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Monday, August 01, 2005
The Salary Cap and Revenue Sharing
by Mark Lawrence
In the NFL there is revenue sharing and a salary cap. What does this mean?
About 2/3 of the NFL's money comes from the TV deal. The players get about 2/3 of team revenue. So, more or less, the TV contract goes to pay the players. These contracts are typically for about 5 years, and every time they are renegotiated the price goes up. So do player's salaries.
The money from the TV contract is share and share alike - the Redskins, Cowboys, Bills, and Packers get identical checks. This money is key to the success of the smaller franchises. Without the TV contract money, there is simply no way on earth that Green Bay could ever field a competitive team.
There are a lot of other sources for NFL money. NFL licensed jerseys, for example that Randy Moss jersey you put on your kid last Halloween when you dressed him up as a demon, result in license fees going to the NFL. This money is also equally shared.
When the teams play, there is a "gate," the money people pay for seats. This is in the neighborhood of about $2.5M per game. This money is split 60-40, with the visiting team getting 40% of the gate. Because of this teams like Jacksonville and Arizona just love it when the Packers or Cowboys come to play. These are the two or three games each year these teams can count on selling out, and the money they get is very welcome. Sometimes you will find that to buy a ticket to see the Packers on the road you have to buy a package of two or three tickets. This is nothing more or less than a device to get money from Packers fans into the pockets of the other teams owners.
The newer stadiums have large box seats which are leased to corporations. This money is not currently shared, which gives individual teams a big incentive to get a new stadium with fewer normal seats and more corporate seats.
Some teams (read: Cowboys) are starting to make their own licensed products and refuse to share the money. They theory is that Jerry Jones is a brilliant marketer (who just happens to live next to half the country's oil wells) so why should he share his hard-earned money with a slacker like Art Rooney (who just happens to live next to a bunch of shut-down steel mills in a solidly blue-collar town). The box seat and license money is a subject of great debate at this instant, and is the big holdup in renewing the NFL labor contract: the owners cannot sign a labor contract until they know how much money they're taking in, and until the new revenue agreement is signed they don't know that.
Finally, a well designed stadium can bring in other money for events like concerts, weddings, a pro shop, and the sale of $12 hot dogs. This money is not shared, again giving teams a huge incentive for a new stadium. The Packer's stadium is a model of efficiency, and does a league-leading job of extracting money from the local residents. If Green Bay were in the Spy / Defense / Government business like Washington, or the oil business like Dallas, the Packers would almost certainly lead the league in revenue. In fact Green Bay makes placemats, napkins and toilet paper, so the Packers are about #12 in the league in revenue.
In 2005 teams will make about $110M - $140M per year in gross revenue, and the players get about $85M of that. The $85M number is the salary cap. This is an agreed upon percentage of total league revenue divided by 32. Each team may spend $85M on players, no more. Each team must spend at least 80% of the salary cap, it's not allowed to be a complete cheapskate. However, things are much more complicated than that simple statement. First, the TV contract has escalator clauses. This has nothing to do with shopping malls and elevators, it means the contract payments increase each year. In '06 the salary cap is likely to be over $100M, about a 20% increase. This means that the top contracts are continually going up in value, and a contract signed a couple years ago is suddenly looking pretty thin. Although the US as a whole has almost no inflation, the NFL lives in an artificial world with about a 10% inflation rate. The idea of salary indexing has not really happened in the NFL, with the result that you see people sign very competitive contracts and two or three years later comparable players are making twice as much. This promotes a lot of hard feelings and contract problems. Appendix 1 shows the historic salary cap.
All 53 team players and the 8 players on the practice squad count towards the salary cap. A team may not exceed the salary cap. If a team does exceed the cap, the NFL can waive players from the team, starting with those earning the lowest salaries, until the team's payroll has fallen under the cap. In addition, the NFL may fine a team 1-$1 million per day for exceeding the cap. In practice this doesn't come up because if a proposed contract would put the team over the salary cap, the NFL won't approve the contract.
Player benefits are currently capped at $12,156,000 per club above the salary cap.
The NFL Labor Contract
The NFL players have a union, the NFL Players Association, the NFLPA. These guys negotiate a labor contract every five to seven years. The contract specifies the percentage of total NFL revenue that goes to the players (currently roughly 2/3), and also specifies certain minimum salaries for players. There is a minimum salary you can pay a guy who is in his first year, which is just over $200k. For each year the player has in the NFL, the minimum salary goes up, until a 10 year veteran has a minimum salary of just over $750k. These numbers change each year with the salary cap, so it's a bit of work to keep up on the exact number each guy has for his minimum salary. Minimum salaries shown in appendix 2.
The NFLPA was worried about veterans being cut for cheaper young guys, so if a player is signed to a one year contract, paid the minimum salary and given a signing bonus no larger than $25,000, then he only counts $450,000 against your cap. Better yet, the money he is paid above the $450,000 amount comes out of a league-wide "player benefit pool" and not from your team's checkbook. Other player benefits include the league retirement plan. Player benefits amount to another approximately $13M over the $85.5M cap in 2005.
The labor contract also specifies what sorts of contracts you may sign with a player. When you read that a player has signed his contract, it's not actually a done deal. The contract is then forwarded to the NFL and NFLPA legal offices, where it is reviewed and either accepted as legal or rejected. Each year a few contracts are sent back for a re-work because the NFL or NFLPA lawyers say it's not a legal contract under the labor agreement.
Some (most) teams perceive themselves to be very close to a superbowl, and therefore the idea of somehow stealing a bit of next year's salary cap for use this year can be very compelling. Especially because of the salary cap inflation, which means the money you steal from next year is a bigger fraction of this year's cap than of next year's, and in any case next year you can do it again. How do you steal cap room from the future? Easy, it's all laid out in the labor agreement.
Contracts and Bonuses
When you sign a player you will typically sign him for several years, and there will be lots of different types of payments made in the contract. The very first payment is a signing bonus. If the contract is for 5 years, and the signing bonus is $5M, then that $5M is paid to the player immediately, but it counts as $1M per year against the team salary cap for the five years of the contract. What if the player gets cut? He keeps the signing bonus, and the remaining bonus that has not been charged against the cap comes due to the team. If you cut him before June 1st, the remaining bonus counts on this year's cap. If you cut him after June 1st, then the remaining bonus counts against next year's cap. Every team does this every year. The cap money which counts towards players that are not on your team is called "dead cap space." Currently the Packers have about $10M in dead cap space due to cutting Darren Sharper, Joe Jackson, and Jamal Reynolds.
Thanks to Jerry Jones there's a rule, the "Deion Sanders Rule" which says that only a certain percentage of the total contract value can be in the signing bonus. This is an attempt to limit the amount of future cap you can move into the current year.
Another type of payment is a "workout bonus." This money is paid to the player if he shows up a certain number of days in the off-season and participates in the off-season training. Cleditus Hunt has $250,000 workout bonuses in his contract, but he refuses to come to Green Bay to work out. Hunt considers that the Packers are "robbing" him of $250,000 per year by refusing to pay him this money, even though he never kept his part of the bargain. So, to "get them back" he refuses to show up for the voluntary mini-camps. Maturity and the ability to play football don't necessarily go together in football players.
Another type of bonus is a "roster bonus." This money is typically due sometime in March or April, and the team must either pay it or cut the player. If the money is paid, it counts against the cap in that year. However, the team may "guarantee" the signing bonus just before paying it. If the bonus is garanteed, then it counts as if it were paid in equal installments for each of the remaining years in the contract. For example, if a player has three years left in his contract and is due a $300k guaranted roster bonus, then that money counts against the cap $100k per year for the remaining three years.
Contracts can have incentive bonuses. These come in two important types: "Likely to be earned," and "Not likely to be earned." If you give Payton Manning a $1M bonus for being selected to the Pro Bowl, then this money will be considered "likely to be earned," as Payton is always selected to go to the pro bowl. Such bonus money counts against this year's cap starting right at the start of the year, even though the pro bowl voting isn't until well into the season.
On the other hand, if you had a clause in Payton's contract that gave him a $1M bonus for personally rushing for 10 or more TDs, this would be considered "Not likely to be earned," as Payton simply doesn't take off with the ball much. He rushes for perhaps a couple TDs a year. This money does not count against this year's cap. If you wind up paying this money, it counts against next year's cap. Whether a bonus is likely to be earned or not is decided by league lawyers, not by your team. However, there are rules and guidelines so that it's pretty easy to structure a payment such that it is or is not likely, depending on your need. Appendix 4 shows individual goals which are not likely to be earned.
A contract may include incentives that are based on team performance, such as total number of games won, total number of points scored, total number of points allowed by the defense. Generally team incentives will be considered not likely to be earned. This is another way to grab cap room from the future. Recently Washington found themselves in a tight cap spot (a situation that's about as rare as the sun coming up), so they converted $1M of Mark Brunell's contract from salary to team based incentives. However, the contract named eight different team goals, and Mark gets his money if any single one of the goals is met. Thus Mark and his agent consider it nearly certain that he will be paid the $1M, while the NFL classifies the $1M as not likely to be earned and therefore not counting against this year's cap. Appendix 3 shows team goals which are not likely to be earned.
Finally, typically the smallest numbers in the contract are the salary. These count against the cap in the year they are paid. Salaries are put into contracts in two very different types. You will often sign an expensive player to a six year contract, with a large signing bonus. The signing bonus counts against the cap as if it were paid in six equal installments, one per year. The player would then often have salaries which were league minimum for each of the first four years, then in years five and six the salary will suddenly jump to several million dollars. Everyone knows that the team will never pay these salaries. They're put there for two reasons. First, it lets the player brag that he just signed a $$$$ contract. Second, it means that after four years the team will be forced to either renegotiate the contract with another large signing bonus, or cut the player making him a free agent. Mike Wahle had a contract just like this, and he got cut.
Working the cap backwards
So we see that bonuses are a way to take money from next year's cap and move it into this year. There are also ways to move money from this year's cap into next year, but these are almost never used. The NFL is most certainly a win-now-pay-later sort of place. The Vikings linebacker Brian Russell had a contract with a $7M bonus for special teams performance. The league considered that this bonus was likely to be earned. However, Brian did not play on special teams, and the bonus was never paid. So the Vikings got a $7M rebate applied to their '05 cap. They apparently did this to offset the $7M cap hit they took for trading Randy Moss, indicating that the decision to trade Randy was made some time ago. You must remember, however, that in '04 they played with $7M less cap room than anyone else. As Fred Brooks says, "You cain't get sumthin' fer nothin', less'uns you have previously gotten nothin' fer sumthin'."
In fact the Vikings owner didn't really feel like spending much money in 2004, so there were a lot of special teams bonuses written for several players. As a result the Vikings have $95M of cap in 2005, which is getting a lot of people upset. I find this a bit gratuitous, as no one was upset in 2004 when the Vikings effectively played with $21M less cap room than any other team. In fact, this technique is getting a fairly popular. In 2005, 17 teams, just more than half the league, had a positive cap carry over from 2004.
An alternative way to move cap room into the future would be to sign a player to a long term contract, but instead of giving him a large signing bonus you could give him a large salary in the first year. The salary counts on this year's cap, and future salaries would be much lower. You would have to write such a contract very carefully. If you pay a large signing bonus and the player seriously misbehaves, you can generally recover part of the signing bonus and cap room. With a large salary, you would have to add contract language that specified particular fines for particular behaviors. Unfortunately, it's difficult to foresee every possibility. When Kellen Winslow crashed his motorcycle and lost a year of play, the Browns were able to recover signing bonus and cap room as the contract specified no dangerous off-field activities including motorcycle riding.
Cap Room and the Draft
Each year there is an NFL draft. The NFL considers the number of picks you made and the rounds they were made in, and gives you a rookie salary cap. This rookie cap is typically something like about $3M - $6M. This is a portion of your overall salary cap, it's not extra money. The contracts you sign with your draftees must fit not only in your overall salary cap, but also inside this rookie cap. For this reason your 1st round draft pick is typically the last to sign. You need to sign everyone else first so that you know how much cap space you have available for the 1st round pick. If you've used up most of your rookie cap on the other players, you're going to have to sign a contract with a bunch of roster bonuses and such to make up the money you need and still fit in this year's camp.
A rookie contract may also include incentive clauses. In this case there is no player history to determine if the payment is likely or unlikely to be earned. So, the NFL has a huge table of possible incentives and how they count. In the case of rookies, the incentive clauses may count partially as likely and partially as unlikely. For example, if you draft a running back and include incentives for rushing yards, there is a table which tells you what fraction of the incentive is likely and what fraction is unlikely. Generally an incentive is unlikely to be earned if the rookie was drafted in the 4th or later round. In rounds 1-3 the amounts which are likely to be earned are not very high. Appendix 5 shows rookie incentives and the fraction which is considered likely to be earned.
During training camp a team typically has about 80 players on the roster. Each of these players has been signed to a contract. However, for calculating the cap, only the 53 highest paid players count. If you sign a new guy during camp to a large contract then he will most likely move into the top 53 and #53 will be bumped off the cap calculation. If you cut a guy during camp, it's possible that you will pick up cap space as the dead cap room will appear next year, the expensive guy is gone, and a minimum wage guy replaces him in the calculation.
What's the result of all this? Each year the NFL publishes how much cash each team actually paid out. The Redskins almost always manage to pay out $100M to players while officially remaining under the salary cap. The flip side of this is that it all comes due one day. San Francisco cut several pro-bowl players in one year (Owens, Garcia, etc) and as a result had almost $40M in dead cap space the next year. History shows that when you spend half as much on players as anyone else, you tend to go roughly 1-15 on the season.
Each team gets to determine their own method of dealing with the cap, depending on their own philosophy and resources. For example, Pittsburgh's owner is not nearly as rich as Washington's or Dallas', and he pays out far less in signing bonuses than most other teams. Because of this Pittsburgh tends to lose a couple excellent pro bowl players each year, and almost never has significant dead cap space. The Packer tend to cut a middle path - each year they have a moderate amount of dead cap space due to previously giving out signing bonuses to players who were subsequently cut. Dallas, Washington, and San Francisco have a history of giving out huge signing bonuses and having a large amount of dead cap space.
|Points scored by offense||Points allowed by defense||Own punt return average|
|Touchdowns scored by offense||Touchdowns allowed by defense||Own kickoff return average|
|Average net yards gained per rushing play||Total defense (net yards)||Opposition punt return average|
|Average net yards gained per passing play||Average net yards given up per rushing play||Opposition kickoff return average|
|Sacks allowed||Average net yards given up per passing play|| |
|Passing % completed||Sacks|| |
|Total offense (net yards)||Interceptions|| |
|Total yards||Total yards|
|Average yards (at least 100 attempts)||Average (at least 20 returns)|
|Passing rating (at least 224 attempts)||Gross average (40 punt minimum)|
|Completion percentage (at least 224 attempts)||Net average (40 punt minimum)|
|Interception percent (at least 224 attempts)||Inside 20-yard line|
|Total yards|| |
|Yards per pass (at least 224 attempts)|| |
|Touchdown passes|| |
|Total receptions||Roster bonuses|
|Total yards||Reporting bonuses|
|Average yards (at least 32 receptions)||Playtime bonuses (excluding special teams)|
|Touchdowns||Special teams playtime|
|Interception return yards||Field goals|
|Touchdowns on interception returns||Field goal percentage (minimum 16 attempts)|
|Opponent fumble recoveries||Field goal percentage 0-19 yards (minimum 4 attempts)|
|Opponent fumble return yards||Field goal percentage 20-29 yards (minimum 4 attempts)|
|Touchdowns on opponent fum.ret.||Field goal percentage 30-39 yards (minimum 4 attempts)|
|Sacks||Field goal percentage 40-49 yards (minimum 4 attempts)|
|Field goal percentage 50 yards or longer (minimum 3 attempts)|
|Draft Status||Percent Counted as LTBE|
|Total Rushing Yards|
|ALL OTHERS (includes free agents)|| |
|Total Passing Yards|
|Opponent Fumble Recoveries|
|Touchdowns On Fumble Returns|