Salary Cap 101: Player Contracts Feb 7, 2005 by Starkiller & Nendzone The Super Bowl is fading in the rearview

mirror and the twists and turns of the offseason road lie ahead. It's that time of year when the main topic of conversation around the NFL turns to free agency and the salary cap. Which teams have cap room, which teams are over the cap, which players take up too much cap room, which players have "cap-friendly" contracts... For some fans, the inner workings of the salary cap are one of the great mysteries of the NFL. It's like understanding quantum physics, the origins of Stonehenge, or how the cream filling gets into Twinkies. If you are one of those fans confused about how this salary cap thing works, maybe can help. (Warning: there will be math! Word problems ahead!) What's in a Number? The annual salary cap dollar limit is a designated percentage of the league's shared revenues (TV rights, ticket sales, merchandise sales, etc.) from the previous league year. The exact percentage is set forth in the NFL's Collective Bargaining Agreement. In 2004, teams had a salary cap limit of just over $80.5 million, or 64.75% of the defined gross revenues. In 2005, it is expected to be about $85 million. So how is it Redskins owner Daniel Snyder wrote out $110 million worth of checks to his players in 2004, almost $30M more in actual payroll than last year's salary cap limit? Ah... now this is where things start to get more complicated ("More complicated?" You're saying...). The truth is that the salary cap is not just a simple spending limit or budget for a team. It's really more just a system of accounting. Every dollar a team spends counts under the cap. It may not count the year they pay it, but eventually teams have to pay the piper. It gives teams the flexibility to maneuver to stay competitive. It also sometimes gives teams just enough rope to hang themselves. But how does a player's contract actually work? Welcome to the exciting world of accounting... 3... 2... 1... Contract Player contracts have a number of different figures, but each falls into one of two categories: guaranteed or unguaranteed. Basically, guaranteed portions of a player's contract are paid out to the player in advance but the salary cap charges are prorated (averaged out) over the life of his contract. Even though the player got a big check up front, the team accounts for it over time. While unguaranteed

figures count entirely in the year they are due, the team can release a player and recoup that unguaranteed money before having paid it. Every player has a base salary, which has a minimum based on their NFL playing experience. The longer he has been in the league, the more he is assured of receiving from a base salary. This base salary will count entirely during one season for salary cap purposes (with rare exceptions we won’t confuse you with). This contract is not normally guaranteed, so a team can almost always save the entire base salary by releasing a player before the season begins. As an exception to this rule, base salaries (in full or just a portion) can be guaranteed up front. That way, a player will receive his salary that season whether or not he is on the roster. The salary cap hit still counts only for that particular season, but teams can't get the money back by releasing the player. This isn't common for contracts and teams don't like guaranteeing salaries. But sometimes a player, often nearing the end of his career, wants to make it tougher for a team to release him. It's a good incentive for a team to keep the player around because they don't like paying a player's salary when he's not on the roster. A player's signing bonus is guaranteed up front. He literally gets a check for signing on the dotted line. The team, meanwhile, gets to prorate the bonus over the life of the contract (up to 7 years depending on what season the contract is signed). So if a player signs a 5-year deal with a $5M signing bonus, the bonus itself will count $1M per season under that team's cap (assuming the player is on the roster that long). Sometimes contracts will include a split signing bonus, which means the player will receive 1 check in the first season, and then another later on. This money all still counts under the salary cap. It's just that the 2nd check doesn't count against the salary cap until it is paid. An option bonus included in a player's contract is a predetermined bonus that the team must pay in order to add extra seasons to a player's deal. When the player and team agree to the contract, the terms of the bonus are also agreed upon (i.e. money, date due, and added years). If and when the team officially agrees to add the option years to the player's contract, the player gets a check. Under the salary cap, the bonus does not count until the team agrees to pick it up. Once they do, it works like a signing bonus: prorated over the remaining life of the contract. A roster bonus works more like a base salary in the end. Like option bonuses, the roster bonus is agreed to by the player and team when the contract is first signed. If the player is still on a team's roster by the predetermined date, he will receive a predetermined dollar amount. Also, like an option bonus, this doesn't count under the salary cap until the date specified comes. And when it does, the player (if still on the roster), receives a check. But instead of being prorated, this

bonus counts entirely under the cap during the season it is awarded. Also, once paid, the bonus is guaranteed to the player, so releasing him even a day later can't save the team that money or salary cap space. Contracts can also include bonuses for attendance at team workouts or reporting for training camp. Usually these are unguaranteed bonuses and count only under the salary cap that year (like a roster bonus). But in some instances they can be guaranteed and act as a signing bonus. The final common portion of a player's contract is incentives. Basically, a player is paid a predetermined sum of money for meeting a predetermined statistical goal. Perhaps a player will receive an extra $100,000 for throwing 20 touchdown passes. Or maybe he will receive $50,000 for making the Pro Bowl. Team-based goals (such as wins or a Super Bowl appearance) can also be incentives. Either way, the player only receives this money after the season if he meets this goal. That's the simple part. The salary cap hit, however, is a little more complex and it depends on the type of incentive. There are 2 types: "likely to be earned" (LTBE) and "not likely to be earned" (NLTBE). LTBE incentives are generally those which the player already surpassed the previous season. Since he has already reached those stats already, he is deemed likely to meet them again. NLTBE incentives use goals which the player did not reach the previous season. For rookies or veterans who didn't play the previous season, the league and players association will determine which individual incentives are likely or not likely to be earned. NLTBE incentives don't count under the salary cap in the year they are due. If a player reaches their goals, the money comes out of the team's salary cap the next season. These are the most common incentives as they give players the chance to make extra money while not hurting the team's salary cap immediately. LTBE incentives count under the salary cap in the year they are due. It doesn't matter that the player may or may not reach these goals. Since they are expected to, the team must account for them ahead of time. If a player doesn't reach some of their incentives, the unpaid portion of the incentives is deducted from the team's salary cap charge the next year to make up for the overage from the previous season's charge. So now for the math portion of our exam... Cap Math: Not Just For Parties Anymore Let's take, as a simple example, Player A who signs a new contract with the Titans. It runs for 3 years, includes a $1.5M signing bonus, and has annual base salaries of $600k, 800k, and $1M.

The signing bonus will count $500k against the cap each year: $1,500,000 ÷ 3 years = $500,000 per year Each season's base salary counts in full for that season. So these would be the annual cap hits assuming the salary is never altered: Year 1: $500k (signing bonus) + $600k (base salary) = $1.1M total cap hit Year 2: $500k (SB) + $800k (base) = $1.3M Year 3: $500k (SB) + $1M (base) = $1.5M But let's take a far more complicated example. Player B signs a 5-year contract with a $9M signing bonus, plus a $5M team option for a 6th season which comes due in year 2. There are roster bonuses of $500k in year 3 and $750k in year 5. Annual salaries are $600k, $600k, $1M, $2M, $2.5M, and $4M. For the sake of argument, we'll assume the contract is never altered, the team picks up all 3 bonuses, and the player plays out the entire contract. The signing bonus will count $1.5M against the cap each year, as team owned option years count towards prorating bonuses: $9,000,000 ÷ 6 years = $1,500,000 per year The option bonus will count $1M against the cap each year starting in year 2: $5,000,000 ÷ 5 years = $1,000,000 per year Year 1: $1.5M (SB) + $600k (base) = $2.1M total cap hit Year 2: $1.5M (SB) + $600k (base) + $1M (option bonus) = $3.1M Year 3: $1.5M (SB) + $1M (base) + $1M (OB) + $500k (roster bonus) = $4M Year 4: $1.5M (SB) + $2M (base) + $1M (OB) = $4.5M Year 5: $1.5M (SB) + $2.5M (base) + $1M (OB) + $750k (RB) = $5.75M Year 6: $1.5M (SB) + $4M (base) + $1M (OB) = $6.5M The math gets more complicated when contracts are renegotiated in future seasons, but we’ll leave that for another day.

Salary Cap 101: Salary Cap Maneuvering Feb 15, 2005 by Starkiller & Nendzone The work on the field is over. Now it's time for general managers to earn their money. The offseason means teams have to put together a roster for the upcoming season while wrestling with the salary cap. Some teams have tons of cap room and that wrestling is easy. For teams like the Titans, who have to clear roughly $20M in cap room this year before they even look at keeping their own free agents, it’s like wrestling the proverbial 800-pound gorilla. While Floyd Reese doesn’t have a sleeper hold in his arsenal, he and other GMs do have a few tricks up their sleeves... Time's Up Teams must be under the salary cap by the first day of the league year (generally March 1). Up until that point, teams can be as far over the salary cap as they want. But if a team isn't under the cap by the deadline (or is over at any point afterwards), they are severely penalized by the league. So let's just say teams aren't going to be over the cap... The Art of Renegotiation One popular way to lower a player's cap number is something called restructuring, which is merely converting unguaranteed money (generally base salaries and roster bonuses) into a signing bonus. Doing so will let a team prorate that money over the remaining life of the contract, lowering his current cap hit. As a tradeoff, it increases the player's cap hit in future years. The easiest and most common way to do this is what's called a simple restructure. This involves converting as much unguaranteed money as possible (every player has to have a minimum base salary) into a signing bonus. The player still gets every penny. The team, meanwhile, saves maximum room under the salary cap that season. These simple restructures are common because they are a quick way to create short-term cap room in the current year, and there is no downside for the player -- he still gets paid all the money due that year. In fact, most players would prefer to get more of their scheduled salary up front as a signing bonus. Sometimes players make a big deal about doing the team a big favor by restructuring. It's all an act. They lose nothing in a normal restructuring. In fact, they'd prefer one big check up front to being paid the same amount in small chunks as the season goes along. As an example, let's look at Titans left tackle Brad Hopkins. In 2005, he's scheduled to receive $3.25M in base salary and a $1.5M roster bonus on top of over $3.3M in already prorated signing bonuses from previous seasons. In 2006

(the final year of his contract), he's scheduled to receive $4.25M in base salary and a $1.5M roster bonus on top of that same $3.3M+ in prorated money. Here's how the cap hit works out if they don’t touch his contract: 2005: $3.25M (base) + $1.5M (RB) + $3,363,333 (prorated) = $8,113,333 cap hit 2006: $4.25M (base) + $1.5M (RB) + $3,363,333 (prorated) = $9,113,333 cap hit But let's say the Titans decide to do a simple restructure on Hopkins' contract. He can't have a base salary of less than $765k this year, so we'll take the rest of his base salary ($2.485M) along with his entire roster bonus and convert it into a new $3.985M signing bonus (prorated to $1,992,500 each of the next 2 seasons). 2005: $765k (base) + $1,992,500 (new proration) + $3,363,333 (old proration) = $6,120,833 2006: $4.25M (base) + $1.5M (RB) + $1,992,500 (new proration) + $3,363,333 (old proration) = $11,105,833 So in lowering his 2005 cap hit by nearly $2M, his 2006 cap hit goes up by the same amount. If this had been done with a player who had 3 years remaining to his contract, the future increase would be spread out evenly over that time (nearly $1M over each of 2 years rather than all at once in 2006). Again, every dollar the team saves in the short-term by restructuring will eventually be accounted for in the long-term. This fact will come back to haunt us later in the article... Take One For The Team... Or Find A New One The easier to understand form of reducing a cap number is asking a player to accept a straight pay reduction. Usually, this is presented to players who are otherwise in danger of being released. The team will get the cap savings from reducing the base salary outright, with no strings attached. There is nothing advantageous financially to the player, aside from avoiding being released. But if a player's market value isn't very high, it often makes more sense to take a cut and stay with his current team. Pay cuts can also be combined with normal renegotiations. A player with a high base salary and at least 2 years remaining on his contract could be convinced that he’d need to take a pay cut to stay with the team. After lowering his base salary, the team could then do a simple renegotiation with his remaining contract to save more cap room. And the player still gets some of his newly reduced salary up front as a signing bonus, which he'll like. Players can also agree to convert base salary into not likely to be earned incentives since they don't count under the cap up front. That way, if a player has performed poorly or has been injured, he can avoid being cut by giving the team cap room and still have a chance to gain back some of the money through

incentives. For the player, there is risk involved since the only way to see that money is to make sure they stay on the field and exceed their prior year's performance. But it's better for him than simply taking a pay cut. We are more likely to see a guy like Steve McNair accept a partial salary-toincentives restructure coming off his injury-riddled 2004 season than to see someone like Eddie George accept one coming off his 2003 season, where he was a 16-game starter. McNair is sure to surpass his injury-laden stats as long as he can stay on the field. George, meanwhile, had enough yards and TDs the previous year to make NLTBE incentives harder to reach. The easier the incentives are to reach, the more likely the player will be to go for it. Extension Cord Another way to lower a player's cap hit is by extending his contract. Essentially, a team would be lowering the player's cap hit by eliminating a high base salary (and possibly a roster bonus) that is normal near the end of most contracts and replacing it with a new signing bonus to be spread out over a few more years. This is generally only done with 1 or maybe 2 years left on the player's contract where it is impossible (you can’t prorate money over just 1 year) or inefficient to simply restructure. Also, the team would have to want to the keep the player around for a while longer than his current contract runs. For the most part, this is just like signing a new contract as far as the cap is concerned. The only real difference is how the old prorated money figures in. The team still has to account for whatever prorated money is left from the original contract. Whatever prorated money was scheduled to count against the cap that year still counts on top of the cap hit from the new extension. Please Release Me Players often get released (or retire) before their contract expires. When that happens, the unguaranteed portion of a player's contract disappears. Base salaries, unpaid roster bonuses, and incentives just go away. Since the player never actually received this money, the team doesn't have to account for it. But the remaining portion of prorated money that hasn't been accounted for accelerates, meaning it all has to be paid upfront instead of over the next few years. Since the player already received these bonuses in the past, the cap hit can't just vanish. When a player who is no longer on a team still counts against the cap, it's generally referred to as "dead money". If a player is cut before June 1, all of that accelerated cap value counts during that particular cap year. If he's cut on or after June 1, only the current prorated portion of his contract still counts that year, but the remaining prorated money all counts the following year.

Let's look at Eddie George’s release in 2004. His contract ran through 2006 and he was released after June 1. He had a $4.25M base salary in 2004 along with a $1M roster bonus due in April. His prorated money for that season counted just over $2M and the prorated money would count the same for each of the next 2 seasons. Here's how his cap hit would have broken down had the Titans kept him at his current contract, released him on March 1, or released him after June 1. Scheduled: $4.25M (base) + $1M (roster bonus) + $2,071,667 (prorated) = $7,321,667 Cut 3/1: $0 (base) + $0 (RB) + $6.215M (accelerated 3 years) = $6.215M Cut 6/1: $0 (base) + $1M (RB) + $2,071,667 (prorated) = $3,071,667 So by releasing Eddie after June 1, the Titans saved the most cap room possible in 2004. But in doing so, they passed along an extra $4.1M+ in dead money to 2005. They were willing to pay him his roster bonus simply to save the extra cap room allowed in post-June 1 cuts. Had they cut him in March, they would have saved just $1.1M against the 2004 cap. But by waiting until after June 1, they saved roughly $4.25M that year. As it was, the 2004 Titans were incredibly close to the salary cap, so had they not gotten that cap relief from Eddie's contract, they would have had to find it somewhere else... Salary Cap Hell The road to salary cap hell is paved with good intentions and Super Bowl aspirations. Usually teams get into salary cap trouble when they try to keep a contending roster together too long by signing too many expensive contracts, renegotiating contracts over and over, and generally pushing back guaranteed salary cap hits into the future. Eventually, it catches up to them. It's like those "no payments until 2007!" ads you see in the Sunday paper -- but when you read the fine print, it turns out that the interest is still accruing. So you can enjoy that new high definition TV for a couple of years without thinking about the money, but when the bill comes due, it's going to hurt. For NFL teams, it means letting lots of good players go and rebuilding. It's not necessarily a sign of poor cap management. It may simply a sign that a team has been trying to contend for a long time. There's no real limit as to how far a team can push the salary cap as long as they can find a way under the cap somehow. But the farther a team pushes its limits, the longer it’s likely to take for the team to recover. Next up in part three: Free Agency

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