The QB Contract Mirage
The 2014 class of quarterback contract extensions has begun taking shape, and while the overall numbers are impressive, they largely are a mirage. Even at the sport’s most important position—signature players leading the franchise—teams are avoiding anything more than short-term commitments.
In the past month contract extensions between the Bengals and Andy Dalton and the 49ers and Colin Kaepernick have illustrated this grip that teams have over young players. This leverage is greater than it has been in the past, and these deals become precedents for other young star players as they enter extension talks.
Pay as you go
Readers of this space know that not only are the total amounts of NFL contracts skewed—they are just numbers on a page, nothing more—but also the more important barometer of "guaranteed money" is rarely accurate. These true values of contracts are the quiet reality of the business. Indeed, both the league and its teams certainly do not want to broadcast how advantaged the NFL is with player compensation compared to other major sports leagues.
The roughly $100 million advertised on both the Dalton and Kaepernick contracts can only become reality if the Bengals and 49ers decide each year for the next six years that the players are worth the scheduled compensation. In other words, both teams can “pay as they go” or move on with no further remaining financial obligations. Giving Dalton and Kaepernick the benefit of the doubt of at least two years (even though there is no true guarantee after this year), they both essentially signed two-year, $25 million deals. Beyond that, we’ll see.
Yes, there are guarantees, but those are activated on a year-to-year basis. While the quarterback extension class of 2013—Joe Flacco, Tony Romo, Aaron Rodgers, Matt Ryan, Jay Cutler—also have “rolling” guarantees, the amounts fully guaranteed at the time of signing were all roughly double those of Kaepernick and Dalton.
Teams like the Bengals and 49ers are able to rationalize their structure by hiding behind an archaic NFL funding rule requiring future skill guarantees to be funded in the current fiscal year (injury-only future guarantees do not need to be similarly funded). Agents and players accept the funding argument, as (1) they see other agents and players on their teams accepting it, and (2) they will trade on this structural issue to achieve the numbers they want.
It is one thing for teams to have this kind of structure and leverage with average or fringe players. However, quarterbacks are their most important players on the team. Major League Baseball and NBA owners, who fully guarantee contracts of all levels of players, must breathe heavy sighs upon seeing NFL contracts.
Let’s see how this leverage begins and continues.
For NFL teams, the revised rookie compensation system is the gift that keeps on giving. Drafted players sign mandatory four-year contracts at fixed and reasonable rates with no opportunity for renegotiation until they have played three seasons. This fact alone gives teams powerful leverage in putting a carrot in front of players with the prospect of earning multiples of that number for the final year of these contracts.
With both Dalton and Kaepernick scheduled to make approximately $900,000 in 2014, the Bengals and 49ers placed offers in front of them that—between bonuses and salaries—dwarfed that amount (in Kaepernick’s case, $13 million; in Dalton’s, $17 million). Few players have the risk tolerance and fortitude to turn down $13-17 million to play for $900,000 in an injury-riddled sport.
With that leverage and the carrots they have, teams like the 49ers and Bengals dictate terms beyond the first year. And while those early earnings are impressive, they allow teams to control other parts of the contract.
The 49ers have protections in Kaepernick’s contract that are rare for players of his caliber. Among them are (1) an annual guarantee activation date in April of each year, almost six weeks beyond the usual trigger date of right after the Super Bowl, (allowing the 49ers three weeks to trade Kaepernick if they should ever so desire); (2) de-escalators reducing future compensation if Kaepernick does not meet certain playing thresholds and (3) a requirement for Kaepernick to purchase a disability policy with the 49ers as beneficiary. I have been told that the Kaepernick contract now regularly comes up in player contract negotiations, with one agent starting a recent extension with a team saying, “Hey, don’t Kaepernick me here!”
Having said this, I certainly understand the pressure that Kaepernick’s agents were under. Several major agents were wooing Kaepernick, both directly and subtly (or not-so-subtly) through their clients who are friends with the 49ers quarterback. To his credit, Kaepernick stayed loyal, but his agents negotiated his deal with the sharks circling. And it appears the 49ers leveraged that situation.
Unlike Kaepernick and Dalton, who were drafted in the second round in 2011, that draft's first selection overall—Cam Newton—essentially has two years left on his rookie contract. The 2011 CBA allows team to place a fifth-year option, at their complete discretion, on first-round picks, so long as the option is affixed during a scheduled period after the player's third year. Naturally the Panthers took advantage of that team option with Newton, giving them another year of control before a major investment. Similarly, come next spring the Colts, Redskins and Dolphins will place the fifth-year option on 2012 first-rounders Andrew Luck, Robert Griffith III and Ryan Tannehill, respectively, giving the teams an additional year of contract control over their most important players.
Although Russell Wilson, as a third-round pick in ’12, does not face the obstacle of an option and does have a Super Bowl victory on his résumé, the Seahawks will have the leverage of a scheduled $800,000 for Wilson in 2015. A similar negotiation might ensue for Nick Foles, another ’12 third-rounder.
The most interesting quarterback negotiation, to me, is between the Chiefs and Alex Smith. Agent Tom Condon negotiated a $59 million guarantee for Matt Ryan at this time last year and is likely asking for a similar deal for Smith, who has posted a 30-9-1 won-loss record since 2011. Smith, who has made $57.65 million in his nine-year career, will not be enticed with short-term earnings in an under-market deal.
My best guess is that Smith will become a free agent in March and ... there will be suitors. The interest may not be Peyton-esque, but Smith represents one of the scarcest and most valuable properties in the business of football: a quarterback with a history of proven success who’s still in a prime age (30). He will be paid.
While the O’Bannon v. NCAA decision is important, let’s hold the phone on declaring the dawn of a new economic age for college athletes. The decision does not allow college athletes to get paid to play or endorse products. It simply allows for “trust funds” of $5,000 for each year of eligibility for use of name, image and likeness. This is hardly the death knell for NCAA sports as we know it.
Ultimately, O’Bannon is part of a legal triumvirate—along with Northwestern football players (unionization) and NFLPA/NBPA lead counsel Jeffrey Kessler (pay for play)—challenging the “way-it’s-always-been” dogma of the NCAA. And coincidentally (or not) on the day before the ruling, the NCAA ceded autonomy to the Power Five conferences to offer perks such as four-year scholarships, disability insurance and cost-of-attendance stipends.
My worry is that with ever-increasing resources allocated to two sports—college football and men’s basketball—there will be a diminution of men’s non-revenue sports and women’s sports. For better or worse, in the arms race for superiority, the resource allocation in college sports is becoming more and more skewed at the top.