future ability to compete.

The reality in the business of football is very few long-term contracts last to completion.  The team terminates most contracts with years remaining.  And when they do, all remaining cap charges accelerate. These dead money charges have drastically affected teams like the Raiders and Redskins, and teams like the Steelers, Panthers and Cowboys will soon feel the effects as well.

What’s the best way to manage the cap?

How, then, do teams avoid the need for cap conversions that constrain their future? It is easier said than done, but the answer is simple: Do not prorate.

For example, say a team and player agree on a $10 million cash spend in the first year of a contract. With optimal cap management, the team would not use a signing bonus but rather pay the $10 million in monies not subject to proration (salary, roster bonus, etc.) This would contain the cap cost, giving the deal a clean cap–no remaining charges—if things ever went south with the player.  This pay-as-you-go strategy—with cash and cap aligned—puts teams ahead of the curve.

The hard part, of course, is for teams to be in position to operate this way.  It requires discipline that must be supported by all layers of the organization. Once there, though, paying as you go creates desired flexibility for the present and future.  Cap will become secondary, instead of primary, for decision making; the flexibility will be there.

Which teams are able to do this?  The teams with players’ cap numbers very close to their cash numbers. The teams not making noise in cap management with conversions and restructures these next two weeks.  The teams with clean caps and no need for the credit card spending.

It is now, in these dark days of winter, when teams set a course in cap and contract management that can affect them, negatively or positively, for years to come.

 mmqb-end-slug-square

More from The MMQB
19 comments
rithmaith
rithmaith

I would like to understand this article but there are a few terms and concepts I don't get:

- what are "earned unlikely" and "likely incentives" exactly? why should they be exempt from the cap? does "netting out" mean they get subtracted from the salary cap? if so, why use a confusing term like "netting out"?

- does Suggs get 12 million immediately in the following year instead of 7.8 million as a result of the restructuring? (i.e. does he just have to stay healthy to the start of next season to benefit and does that mean he is demotivated to put himself in harms way from now until then?)

- how exactly does proration accelerate?

- why are teams allow "convert" charges since it sounds like they are gaming the system?

Buck2185
Buck2185

I could care less about this whole subject matter. I'm just wondering when King is going to start slobbering over everything Patriot and Richard Sherman again......

SFCRET
SFCRET

Suggs does have a 1 million dollar salary every year.  It is the bonus up front money that is pro rated over the 5 years of the contract.

SFCRET
SFCRET

I understand that there is a requirement to spend a certain minimum percentage of the teams cap.  Why is that?


stevesturm1
stevesturm1

I'm not an NFL executive, nor do I play one on TV, but I think the real issue is with pro-rated contracts that exceed the number of years the club really expects to have the player.  If the Ravens really felt Suggs was going to be on the roster for five years, this was a good deal for both.  But if they felt that Suggs was not going to last past two or three years, then they get bit.


I'm also confused on one aspect of his deal.  As described, he has no salary for years 2-5 of the contract?  I thought there was a minimum salary?  Is the minimum based on money attributable to salary for a given year?  Or is it based on dividing the amount of the contract over the life of the contract?

tmadz
tmadz

I would love to work for the contract departments for one of these teams. The financial modeling has to be crazy and it changes on every deal. I imagine that someone has tried to write software to track spending and the change in conditions based on new CBA. The easiest part has to be the draftees now and the unrafted FA's. Small numbers. Then the cash flow projections and all. Exciting finance work. Not to mention a Ring when your team wins (I hope).

phineasbs
phineasbs

I think this article is very, very oversimplified, to the point of inaccurately portraying the situation, particularly the concluding section.  "The hard part, of course, is for teams to be in position to operate this way.  It requires discipline that must be supported by all layers of the organization."  Actually, the reason that pay-as-you-go is so hard is that players with any leverage (and talent) won't sign extensions or free agent contracts with no guaranteed money beyond the first year, which is what a pay-as-you-go approach requires.  Of course "smart" cap managers would only sign players willing to have no financial security where they could be cut at any time with no long-term consequence to a team's cap, but "smart" agents and players generally won't take such an offer if someone else offers more security.  Thus, the "smart" cap manager proposed in this article rarely exists in the real world.  I suppose the more realistic point that the author could have made is that smart cap managers avoid committing long-term guaranteed money unless absolutely necessary, and its the last part of that sentence that makes it so hard: when and for whom is it worth making such a commitment.

Forte
Forte

This is far too short an article for the subject matter - you can almost tell how much was edited out.


1) I agree with the other comment: the Suggs example offers no real clarification.

2) One important point is missing, extending the contract with a new signing bonus (kicking the can down the road) made a lot more sense when the cap was increasing every year.  The "cost" was deferred and would be a smaller fraction of your budget.  When the cap started becoming flat, the strategy didn't work so well.

3) How many GMs make short term decisions because of an impatient owner and fan base?  This piece really could have been two long articles - the mechanics of the cap, and then managing the "people issues" around the cap.   

PhillyPenn
PhillyPenn

He's right, I didn't really understand the cap and now I still don't.  That's cool, because I don't really have to.  So good luck with all that Messrs.  Lurie and Roseman.

comments
comments

Clicked on link that said, "Understanding NFL's most confusing topic". Thought someone was finally gonna explain pass interference and defensive holding rules as enforced per time of year, geographic setting, game situation, and quarterback.

hubrob107
hubrob107

the suggs explanation is one of the worst pieces of writing ever.  you have to explain the previous contract made suggs cap number 13million even though his salary money was going to be less.  the guaranteed money of 12 million is about what they expect to pay him over the next two years...so at 12million for 2 years or 7million and change for 1 year it makes sense for suggs and the team.

StephenGrange
StephenGrange

In AZ land..we are dealing with the L Fitgerald situation by kicking the can down the road....It is hard to see how he will not be traded/released for cap reasons after this year.


Hard business.

KristianColasacco
KristianColasacco

@SFCRET It was part of the last CBA.  It's to keep teams from cheaping out and not spending much money.

ballhawk2925
ballhawk2925

@stevesturm1  

He does have a base salary in years 2-5 that is $4 to $4.5 million each year.


And yes, there is a minimum salary for players which is dependent on Credited Seasons earned by the player. This is calculated separately from any bonuses or incentives. You might hear this referred to as a "base salary" or "P5 salary". This table shows the minimum salaries over the next several years, if you're interested.


If you want to see the specifics for each year of Suggs' contract, check out overthecap.com, which also has a lot of articles explaining the salary cap.  

BallRush
BallRush

@phineasbs  I think you missed something and need to retract your criticism.  What he's saying is that in lieu of guaranteed money that is spread out over the life of the contract, give a signing bonus that is paid and counted against the cap in the same year.  In my opinion, and not said in the article, the only time you would give guaranteed money, and spread it out over the contract is when you sign a player you are sure will be playing throughout the entire contract period.

sullivanjc91
sullivanjc91

You are incorrect. What you are saying the author suggesting is a roster bonus. That is guaranteed cash paid out the first year that counts towards the cap only for the first year. A signing bonus' cap hit is prorated over the life of the contract. Ether way the player gets the cash immediately. Smart teams try to use a roster bonus as guaranteed money instead of a signing bonus. It makes no difference to the player. The limitation is that it can be difficult to swallow the cap hit for the roster bonus and 1st year salary, on the 1st year cap.

Newsletter