Showing posts with label NFL salary cap. Show all posts
Showing posts with label NFL salary cap. Show all posts
Sunday, June 10, 2012
Wednesday, May 2, 2012
The NFL rookie pool and the salary cap
A lot of people, including many in the media, have a misunderstanding
of how the NFL salary cap and rookie pool are intertwined, beyond the
misnomer of "a cap within a cap." This post is an attempt to explain
exactly how the rookie pool works and how it relates to the cap. (Note:
This post is a rewrite of a 2009 post, with all information updated to apply to 2012.)
First, a couple of definitions:
Top 51 Rule: This is explained in Article 13, Section 6, subsection (a)(i) of the Collective Bargaining Agreement. The rule states, "between the start of the League Year and the first day of the regular playing season, only the following amounts from Paragraph 5 shall be included for players whose Player Contracts are not among the Team’s 51 highest valued Player Contracts, tenders and Offer Sheets (as determined under this Section 6): (1) Any amount that exceeds the Minimum Active/Inactive List Salary for Undrafted Rookie Free Agents; and (2) Any amount that exceeds twice the applicable Minimum Active/Inactive List Salary for all other players."
In simple terms, it means that during the offseason, for any player whose cap number is not among his team's 51 highest cap numbers, his base salary ("Paragraph 5" salary) does not count against the cap. The two exceptions listed above ("any amount that exceeds ...") are not known to have ever come into play, because teams traditionally give undrafted rookies minimum base salaries, and it would be extremely unlikely for a team to have a player outside its Top 51 with a base salary more than twice his applicable minimum.
As an example of how the Top 51 Rule works, consider a team whose 51st-highest cap number for current players (contracts, tenders or offer sheets) is $480,580. The team's next-highest cap number is $475,580, which is for a second-year player with a base salary of $465,000, a signing bonus proration of $5,000 and a standard workout bonus of $5,580. Because this player is outside the hypothetical team's Top 51, his minimum base salary does not count against the cap, but the other $10,580 does. The same thing would apply to the rest of the team's players outside its Top 51: their minimum base salaries would not count against the cap, but everything else would. (All "dead money" also counts against the cap.)
Rookie pool: On a league-wide basis, the rookie pool (described in Article 7 of the CBA) is the total amount of money that can be spent on all rookies, except that the minimum base salaries for undrafted rookies do not count toward the rookie pool. Each team's rookie pool is its portion of the league-wide total and is determined by the number, round and position of the draft choices it uses, plus one-third of the annual limit for signing bonuses given to undrafted rookies. (One-third of the total represents the first-year proration of bonuses on their three-year contracts.)
Basically, the entire first-year cap numbers for all of a team's draft choices must fit into its rookie pool, along with any first-year cap charges for undrafted rookies other than their minimum base salaries. When a team signs a drafted player, his first-year cap number does not have to be equal, or even close to, the rookie pool value of the pick used to select him, as long as the team's combined rookie pool charges for all of its rookies don't exceed its limit.
(NOTE: The 2012 team rookie pool figures that have been reported do not include the undrafted rookie reservation, which is one-third of $76,585 for each team. That means that each team's true rookie pool, as defined by the CBA, is $25,528 higher than the reported figure. Post updated May 13, 2012)
Saying that the rookie pool is "a cap within a cap" is a bit of a misnomer because the rookie pool actually is a separate accounting from the salary cap, although rookies count toward both limits. The calculations are different, though, so the amount a rookie counts against the rookie pool isn't necessarily the same as the amount he counts against the salary cap.
When a player is drafted, he automatically is tendered a one-year contract for the rookie minimum base salary (for 2012, that is $390,000). This amount immediately is applied to the team's rookie pool and salary cap. Because most teams have at least 51 players with cap numbers higher than the rookie minimum salary before the draft, the automatic tenders for drafted players won't affect those teams' caps at all. It sometimes is mistakenly reported that teams must have cap room in order to use their draft choices, but that applies only to teams that have fewer than 51 players signed or tendered at the time of the draft. And even then, it applies only to the number of draft choices a team uses until it has 51 players signed or tendered. So, for example, if a team had 49 players signed or tendered before the draft, it would need only $780,000 of cap room in order to make all of its selections. After the first two draftees are automatically tendered, the team would have 51 players signed or tendered, and the rest of the team's draftees would fall outside its 51 highest cap numbers and would not affect its cap.
When a drafted player signs his contract, the team is charged against its salary cap according to the Top 51 Rule, and it is charged against its rookie pool according to the rules in Article 7.
Let's consider a seventh-round draft pick who signs a four-year contract with minimum base salaries and a $44,000 signing bonus and who was selected by a team with its 51st-highest cap number being $480,000 (for a second-year player with a $465,000 base salary). The rookie's first-year cap number would be $401,000, consisting of his $390,000 base salary and his $11,000 bonus proration. Because he was drafted, the entire $401,000 would count against his team's rookie pool, replacing his automatic tender. But because he is below his team's top 51 cap numbers, only his $11,000 bonus proration counts against the salary cap during the offseason.
Now consider a third-round draft pick for the same team. He signs a four-year contract with minimum base salaries and a signing bonus of $700,000. His first-year cap number would be $565,000, consisting of his $310,000 base salary and his $175,000 bonus proration. All $565,000 would count against his team's rookie pool and against his team's salary cap. However, by assuming his place among the team's top 51 cap numbers, he knocks the player with a $480,000 cap number ($465,000 base salary) out of the team's top 51. For that player, his base salary no longer counts against the cap, leaving only the other $15,000 counting against the cap. The net result is that the team's cap room is reduced by only $100,000 — the draftee's $565,000 is charged against the cap, but the second-year player's $465,000 base salary no longer is.
As you can see, as long as his team already has at least 51 players signed or tendered, a draftee's effect on his team's salary cap is far less than his rookie pool charge. Most people forget this when they consider how much cap room must be "set aside" for rookies. You'll often see people say that, for example, if a team has $4 million of cap room and a rookie pool of $5 million, it will need to clear another $1 million from its cap in order to sign all of its draft choices. Of course, if the team already has close to or more than 51 players signed or tendered, that's wrong, because that team's rookies will reduce its salary cap by far less than $5 million, as shown above.
As long as a team has at least 51 players already signed or tendered, it is impossible for its entire rookie class to reduce its cap room by more than its rookie pool minus the amount equal to the minimum rookie salary times the number of draftees signed. For example, if a team with a rookie pool of $5.9 million already has at least 51 players signed or tendered, then signs all 10 of its draftees and any number of undrafted rookies, it is impossible for the team's entire rookie class to reduce its cap room by more than $2 million. That's because the $390,000 base salary of every undrafted rookie and every draftee who doesn't make the team's top 51 won't count against the cap, and every draftee who does make the top 51 will knock another player's base salary of at least $390,000 out of the top 51.
To determine the maximum amount that a team's entire rookie class could reduce its cap room, it is necessary to know how many players it has signed or tendered, how many of its draftees are likely to have first-year cap numbers that qualify for its top 51 and the cap numbers and base salaries for as many players at the bottom of its top 51 as it has draftees who will qualify for the top 51.
If all of that is not known, a reasonable estimate for most teams this season can be made by starting with each team's rookie pool, then subtracting $465,000 for each draft pick in the first four rounds and $390,000 for each draft pick in the fifth, sixth or seventh rounds. For example, a team with a rookie pool of $5 million and one draft pick in each round will use approximately $1.97 million of cap room to sign all of its rookies ($5 million, minus the $1.86 million for the four players displaced in the team's top 51, minus $1.17 million for the three late-round draftees whose base salaries won't count against the cap). Using this method might not be precise for every team, but it will provide a pretty good estimate.
First, a couple of definitions:
Top 51 Rule: This is explained in Article 13, Section 6, subsection (a)(i) of the Collective Bargaining Agreement. The rule states, "between the start of the League Year and the first day of the regular playing season, only the following amounts from Paragraph 5 shall be included for players whose Player Contracts are not among the Team’s 51 highest valued Player Contracts, tenders and Offer Sheets (as determined under this Section 6): (1) Any amount that exceeds the Minimum Active/Inactive List Salary for Undrafted Rookie Free Agents; and (2) Any amount that exceeds twice the applicable Minimum Active/Inactive List Salary for all other players."
In simple terms, it means that during the offseason, for any player whose cap number is not among his team's 51 highest cap numbers, his base salary ("Paragraph 5" salary) does not count against the cap. The two exceptions listed above ("any amount that exceeds ...") are not known to have ever come into play, because teams traditionally give undrafted rookies minimum base salaries, and it would be extremely unlikely for a team to have a player outside its Top 51 with a base salary more than twice his applicable minimum.
As an example of how the Top 51 Rule works, consider a team whose 51st-highest cap number for current players (contracts, tenders or offer sheets) is $480,580. The team's next-highest cap number is $475,580, which is for a second-year player with a base salary of $465,000, a signing bonus proration of $5,000 and a standard workout bonus of $5,580. Because this player is outside the hypothetical team's Top 51, his minimum base salary does not count against the cap, but the other $10,580 does. The same thing would apply to the rest of the team's players outside its Top 51: their minimum base salaries would not count against the cap, but everything else would. (All "dead money" also counts against the cap.)
Rookie pool: On a league-wide basis, the rookie pool (described in Article 7 of the CBA) is the total amount of money that can be spent on all rookies, except that the minimum base salaries for undrafted rookies do not count toward the rookie pool. Each team's rookie pool is its portion of the league-wide total and is determined by the number, round and position of the draft choices it uses, plus one-third of the annual limit for signing bonuses given to undrafted rookies. (One-third of the total represents the first-year proration of bonuses on their three-year contracts.)
Basically, the entire first-year cap numbers for all of a team's draft choices must fit into its rookie pool, along with any first-year cap charges for undrafted rookies other than their minimum base salaries. When a team signs a drafted player, his first-year cap number does not have to be equal, or even close to, the rookie pool value of the pick used to select him, as long as the team's combined rookie pool charges for all of its rookies don't exceed its limit.
(NOTE: The 2012 team rookie pool figures that have been reported do not include the undrafted rookie reservation, which is one-third of $76,585 for each team. That means that each team's true rookie pool, as defined by the CBA, is $25,528 higher than the reported figure. Post updated May 13, 2012)
How it all works
Saying that the rookie pool is "a cap within a cap" is a bit of a misnomer because the rookie pool actually is a separate accounting from the salary cap, although rookies count toward both limits. The calculations are different, though, so the amount a rookie counts against the rookie pool isn't necessarily the same as the amount he counts against the salary cap.
When a player is drafted, he automatically is tendered a one-year contract for the rookie minimum base salary (for 2012, that is $390,000). This amount immediately is applied to the team's rookie pool and salary cap. Because most teams have at least 51 players with cap numbers higher than the rookie minimum salary before the draft, the automatic tenders for drafted players won't affect those teams' caps at all. It sometimes is mistakenly reported that teams must have cap room in order to use their draft choices, but that applies only to teams that have fewer than 51 players signed or tendered at the time of the draft. And even then, it applies only to the number of draft choices a team uses until it has 51 players signed or tendered. So, for example, if a team had 49 players signed or tendered before the draft, it would need only $780,000 of cap room in order to make all of its selections. After the first two draftees are automatically tendered, the team would have 51 players signed or tendered, and the rest of the team's draftees would fall outside its 51 highest cap numbers and would not affect its cap.
When a drafted player signs his contract, the team is charged against its salary cap according to the Top 51 Rule, and it is charged against its rookie pool according to the rules in Article 7.
Let's consider a seventh-round draft pick who signs a four-year contract with minimum base salaries and a $44,000 signing bonus and who was selected by a team with its 51st-highest cap number being $480,000 (for a second-year player with a $465,000 base salary). The rookie's first-year cap number would be $401,000, consisting of his $390,000 base salary and his $11,000 bonus proration. Because he was drafted, the entire $401,000 would count against his team's rookie pool, replacing his automatic tender. But because he is below his team's top 51 cap numbers, only his $11,000 bonus proration counts against the salary cap during the offseason.
Now consider a third-round draft pick for the same team. He signs a four-year contract with minimum base salaries and a signing bonus of $700,000. His first-year cap number would be $565,000, consisting of his $310,000 base salary and his $175,000 bonus proration. All $565,000 would count against his team's rookie pool and against his team's salary cap. However, by assuming his place among the team's top 51 cap numbers, he knocks the player with a $480,000 cap number ($465,000 base salary) out of the team's top 51. For that player, his base salary no longer counts against the cap, leaving only the other $15,000 counting against the cap. The net result is that the team's cap room is reduced by only $100,000 — the draftee's $565,000 is charged against the cap, but the second-year player's $465,000 base salary no longer is.
As you can see, as long as his team already has at least 51 players signed or tendered, a draftee's effect on his team's salary cap is far less than his rookie pool charge. Most people forget this when they consider how much cap room must be "set aside" for rookies. You'll often see people say that, for example, if a team has $4 million of cap room and a rookie pool of $5 million, it will need to clear another $1 million from its cap in order to sign all of its draft choices. Of course, if the team already has close to or more than 51 players signed or tendered, that's wrong, because that team's rookies will reduce its salary cap by far less than $5 million, as shown above.
As long as a team has at least 51 players already signed or tendered, it is impossible for its entire rookie class to reduce its cap room by more than its rookie pool minus the amount equal to the minimum rookie salary times the number of draftees signed. For example, if a team with a rookie pool of $5.9 million already has at least 51 players signed or tendered, then signs all 10 of its draftees and any number of undrafted rookies, it is impossible for the team's entire rookie class to reduce its cap room by more than $2 million. That's because the $390,000 base salary of every undrafted rookie and every draftee who doesn't make the team's top 51 won't count against the cap, and every draftee who does make the top 51 will knock another player's base salary of at least $390,000 out of the top 51.
To determine the maximum amount that a team's entire rookie class could reduce its cap room, it is necessary to know how many players it has signed or tendered, how many of its draftees are likely to have first-year cap numbers that qualify for its top 51 and the cap numbers and base salaries for as many players at the bottom of its top 51 as it has draftees who will qualify for the top 51.
If all of that is not known, a reasonable estimate for most teams this season can be made by starting with each team's rookie pool, then subtracting $465,000 for each draft pick in the first four rounds and $390,000 for each draft pick in the fifth, sixth or seventh rounds. For example, a team with a rookie pool of $5 million and one draft pick in each round will use approximately $1.97 million of cap room to sign all of its rookies ($5 million, minus the $1.86 million for the four players displaced in the team's top 51, minus $1.17 million for the three late-round draftees whose base salaries won't count against the cap). Using this method might not be precise for every team, but it will provide a pretty good estimate.
Monday, May 11, 2009
Matthew Stafford's contract
No. 1 draft pick Matthew Stafford's contract with the Detroit Lions is an example of how the value of a contract often gets exaggerated when reported by the media. Stafford's contract has been reported as being for six years and $72 million, with $41.7 million guaranteed and an additional $6 million in incentives that could push the total value to $78 million. Those numbers could be correct -- if Stafford plays a certain percentage of the Lions' offensive snaps. However, if Stafford doesn't achieve certain qualifying incentives in his contract, he'll never receive close to that $41.7 million he's supposedly "guaranteed."
The only parts of Stafford's contract that he's fully guaranteed to receive right now are most of his base salaries and the protected value of his option bonus. He did not receive a signing bonus, which isn't unusual for a high draft pick. In 2008, none of the first seven players drafted got a signing bonus. Stafford's base salaries are $3.1 million for 2009, $395,000 for 2010, $1.17 million for 2011, $1.95 million for 2012 and $2.7 million for 2013. In 2010, the Lions will have to decide whether to exercise an option for 2014 by paying Stafford a $17.4 million option bonus. If they exercise the option, the bonus gets prorated from 2010 to 2014, and Stafford gets a base salary of $3.495 million for 2014.
Here are Stafford's salary cap numbers if the Lions exercise the option and Stafford does not achieve any playing-time or performance incentives --
2009 $3.1 million
2010 $3.875 million ($395,000 base salary plus $3.48 million option bonus proration)
2011 $4.65 million ($1.17 million base salary plus $3.48 million option bonus proration)
2012 $5.425 million ($1.945 million base salary plus $3.48 million option bonus proration)
2013 $6.2 million ($2.72 million base salary plus $3.48 million option bonus proration)
2014 $6.975 million ($3.495 million base salary plus $3.48 million option bonus proration)
Those are the basic elements of Stafford's contract, and they illustrate the 25 Percent Rule, which applies to rookies' contracts. The 25 Percent Rule essentially says that certain amounts in a rookie's contract can't increase each year by more than 25 percent of the first-year total of those amounts. Signing bonus prorations and most other amounts treated as signing bonuses aren't included in the calculation of the 25 Percent Rule, but option bonus prorations are included. The only first-year money Stafford gets is his base salary of $3.1 million, 25 percent of which comes to $775,000. So the applicable amounts in his contract -- in his case, those are his base salaries and option bonus prorations -- can't increase by more than $775,000 each year. And not coincidentally, that's exactly how much they increase each year.
The amounts listed in the chart represent the minimum he is scheduled to earn if he's on the Lions' roster through the 2014 season. The total of those amounts is $30.21 million. Not only is that not anywhere close to $41.7 million, Stafford isn't even guaranteed to receive all of that $30.21 million. The actual amount he's absolutely guaranteed to receive under any circumstances is a mere $17.05 million.
Let's take a look at what happens if the Lions decide very early in Stafford's career that they made an egregious mistake, and Stafford is closer to being the next Bobby Garrett than he is to being the next Bobby Layne. Suppose Stafford plays less than 35 percent of the Lions' offensive snaps during the 2009 regular season, and the team decides not to exercise the option in his contract for 2014. Stafford's option bonus is mostly protected, which means that if it's not exercised, a clause in his contract automatically kicks in and assures that he'll get most of the money anyway. If the option isn't exercised, Stafford's base salaries automatically increase to $3.875 million in 2010, $4.65 million in 2011, $5.425 million in 2012 and $6.2 million in 2013, and he becomes a free agent in 2014. You'll notice that those amounts are the same as his cap numbers if the option is exercised, and the total amount is the same. However, there's a catch to that $6.2 million in 2013.
In an NFL contract, base salaries can be guaranteed "for skill" and "for injury" and against cap considerations. A fully guaranteed salary protects a player in all three scenarios. If he can no longer play effectively, suffers a career-ending injury or simply has too high of a cap number, he'll still receive his salary if it's fully guaranteed. And Stafford's base salaries are fully guaranteed through 2012. His 2013 base salary, however, is not fully guaranteed, because of a rule in the Collective Bargaining Agreement that deals with guaranteed salaries. Article XXIV, Section 7, (d)(ii) of the CBA says, "In a Player Contract entered into in a Capped Year, 50% of the Salary fully guaranteed for any League Year beyond three years after the Final Capped Year will be included in Salary and Team Salary during the League Year or Years of the Contract in which the Salary Cap is in effect in a proportion to be determined by the Team." The "Final Capped Year" currently is 2009, which means that half of any salary fully guaranteed beyond 2012 would be charged against the Lions' salary cap in 2009. As a result, Stafford's 2013 base salary (and 2014, if his option is exercised) is not fully guaranteed. It's guaranteed against cap considerations and "for injury," but it's not guaranteed "for skill." So if the Lions decide Stafford simply doesn't have the skill to play for them, they can cut him without paying his salary for 2013. If that happens, and if Stafford never acheives any playing-time or performance incentives, the Lions will have paid him only $17.05 million.
So, why has Stafford's contract been reported as having $41.7 million in guaranteed money? Most likely, it's because Stafford's agent, Tom Condon, wants everyone to think that he got his client that much guaranteed money. In reality, though, that's not the amount that Stafford is guaranteed to receive -- it's the amount that he COULD BE guaranteed to receive, if he achieves certain qualifiers and the Lions exercise his option. If Stafford achieves his qualifiers in 2009, there's a $9.105 million roster bonus in 2010, an additional $7.83 million in fully guaranteed salary for 2011 and an additional $755,000 in fully guaranteed salary for 2012. Along with the $17.4 million option bonus and his standard base salaries for 2009 through 2012, the total comes to $41.7 million, the figure cited by the media. But $24.65 million of that "guaranteed" money is dependent upon Stafford meeting his qualifiers. (The contract also includes built-in ways for Stafford to receive most or all of that money even if it takes him until 2010, 2011 or 2012 to achieve his qualifiers.)
The rest of Stafford's $72 million consists of a potential $7.8 million salary escalator in 2012 and escalated salaries of $11.5 million in 2013 and $11 million in 2014. But again, the only way for him to have those salaries is by reaching his qualifiers in certain seasons. And if those aren't enough, he has additional escalators of up to $1.5 million in certain seasons that could push his total contract value to its maximum of $78 million.
On a related note, I hate to correct ESPN.com's NFC North blogger, Kevin Seifert, considering that he has cited my blog three times. But in his May 8 entry about Stafford's contract, he mistakenly says that the use of the option bonus is "exact strategy" I wrote about in this post that I made on March 21 about a loophole around the 30 Percent Rule (and possibly the 25 Percent Rule for rookies). But it's not the same strategy. Option bonuses aren't a loophole around the rules, because the CBA specifically states that option bonuses count in the calculations for either rule. The loophole involves completion bonuses, which can be guaranteed but do not count in the calculations for the 30 Percent Rule.
The only parts of Stafford's contract that he's fully guaranteed to receive right now are most of his base salaries and the protected value of his option bonus. He did not receive a signing bonus, which isn't unusual for a high draft pick. In 2008, none of the first seven players drafted got a signing bonus. Stafford's base salaries are $3.1 million for 2009, $395,000 for 2010, $1.17 million for 2011, $1.95 million for 2012 and $2.7 million for 2013. In 2010, the Lions will have to decide whether to exercise an option for 2014 by paying Stafford a $17.4 million option bonus. If they exercise the option, the bonus gets prorated from 2010 to 2014, and Stafford gets a base salary of $3.495 million for 2014.
Here are Stafford's salary cap numbers if the Lions exercise the option and Stafford does not achieve any playing-time or performance incentives --
2009 $3.1 million
2010 $3.875 million ($395,000 base salary plus $3.48 million option bonus proration)
2011 $4.65 million ($1.17 million base salary plus $3.48 million option bonus proration)
2012 $5.425 million ($1.945 million base salary plus $3.48 million option bonus proration)
2013 $6.2 million ($2.72 million base salary plus $3.48 million option bonus proration)
2014 $6.975 million ($3.495 million base salary plus $3.48 million option bonus proration)
Those are the basic elements of Stafford's contract, and they illustrate the 25 Percent Rule, which applies to rookies' contracts. The 25 Percent Rule essentially says that certain amounts in a rookie's contract can't increase each year by more than 25 percent of the first-year total of those amounts. Signing bonus prorations and most other amounts treated as signing bonuses aren't included in the calculation of the 25 Percent Rule, but option bonus prorations are included. The only first-year money Stafford gets is his base salary of $3.1 million, 25 percent of which comes to $775,000. So the applicable amounts in his contract -- in his case, those are his base salaries and option bonus prorations -- can't increase by more than $775,000 each year. And not coincidentally, that's exactly how much they increase each year.
The amounts listed in the chart represent the minimum he is scheduled to earn if he's on the Lions' roster through the 2014 season. The total of those amounts is $30.21 million. Not only is that not anywhere close to $41.7 million, Stafford isn't even guaranteed to receive all of that $30.21 million. The actual amount he's absolutely guaranteed to receive under any circumstances is a mere $17.05 million.
Let's take a look at what happens if the Lions decide very early in Stafford's career that they made an egregious mistake, and Stafford is closer to being the next Bobby Garrett than he is to being the next Bobby Layne. Suppose Stafford plays less than 35 percent of the Lions' offensive snaps during the 2009 regular season, and the team decides not to exercise the option in his contract for 2014. Stafford's option bonus is mostly protected, which means that if it's not exercised, a clause in his contract automatically kicks in and assures that he'll get most of the money anyway. If the option isn't exercised, Stafford's base salaries automatically increase to $3.875 million in 2010, $4.65 million in 2011, $5.425 million in 2012 and $6.2 million in 2013, and he becomes a free agent in 2014. You'll notice that those amounts are the same as his cap numbers if the option is exercised, and the total amount is the same. However, there's a catch to that $6.2 million in 2013.
In an NFL contract, base salaries can be guaranteed "for skill" and "for injury" and against cap considerations. A fully guaranteed salary protects a player in all three scenarios. If he can no longer play effectively, suffers a career-ending injury or simply has too high of a cap number, he'll still receive his salary if it's fully guaranteed. And Stafford's base salaries are fully guaranteed through 2012. His 2013 base salary, however, is not fully guaranteed, because of a rule in the Collective Bargaining Agreement that deals with guaranteed salaries. Article XXIV, Section 7, (d)(ii) of the CBA says, "In a Player Contract entered into in a Capped Year, 50% of the Salary fully guaranteed for any League Year beyond three years after the Final Capped Year will be included in Salary and Team Salary during the League Year or Years of the Contract in which the Salary Cap is in effect in a proportion to be determined by the Team." The "Final Capped Year" currently is 2009, which means that half of any salary fully guaranteed beyond 2012 would be charged against the Lions' salary cap in 2009. As a result, Stafford's 2013 base salary (and 2014, if his option is exercised) is not fully guaranteed. It's guaranteed against cap considerations and "for injury," but it's not guaranteed "for skill." So if the Lions decide Stafford simply doesn't have the skill to play for them, they can cut him without paying his salary for 2013. If that happens, and if Stafford never acheives any playing-time or performance incentives, the Lions will have paid him only $17.05 million.
So, why has Stafford's contract been reported as having $41.7 million in guaranteed money? Most likely, it's because Stafford's agent, Tom Condon, wants everyone to think that he got his client that much guaranteed money. In reality, though, that's not the amount that Stafford is guaranteed to receive -- it's the amount that he COULD BE guaranteed to receive, if he achieves certain qualifiers and the Lions exercise his option. If Stafford achieves his qualifiers in 2009, there's a $9.105 million roster bonus in 2010, an additional $7.83 million in fully guaranteed salary for 2011 and an additional $755,000 in fully guaranteed salary for 2012. Along with the $17.4 million option bonus and his standard base salaries for 2009 through 2012, the total comes to $41.7 million, the figure cited by the media. But $24.65 million of that "guaranteed" money is dependent upon Stafford meeting his qualifiers. (The contract also includes built-in ways for Stafford to receive most or all of that money even if it takes him until 2010, 2011 or 2012 to achieve his qualifiers.)
The rest of Stafford's $72 million consists of a potential $7.8 million salary escalator in 2012 and escalated salaries of $11.5 million in 2013 and $11 million in 2014. But again, the only way for him to have those salaries is by reaching his qualifiers in certain seasons. And if those aren't enough, he has additional escalators of up to $1.5 million in certain seasons that could push his total contract value to its maximum of $78 million.
On a related note, I hate to correct ESPN.com's NFC North blogger, Kevin Seifert, considering that he has cited my blog three times. But in his May 8 entry about Stafford's contract, he mistakenly says that the use of the option bonus is "exact strategy" I wrote about in this post that I made on March 21 about a loophole around the 30 Percent Rule (and possibly the 25 Percent Rule for rookies). But it's not the same strategy. Option bonuses aren't a loophole around the rules, because the CBA specifically states that option bonuses count in the calculations for either rule. The loophole involves completion bonuses, which can be guaranteed but do not count in the calculations for the 30 Percent Rule.
Wednesday, April 15, 2009
The rookie pool and the salary cap
A lot of people, including many in the media, have a misunderstanding of how the salary cap and rookie pools are intertwined, beyond the misnomer of "a cap within a cap." This post is an attempt to explain exactly how the rookie pool works and how it relates to the cap.
First, a couple of definitions:
Rule of 51: This is the commonly used name for the rule explained in Article XXIV, Section 7, subsection (a)(i) of the Collective Bargaining Agreement. The rule states, "between March 1 and the first day of the regular playing season, only the following amounts from Paragraph 5 shall be included for players whose Player Contracts are not among the Team’s 51 highest valued Player Contracts, tenders and Offer Sheets (as determined under this Section 7): (1) Any amount that exceeds the Minimum Active/Inactive List Salary for Undrafted Rookie Free Agents; and (2) Any amount that exceeds twice the applicable Minimum Active/Inactive List Salary for all other players."
In simple terms, it means that during the offseason, for any player whose cap number is not among his team's 51 highest cap numbers, his base salary ("Paragraph 5" salary) does not count against the cap. The two exceptions listed above ("any amount that exceeds ...") are not known to have ever come into play, because teams traditionally give undrafted rookies minimum base salaries, and it would be extremely unlikely for a team to have a player outside its Top 51 with a base salary more than twice his applicable minimum.
As an example of how the Rule of 51 works, consider a team whose 51st-highest cap number for current players (contracts, tenders or offer sheets) is $400,000. The team's next-highest cap number is $397,280, which is for a second-year player with a base salary of $385,000, a signing bonus proration of $5,000 and a standard workout bonus of $7,280. Because this player is outside the hypothetical team's Top 51, his minimum base salary does not count against the cap, but the other $12,280 does. The same thing would apply to the rest of the team's players outside its Top 51: their minimum base salaries would not count against the cap, but everything else would. (All "dead money" also counts against the cap.)
Rookie pool: On a league-wide basis, the rookie pool (described in Article XVII of the CBA) is the total amount of money that can be spent on rookies, except that the minimum base salaries for undrafted rookies do not count toward the rookie pool. Each team's rookie pool is its portion of the league-wide total and is determined by the number, round and position of the draft choices it uses.
Basically, the entire first-year cap numbers for all of a team's draft choices must fit into its rookie pool, along with any first-year cap charges for undrafted rookies other than their minimum base salaries.
After the draft, teams are told the amount of their rookie pool, but they never are told the rookie pool value for each draft pick. However, astute teams — presumably all of them — could estimate with reasonable precision the specific rookie pool value of each pick prior to the draft. When teams sign a drafted player, his first-year cap number does not have to be equal, or even close to, the rookie pool value of the pick used to select him, as long as the team's combined rookie pool charges for all of its rookies don't exceed its limit.
How it all works
Saying that the rookie pool is "a cap within a cap" is a bit of a misnomer because the rookie pool actually is a separate accounting from the salary cap, although rookies count toward both limits. The calculations are different, though, so the amount a rookie counts against the rookie pool isn't necessarily the same as the amount he counts against the salary cap.
When a player is drafted, he automatically is tendered a one-year contract for the rookie minimum base salary (for 2009, that is $310,000). This amount immediately is applied to the team's rookie pool and salary cap. Because most teams have at least 51 players with cap numbers higher than the rookie minimum salary before the draft, the automatic tenders for drafted players won't affect those teams' cap at all. It sometimes is mistakenly reported that teams must have cap room in order to use their draft choices, but that applies only to teams that have fewer than 51 players signed or tendered at the time of the draft. And even then, it applies only to the number of draft choices a team uses until it has 51 players signed or tendered. So, for example, if a team had 49 players signed or tendered before the draft, it would need only $620,000 of cap room in order to make all of its selections. After the first two draftees are automatically tendered, the team would have 51 players signed or tendered, and the rest of the team's draftees would fall outside its 51 highest cap numbers and would not affect its cap.
When a drafted player signs his contract, the team is charged against its salary cap according to the Rule of 51, and it is charged against its rookie pool according to the rules in Article XVII.
Let's consider a seventh-round draft pick who signs a four-year contract with minimum base salaries and a $44,000 signing bonus and who was selected by a team with its 51st-highest cap number being $400,000 (for a second-year player with a $385,000 base salary). His first-year cap number would be $321,000, consisting of his $310,000 base salary and his $11,000 bonus proration. Because he was drafted, the entire $321,000 would count against his team's rookie pool, replacing his automatic tender. But because he is below his team's top 51 cap numbers, only his $11,000 bonus proration counts against the salary cap during the offseason.
Now consider a third-round draft pick for the same team. He signs a four-year contract with minimum base salaries and a signing bonus of $700,000. His first-year cap number would be $485,000, consisting of his $310,000 base salary and his $175,000 bonus proration. All $485,000 would count against his team's rookie pool and against his team's salary cap. However, by assuming his place in the team's top 51 cap numbers, he knocks the player with a $400,000 cap number ($385,000 base salary) out of the team's top 51. For that player, his base salary no longer counts against the cap, leaving only the other $15,000 counting against the cap. The net result is that the team's cap room is reduced by only $100,000 — the draftee's $485,000 is charged against the cap, but the second-year player's $385,000 base salary no longer is.
As you can see, as long as his team already has at least 51 players signed or tendered — as all 32 teams did by April 15 — a draftee's effect on his team's salary cap is far less than his rookie pool charge. Most people forget this when they consider how much cap room must be "set aside" for rookies. You'll often see people say that, for example, if a team has $5 million of cap room and a rookie pool of $4 million, it has only $1 million available to spend on other players. Of course, if the team already has close to or more than 51 players signed or tendered, that's wrong, because that team's rookies will reduce its salary cap by far less than $4 million, as shown above.
As long as a team has at least 51 players already signed or tendered, it is impossible for its entire rookie class to reduce its cap room by more than its rookie pool minus the amount equal to the minimum rookie salary times the number of draftees signed. For example, if a team with a rookie pool of $5.1 million already has at least 51 players signed or tendered, then signs all 10 of its draftees and any number of undrafted rookies, it is impossible for the team's entire rookie class to reduce its cap room by more than $2 million. That's because the $310,000 base salary of every undrafted rookie and every draftee who doesn't make the team's top 51 won't count against the cap, and every draftee who does make the top 51 will knock another player's base salary of at least $310,000 out of the top 51.
To determine the maximum amount that a team's entire rookie class could reduce its cap room, it is necessary to know how many players it has signed or tendered, how many of its draftees are likely to have first-year cap numbers that qualify for its top 51 and the cap numbers and base salaries for as many players at the bottom of its top 51 as it has draftees who will qualify for the top 51.
If all of that is not known, a reasonable estimate for most teams this season can be made by starting with the team's rookie pool, then subtracting $385,000 for each draft pick in the first four rounds and $310,000 for each draft pick in the fifth, sixth or seventh rounds. For example, a team with a rookie pool of $4 million and one draft pick in each round will use approximately $1.53 million of cap room to sign all of its rookies ($4 million, minus the $1.54 million for the four players displaced in the team's top 51, minus $930,000 for the three late-round draftees whose base salaries won't count against the cap). Using this method might not be precise for every team, but it will give you a pretty good estimate.
First, a couple of definitions:
Rule of 51: This is the commonly used name for the rule explained in Article XXIV, Section 7, subsection (a)(i) of the Collective Bargaining Agreement. The rule states, "between March 1 and the first day of the regular playing season, only the following amounts from Paragraph 5 shall be included for players whose Player Contracts are not among the Team’s 51 highest valued Player Contracts, tenders and Offer Sheets (as determined under this Section 7): (1) Any amount that exceeds the Minimum Active/Inactive List Salary for Undrafted Rookie Free Agents; and (2) Any amount that exceeds twice the applicable Minimum Active/Inactive List Salary for all other players."
In simple terms, it means that during the offseason, for any player whose cap number is not among his team's 51 highest cap numbers, his base salary ("Paragraph 5" salary) does not count against the cap. The two exceptions listed above ("any amount that exceeds ...") are not known to have ever come into play, because teams traditionally give undrafted rookies minimum base salaries, and it would be extremely unlikely for a team to have a player outside its Top 51 with a base salary more than twice his applicable minimum.
As an example of how the Rule of 51 works, consider a team whose 51st-highest cap number for current players (contracts, tenders or offer sheets) is $400,000. The team's next-highest cap number is $397,280, which is for a second-year player with a base salary of $385,000, a signing bonus proration of $5,000 and a standard workout bonus of $7,280. Because this player is outside the hypothetical team's Top 51, his minimum base salary does not count against the cap, but the other $12,280 does. The same thing would apply to the rest of the team's players outside its Top 51: their minimum base salaries would not count against the cap, but everything else would. (All "dead money" also counts against the cap.)
Rookie pool: On a league-wide basis, the rookie pool (described in Article XVII of the CBA) is the total amount of money that can be spent on rookies, except that the minimum base salaries for undrafted rookies do not count toward the rookie pool. Each team's rookie pool is its portion of the league-wide total and is determined by the number, round and position of the draft choices it uses.
Basically, the entire first-year cap numbers for all of a team's draft choices must fit into its rookie pool, along with any first-year cap charges for undrafted rookies other than their minimum base salaries.
After the draft, teams are told the amount of their rookie pool, but they never are told the rookie pool value for each draft pick. However, astute teams — presumably all of them — could estimate with reasonable precision the specific rookie pool value of each pick prior to the draft. When teams sign a drafted player, his first-year cap number does not have to be equal, or even close to, the rookie pool value of the pick used to select him, as long as the team's combined rookie pool charges for all of its rookies don't exceed its limit.
How it all works
Saying that the rookie pool is "a cap within a cap" is a bit of a misnomer because the rookie pool actually is a separate accounting from the salary cap, although rookies count toward both limits. The calculations are different, though, so the amount a rookie counts against the rookie pool isn't necessarily the same as the amount he counts against the salary cap.
When a player is drafted, he automatically is tendered a one-year contract for the rookie minimum base salary (for 2009, that is $310,000). This amount immediately is applied to the team's rookie pool and salary cap. Because most teams have at least 51 players with cap numbers higher than the rookie minimum salary before the draft, the automatic tenders for drafted players won't affect those teams' cap at all. It sometimes is mistakenly reported that teams must have cap room in order to use their draft choices, but that applies only to teams that have fewer than 51 players signed or tendered at the time of the draft. And even then, it applies only to the number of draft choices a team uses until it has 51 players signed or tendered. So, for example, if a team had 49 players signed or tendered before the draft, it would need only $620,000 of cap room in order to make all of its selections. After the first two draftees are automatically tendered, the team would have 51 players signed or tendered, and the rest of the team's draftees would fall outside its 51 highest cap numbers and would not affect its cap.
When a drafted player signs his contract, the team is charged against its salary cap according to the Rule of 51, and it is charged against its rookie pool according to the rules in Article XVII.
Let's consider a seventh-round draft pick who signs a four-year contract with minimum base salaries and a $44,000 signing bonus and who was selected by a team with its 51st-highest cap number being $400,000 (for a second-year player with a $385,000 base salary). His first-year cap number would be $321,000, consisting of his $310,000 base salary and his $11,000 bonus proration. Because he was drafted, the entire $321,000 would count against his team's rookie pool, replacing his automatic tender. But because he is below his team's top 51 cap numbers, only his $11,000 bonus proration counts against the salary cap during the offseason.
Now consider a third-round draft pick for the same team. He signs a four-year contract with minimum base salaries and a signing bonus of $700,000. His first-year cap number would be $485,000, consisting of his $310,000 base salary and his $175,000 bonus proration. All $485,000 would count against his team's rookie pool and against his team's salary cap. However, by assuming his place in the team's top 51 cap numbers, he knocks the player with a $400,000 cap number ($385,000 base salary) out of the team's top 51. For that player, his base salary no longer counts against the cap, leaving only the other $15,000 counting against the cap. The net result is that the team's cap room is reduced by only $100,000 — the draftee's $485,000 is charged against the cap, but the second-year player's $385,000 base salary no longer is.
As you can see, as long as his team already has at least 51 players signed or tendered — as all 32 teams did by April 15 — a draftee's effect on his team's salary cap is far less than his rookie pool charge. Most people forget this when they consider how much cap room must be "set aside" for rookies. You'll often see people say that, for example, if a team has $5 million of cap room and a rookie pool of $4 million, it has only $1 million available to spend on other players. Of course, if the team already has close to or more than 51 players signed or tendered, that's wrong, because that team's rookies will reduce its salary cap by far less than $4 million, as shown above.
As long as a team has at least 51 players already signed or tendered, it is impossible for its entire rookie class to reduce its cap room by more than its rookie pool minus the amount equal to the minimum rookie salary times the number of draftees signed. For example, if a team with a rookie pool of $5.1 million already has at least 51 players signed or tendered, then signs all 10 of its draftees and any number of undrafted rookies, it is impossible for the team's entire rookie class to reduce its cap room by more than $2 million. That's because the $310,000 base salary of every undrafted rookie and every draftee who doesn't make the team's top 51 won't count against the cap, and every draftee who does make the top 51 will knock another player's base salary of at least $310,000 out of the top 51.
To determine the maximum amount that a team's entire rookie class could reduce its cap room, it is necessary to know how many players it has signed or tendered, how many of its draftees are likely to have first-year cap numbers that qualify for its top 51 and the cap numbers and base salaries for as many players at the bottom of its top 51 as it has draftees who will qualify for the top 51.
If all of that is not known, a reasonable estimate for most teams this season can be made by starting with the team's rookie pool, then subtracting $385,000 for each draft pick in the first four rounds and $310,000 for each draft pick in the fifth, sixth or seventh rounds. For example, a team with a rookie pool of $4 million and one draft pick in each round will use approximately $1.53 million of cap room to sign all of its rookies ($4 million, minus the $1.54 million for the four players displaced in the team's top 51, minus $930,000 for the three late-round draftees whose base salaries won't count against the cap). Using this method might not be precise for every team, but it will give you a pretty good estimate.
Saturday, March 21, 2009
A loophole around the NFL's 30 Percent Rule
I originally intended this blog to be only for the discussion of compensatory picks, but I'm making an exception for this post.
The 30 Percent Rule explained
Because the NFL is in the final year of the salary cap, teams aren't able to structure contracts quite in the same way they typically do, with the first-year cap number being especially small. The 30 Percent Rule limits the annual increase in certain components of a player's cap number to 30 percent of those components in the Final Capped Year, starting in the first uncapped year. Because this is the Final Capped Year, this year's cap details are what determines how much a contract can increase each season after this. That limits how small this year's cap number can be when using the normal structure of a contract.
For example, consider a five-year veteran signing a three-year contract for $15 million, with a $6 million signing bonus and a total of $9 million in base salaries. If the cap currently extended through 2011, that contract could be structured with a cap hit this season of $2.62 million ($620,000 base salary and $2 million signing bonus allocation). But in reality, because 2010 and 2011 currently are uncapped, the contract must comply with the 30 Percent Rule. In the case of this particular contract, that means the base salaries can't increase by more than 30 percent of this year's base salary. So the lowest this year's base salary could be is $2,307,693, which could increase to $3 million in 2010 and $3,692,307 in 2011, for a total of $9 million in base salaries. This year's cap number would be $4,307,693 — or almost $1.7 million more than it would be using the normal contract structure.
The key to structuring contracts that comply with the 30 Percent Rule is knowing which components are included in the calculations (most of them) and which components are not included (mostly signing bonuses and other amounts treated as signing bonuses, except that option bonuses paid to extend a contract are included).
The challenge most teams are having while structuring contracts this year is finding a way to minimize this year's cap hit while also guaranteeing the player as much money as possible. Other cap rules limit the types of payments that can be guaranteed in future seasons without affecting this year's cap, and the 30 Percent Rule limits the amounts of those payments as compared to this year's cap number.
Many teams are using a protected option bonus in 2010 to increase a player's guaranteed money while limiting this year's cap hit. Because option bonus prorations start in the season they're paid, this year's cap number isn't affected by an option bonus paid in 2010. But because option bonus prorations are included in the calculations for the 30 Percent Rule, the other cap components that are included in the calculations have to be large enough this season to keep the contract compliant in 2010, when the option bonus proration is included. That restricts just how low this year's cap number can be.
The loophole
One team, though, has found a loophole in the 30 Percent Rule that can be used essentially to guarantee money while at the same time minimizing this year's cap number in the usual manner. The New Orleans Saints have used what is known as a "completion bonus" in the contracts of Jonathan Vilma, Jon Stinchcomb and Jabari Greer.
Here is Artcle XXIV, Section 7(b)(iv)(16) of the Collective Bargaining Agreement, which is under "Amounts Treated as Signing Bonuses" —
(16) Any bonus to be paid to a player solely for fulfilling his obligations to play under his Player Contract without seeking to renegotiate and/or “holding out” (i.e., a “completion bonus”), and which bonus is otherwise guaranteed for skill and injury, except that the amount of any such completion bonus shall be calculated at its present value, computed at the one-year Treasury Note rate published in The Wall Street Journal on February 1 of the League Year in which the Player Contract is executed. Further, if any event occurs which extinguishes the player’s right to receive such completion bonus, any amount of the bonus that has previously been included in Team Salary shall be immediately added to the Team’s Salary Cap for the current League Year, if such event occurs prior to June 1, or for the next League Year, if such event occurs after such date, with the remainder of the bonus that has been allocated to Team Salary for future League Years immediately extinguished.
Essentially, Vilma, Stinchcomb and Greer will receive a completion bonus in 2010 if they fulfill their contract obligations this year without holding out or seeking to renegotiate. Completion bonuses can be fully guaranteed for skill or injury, they aren't included in the calculations for the 30 Percent Rule, and the key to the loophole is that their prorations don't begin until 2010, the season in which they're paid. This loophole allows the Saints, or any other team that uses a completion bonus, to guarantee more money while also minimizing this year's cap hit to a greater degree than any other method of structuring a contract.
Although the Saints' use of completion bonuses has been reported in the media, including by Jason Cole of Yahoo.com and by Mike Triplett of The Times-Picayune, the issue has gone largely unnoticed. This might be because Cole's article focused on the "good behavior" aspect of completion bonuses or because the Saints' completion bonuses are relatively small ($5.5 million for Stinchcomb, $3.53 million for Vilma and $2 million for Greer). It would have received much more attention if the Washington Redskins had used a completion bonus to give Albert Haynesworth a first-year cap number of, say, $3.8 million — or, theoretically, as low as $2.796 million — instead of $7 million. If the "highest-paid defensive player in NFL history" had a lower first-year cap number than free-agent signings such as Frank Omiyale ($4.95 million) and Phillip Buchanan ($4.0 million), that would get attention.
Haynesworth got a seven-year contract worth $80 million, with $41 million of that guaranteed. He also has $35 million in Not Likely To Be Earned incentives. His guaranteed money consists of a $5 million signing bonus, a $21 million protected option bonus in 2010 and $15 million in base salaries during his first three years. His first-year base salary is $6 million, which along with his $1 million signing bonus proration gives him a cap number of $7 million for 2009. He will receive a total of $11 million this year ($5 million signing bonus and $6 million base salary) and $24.6 million in 2010 ($21 million option bonus and $3.6 million base salary) if the Redskins exercise the option. If the Redskins don't exercise the option, several of the base salaries would increase and become fully or partially guaranteed, adding up to the same $21 million in additional guarantees, making the option bonus "protected" and that money guaranteed.
By using a completion bonus instead of an option bonus, the Redskins could have given Haynesworth a much lower cap number while still paying the same amount of money in the same seasons. For example, the Redskins could have paid him a $9 million signing bonus and $2 million base salary this season, giving him the same $11 million this year but a cap hit of just $3.8 million. In 2010, the Redskins could pay him a base salary of $2.6 million, which would comply with the 30 Percent Rule, plus a $22 million guaranteed completion bonus for fulfilling his obligations in 2009. The total payout for 2010 would be $24.6 million, and his cap number (if 2010 becomes capped) would be $8.8 million, with both numbers being the same as in his actual contract. The rest of the contract theoretically could follow the same pattern, with completion bonuses and base salaries combining to match the annual payouts in the current contract.
Most of the major signings this offseason occurred before the Saints signed Vilma, Stinchcomb and Greer. It will be interesting to see if any other teams use the same contract structure this offseason. In particular, it could help teams fit rookies' contracts into the rookie pool while still complying with the 25 Percent Rule for rookies (although the CBA doesn't specify whether a completion bonus would be treated the same for the 25 Percent Rule as it is for the 30 Percent Rule). And it could help a team looking to give a player a huge contract or contract extension without making a huge dent in the salary cap, such as the Dallas Cowboys' attempts to extend DeMarcus Ware's contract. Using the completion bonus loophole around the 30 Percent Rule, the Cowboys theoretically could give Ware a contract larger than Haynesworth's but with a much smaller impact on their salary cap.
Subscribe to:
Posts (Atom)