The NFL Salary Cap – A Primer
· The CBA
o The CBA (Collective Bargaining Agreement) is the document that lays out the system and rules under which Players, Teams, and the League interact and operate.
o The NFL Management Council and the NFLPA (NFL Player’s Association) are the two parties that negotiate the CBA, and 24 team owners and the NFLPA must agree to the document.
o The CBA, crucially, specifies which revenue streams the players will receive a portion of, and how large a portion, or percentage, of such revenue they will receive.
o It also defines the rules that govern player contracts, the salary cap, and free agency.
o Included as well are the rights players possess. For instance, players may file grievances against their teams under the CBA, and the number of off-season workouts and mini-camps coaches may hold is explicitly outlined and limited in the CBA as well.
o The CBA also mandates player benefits, such as Group Insurance, Pension funding, Injury Protection, Travel/Moving/Meal expenses, Per Diem Preseason money, Post-season pay, Severance pay, Performance-Based pay, Minimum Salary Benefit pay, and Tuition Assistance pay.
o Presently, 2011 is the Final Capped Year. 2012 and beyond is “uncapped”, so a new extension of the CBA would be required by that time.
o The CBA outlines Termination Rights that allow the NFL or NFLPA to terminate the CBA prematurely by giving notice on November 8th of either 2008 or 2009. In 2008, if this is exercised: 2009 would be the Final Capped Year and 2010 would be “uncapped” and the final year of the deal. In 2009, if this is exercised: 2010 would be the Final Capped Year and 2011 would be “uncapped” and the final year of the deal.
o Unless stated otherwise, outlined below are the rules that govern a typical Capped Year (not the final Capped year, for which there are special rules, or Uncapped years)
· League Year
o League Years begin in early March.
o For instance, Free Agency was originally scheduled to commence March 3rd for the 2006 League Year. It was pushed back to March 11th.
· The Salary Cap
o For each League Year the NFL sets a Salary Cap, as shown below:
o The Salary Cap in 2006 and beyond is calculated based on how much Total Revenue (TR) and Total Football Revenue (TFR) the NFL projects it will take in that year.
o Precisely what percentage of the NFL’s TR and TFR will be allocated for player salaries and benefits is stated in the CBA and from 2006-2011 the percentage increases every two years. The exact percentages are as follows:
o (Please note that prior to 2006, the percentages refer to Defined Gross Revenue, DGR, which was the revenue stream used at that time to calculate the Salary Cap,)
o Once the appropriate percentage of revenues has been set aside for the players, the projected cost of Player Benefits is removed.
o The remaining amount is then divided by 32 (as there are 32 NFL teams), and the resulting quotient is the Salary Cap for that League Year.
o In equation form, the Salary Cap for a particular year is calculated as follows:
§ [(R * p% - B)/32] where R is the NFL’s Projected TFR Revenue for that year; p is the percentage of revenue the players receive; and B is the projected cost of player benefits;
o In 2005, the Salary Cap was $85.5 million. DGR totaled $5.125 billion. 65.5% of that revenue was allocated to players. $572 million went toward Player Benefits, with the balance divided among the 32 teams to yield the $85.5 million Cap.
o In 2006, the Salary Cap ended up being $102 million after the CBA extension was reached.
o Where is that money coming from? The two biggest components of the NFL’s revenue are: T.V. Money (from the contracts broadcast networks agree to in exchange for the right to cover NFL games; $600+million/year/network); and Gate Receipts (tickets you and I buy to see our favorite team play).
· The Salary Cap Announcement
o The Salary Cap for both 2006 and 2007 was announced in March of 2006.
o Starting in 2008, the Salary Cap for a given year will be agreed upon two years prior. For instance, the 2008 Salary Cap will be agreed upon after the 2006 season.
o However, the Salary Cap value originally agreed upon two years in advance can be adjusted, as governed by the Cap Adjustment Mechanism (CAM).
· Cap Adjustment Mechanism
o The CBA outlines a “trigger” percentage of Total Revenue (TR) for each capped League Year from 2006-2011. The TR trigger percentages are as follows: 59.0% (2006-2007); 59.5% (2008-2009); 60% (2010-2011).
o If payroll exceeds the trigger level in any League Year, the overage will be allocated proportionally to those teams over the trigger level.
o The allocation assigned to each team over the trigger level will then be charged to their Salary Cap evenly over the remaining Capped Years of the CBA.
o To demonstrate, let’s hypothetically say payroll exceeds the trigger percentage in 2007 and the Giants are a team that is over the trigger level and their proportionate allocation of the overage is $4 million. The $4 million would be charged to the Salary Cap of the Giants evenly over 2008-2011, meaning their Salary Cap in 2008 would be $1 million lower ($4 million/4 years) than a team that did not exceed the trigger and so on through 2011.
o On the other hand, if payroll is less than the trigger level, then the amount by which payroll is less than the trigger percentage will be credited to all 32 NFL teams evenly over the remaining Capped Years of the CBA.
o Credits (if payroll is lower than trigger) and Charges (if payroll is higher than trigger) may have to be netted in the event there is an overage one year and then an underage another year. In other words, each team could receive a $1 million annual credit from 2007-2011 due to payroll being less than the trigger in 2006, but then – as outlined above – the Giants could face a charge of $1 million if they exceed the trigger in 2007. As a result, in 2008 the Giants would have their $1 million credit offset by the $1 million charge. Thus, the net effect on the Salary Cap of the Giants would be $0.
o In the event the CBA is terminated, as outlined above, then credits and charges will not accelerate onto the Final Capped Year.
· Maximum Team Salary
o Each of the 32 NFL teams has a unique Team Salary.
o The Salary Cap is simply a “cap” or ceiling placed on each franchise’s Team Salary.
o From the start of the League Year (early March) through the NFL season, a franchise’s Team Salary cannot exceed the league-mandated Salary Cap.
o If a team is not under the Salary Cap by the deadline in March, then the team will not be permitted to sign additional players and they will be given one week to comply. If they remain over the Salary Cap the N.F.L. will void the team’s most recent contracts or tenders until the team is under.
o If a team is found guilty of circumventing the Salary Cap, the team may lose draft picks or face other sanctions.
· Minimum Team Salary
o There also is a league-wide Minimum Team Salary, the level a club’s Team Salary must be at or above when the League Year ends. This salary “floor” is rarely a practical issue that teams face.
o The NFL calculates Minimum Team Salary as 90% of a team’s Salary Cap 2007-2011 and 84% in 2006.
o At the end of each League Year no franchise’s Team Salary may be below the league-mandated Minimum Team Salary.
o If a club’s Team Salary is below the minimum at the conclusion of the League Year, then the amount by which it is below the minimum will be distributed to players on the roster at the league’s discretion.
o What counts toward Team Salary during the Off-season and Pre-season
o If Team Salary must not exceed the Salary Cap once the League Year begins the key question is, “What exactly is Team Salary?”
o To answer that question, let’s look at what counts toward Team Salary between the start of the League Year and the first day of the regular-season:
1. Player Contracts
3. Dead Money
4. “Net Incentives” and the “Adjusted” Salary Cap
o Player Contracts
§ All players who have signed with a team have a Player Contract.
§ The contract calls for base salaries, bonuses, and incentives which help determine the player’s Player Salary in a given year. Every player under contract has a Player Salary and every Player Salary counts toward Team Salary.
§ It should be noted that Player Salary is not the same as the player’s take-home income. A player’s actual earnings may be more or less than their Player Salary.
§ Also, since a player’s salary, bonuses, and incentives will change from year-to-year, Player Salary changes from year-to-year.
§ Player Salary for a given year has three components:
1. Paragraph-Five Base Salary
2. Prorata Signing Bonus Money
3. Roster/Reporting/Workout/LTBE Amounts
§ Paragraph-Five Base Salary
· Every player has a Paragraph-Five Base Salary. The player’s base salary is the amount of money the player will be paid, in equal increments, over the course of the regular-season if the player remains on the team.
· During the offseason/pre-season, if a player’s Player Salary with the base salary component included would rank among the 51 Highest Cap Values on the team, then that player’s base salary counts toward Player Salary, and thus Team Salary
· But if Player Salary with the base salary component included would not rank among the 51st Highest Cap Values on the team, then that player’s base salary does not count toward Player Salary, and thus Team Salary.
· Even if the player’s base salary does not count for cap purposes, the player’s contract is still valid and the player will be paid the salary if he remains on the team.
§ Tenders and Offer Sheets, in addition to Player Contracts, are included in the tabulation of the 51 Highest Cap Values.
o Prorata Signing Bonus Amounts
§ A signing bonus that a player has received -- which prorated over the current League Year -- counts in a prorated amount toward Player Salary.
§ Signing bonuses prorate equally over the remaining term of the player’s contract within the limitations set out below. So if a player has three years remaining on his contract, and receives a $3 million signing bonus, the signing bonus amount ($3 million) would prorate over the remaining term of the contract (3 years).
§ The proration limits are as follows:
§ *If the CBA is terminated prematurely, the 5-year proration limit scheduled for the current Final Capped Year, 2011, would then apply to the new Final Capped Year, 2009 or 2010.
§ $3 million / 3 years = $1 million / year. For cap purposes, $1 million of the bonus would count toward Player Salary and Team Salary in each of the remaining years of the player’s contract.
§ In the end, the full $3 million amount of the bonus would count toward Player Salary and Team Salary, but for cap purposes the impact of the bonus would be spread over the remaining term of the contract, or three years. The player would receive the full $3 million on one day in a lump sum, but for cap purposes the bonus would count in a prorated amount in each of the player’s remaining years under contract.
§ An option bonus (often the “second-tier” of a two-tiered bonus given to high-priced players) also prorates over the remaining term of the player’s contract as soon as the option is exercised or as soon as the last year in which the option may be exercised begins, whichever comes first.
§ In addition, other amounts prorate. Guaranteed salary advances, guaranteed reporting bonuses, guaranteed or paid buyout bonuses, and money paid or guaranteed for a contract modification (like an extension or simple-restructure).
§ The advantage to signing bonuses (and prorating amounts) is that, unlike base salary, they allow a player to receive a payment in the current year without the full amount of that payment counting toward Player Salary and Team Salary in the current year.
§ The downside is that in every other remaining year of the contract, money the player is not set to earn in actual income that year will count toward Player Salary and Team Salary.
§ As you can see in the table above, in 2006 the player will have $1 million count toward Player Salary as a result of the $3 million signing bonus even he earns $0.0 from the bonus in 2006. The upside is that in 2005 the player was paid $3 million in actual income, but only had $1 million of that amount count for cap purposes.
§ Usually signing bonus amounts prorate over the remaining term of the player’s contract, but there are two exceptions to that. First, the CBA specifies amortization limits. Currently, signing bonuses cannot prorate beyond 2009, regardless of a player’s contract term. Second, if void language in a Player Contract allows a player to void years based upon events in his sole control then those years will not count for amortization purposes.
§ Some players have received more than one signing bonus that has prorated over the current year. As a result, the prorated amount of all the bonuses is summed to find the aggregate Signing Bonus component of that player’s Player Salary.
o Roster/Reporting/Workout Bonuses
§ The full amount of non-guaranteed roster/reporting/workout bonuses count only in the League Year in which the bonus can be earned. These bonuses do not prorate, and they count toward Team Salary as soon as the relevant League Year begins, even if the bonus may not be paid until a later date in the year.
§ Non-guaranteed roster/reporting bonuses are found in the contracts of some prominent players. They set an early deadline for the team and player to come to agreement on new contract terms if the team feels the player needs to renegotiate his contract. The team will want to complete a renegotiation of the deal prior to the date of the non-guaranteed bonus because once the bonus is earned and paid it is a sunk cost, whereas before it is earned it can be cleared from Team Salary in the event the player is released, since it is not a guaranteed payment. The bonus might be due in March or April, early in the offseason.
o LTBE Amounts
§ LTBE refers to likely-to-be-earned performance incentives, money tied to attaining a performance level. These amounts count in full toward Team Salary in a given year if they are Likely to be Earned (LTBE) for that year.
o The “Adjusted” Salary Cap
o The net impact of incentives from the prior season is credited or charged to Team Salary as the case may be.
o If a LTBE incentive from the immediately prior season was not earned by the player then the team receives a credit on Team Salary in the amount of the LTBE incentive. So if a team was charged $1 million on 2004 Team Salary for a LTBE incentive that called for a player to run for a thousand yards and that player in the end did not run for a thousand yards, then the team would receive a $1 million credit on 2005 Team Salary. This is because the team was charged in 2004 for an incentive that was never actually earned, so to reconcile the team receives a credit the following year.
o If a NLTBE incentive from the immediately prior season was earned by the player then the team receives a charge on Team Salary in the amount of the NLTBE incentive. Let’s say in 2004 a NLTBE incentive called for the team to pay a player $1 million if that player ran for a thousand yards and that player in the end did run a thousand yards. At the conclusion of the 2004 season, the $1 million incentive would be applied against the 2004 Team Salary. If the team was only $250,000 under the cap limit at the end of the season, then only $250,000 of the $1 million incentive could be applied to 2004 Team Salary. The remainder of the $1 million would be charged to 2005 Team Salary. $750,000, in this case, would count toward 2005 Team Salary. This is because the incentive was not fully charged to 2004 Team Salary and thus to reconcile the team must be charged for the incentive the following year.
o In short, Unearned-LTBE incentives from the prior season lead to credits and Earned-NLTBE incentives lead to charges. Ultimately, all the applicable incentives are netted and each team ends up with an “Adjusted” Salary Cap.
o The 2005 Salary Cap was $85.5 million. But a team’s net incentives could lower or raise the cap ceiling. If a team’s incentives net to -$2 million, then that team’s cap ceiling is really $83.5 million, not $85.5 million. T
o The league-announced Salary Cap is really the “Base” or “Unadjusted” Salary Cap. Each team, in fact, has an “Adjusted” Salary Cap based upon the reconciliation of LTBE and NLTBE incentives. So either a charge or credit attributable to the net impact of incentives counts toward Team Salary.
o Dead Money
· When a player is released, any unamortized signing money attributable to the player accelerates.
· Remember that a signing bonus amortizes over the term of a player’s contract, as shown below.
· If the player were to be released in 2006, then the $1 million that was scheduled to be applied to 2007 Team Salary and the $1 million that was scheduled to be applied to 2008 Team Salary would not remain amortized as they were. Instead, both amounts would be combined and form an Acceleration charge.
· If the player were released on or before June 1 in 2006, then the acceleration charge would be applied to 2006 Team Salary.
· If the player were released after June 1 in 2006, then the acceleration charge would be applied to 2007 Team Salary.
· Special Post-June Release Rule: Each team can release up to two players each year prior to June 2 and have that player’s release have the implications as a post-June 1 release. The Player Salary, or cap value, of the player will be carried on the club’s Team Salary until June 1. Then, in June the player’s base salary and unearned roster/reporting/LTBE amounts will come off the cap and acceleration will be charged to the following year Team Salary, just as though the player were released in June. The benefit is that the team can be fair to up to two of its players and release players before June, when the free agent market is more active, and yet enjoy the cap implications of a post-June release.
· For this rule, the Player Salary of the selected player will not reflect any renegotiation of the player’s contract that occurred after the last regular-season game of the prior season. Let’s say a player has a $5 million base salary and a cap value (Player Salary) of $8 million as of the last game of the 2005 regular-season. In March of 2006, the player agrees to lower his base salary to $500,000, lowering his Player Salary to $3.5 million. He is then released in March under this rule. His team will carry him at $8 million, his cap value as of the last-regular season game, not $3.5 million.
o Dead Money
· If a player is released before June, the “dead money” resulting from the move is the sum of the acceleration charge, the prorata amortized signing bonus amount, and any paid likely-to-be-earned amounts.
· As can be seen, the total dead money (the charge the released player leaves behind on Team Salary) would be $3 million
· If a player is released after June, the “dead money” is spread over two seasons, since the acceleration charge is applied to the following year.
· Note that the total amount of dead money, the total amount of acceleration, and the size of the prorata amount remain the same. What changes in the case of a post-June release is the distribution of those charges. In the end, the same amount of dead money is applied to Team Salary.
o In-Season Releases: Termination Pay
· A veteran with four-plus credited seasons in the NFL who is on a team’s opening-day roster has the right to receive Termination Pay for that year in the event he is released by that team during that NFL season and is not subsequently picked up on waivers.
· A veteran once (and not more than once) during his NFL career can exercise the Termination Pay option and be paid his base salary even if released. The team that releases the player would be responsible for the full amount of his base salary.
o The Deion Rule
· The Deion Rule (named after Deion Sanders) is designed to inhibit teams from paying a player a huge signing bonus and low base salaries. It applies to all contracts that stretch from a Capped Year to an Uncapped Year except those executed in the Final Capped Year (currently 2011).
· First, the sum of the player’s base salaries and roster/reporting bonuses in the Capped Years (years in which the Salary Cap is in effect) is found. If less than three Capped Years exist, then the first three years of the contract are used.
· Then, the portion of the player’s signing bonus that has been prorated into those years is found.
· If the signing bonus prorated in those years is greater than the sum of the base salaries and roster/reporting bonuses, then a Deion Charge will be applied.
· The amount by which the prorated signing bonus exceeds the base salary and roster/reporting bonuses (the Difference) is allocated equally over the Capped Years of the contract (or the first three years of the deal) as a charge on Team Salary (called a Deion Charge), and the difference is then credited on Team Salary equally over the Uncapped Years.
· If the Difference is $3 million, and there are three Capped Years and three Uncapped Years, then $1 million would be charged in each Capped Year, and $1 million would be credited in each Uncapped Year.
· One exception exists: the Difference cannot exceed 50% of the signing bonus money prorated in the Uncapped Years. If the difference between prorated signing bonus and salary/roster/reporting bonus in the Capped Years is $5 million, and 50% of the signing bonus prorated in the Uncapped Years is $4 million, then only $4 million can be charged in the Capped Years.
· When totaling up the signing bonus prorated in the Capped Years (or first three years of the contract), ignore signing bonus money from a prior contract, such as a rookie contract. Only the prorated portion of the signing bonus from the current contract is at issue. However, when it comes to option bonuses, once exercised the prorated portion of an option bonus is included, along with the signing bonus proration, in the Deion Rule calculations.
· For example, in Year 1 a player receives a $5 million signing bonus which prorates over five years when there are three Capped Years remaining. In Year 2, he receives a $4 million option bonus which prorates over four years. In Year 1, the Deion Rule calculation would include the proration of the $5 million signing bonus from Year 1 to Year 3 ($3 million).
· In Year 1, if the player’s salaries and roster/reporting bonuses from Year 1 to Year 3 were more than $3 million, there would be no Deion charges. In Year 2, the $4 million option is paid. New Deion calculations are conducted. The prorated portion of the $4 million option bonus that will count in Year 2 and Year 3 is now included ($2 million). That $2 million is added to the $3 million from the signing bonus to determine a new prorated signing bonus amount of $5 million. In Year 2, base salary and roster/reporting bonuses from Year 1 to Year 3 would have to be more than $5 million, or else a Deion Charge would apply.
· It is possible that a player may sign a contract that includes a signing bonus, and that signing bonus may not cause any Deion Charges. But the following year an option bonus may
· In effect, the regular amortization of the signing bonus is altered so that more bonus money counts in the Capped Years (or first three years) and less counts in the Uncapped Years. More money isn’t charged on Team Salary, but there is a redistribution that front-loads the bonus.
o Injury Settlements
· If a player suffers a football injury in a given year while under contract with an NFL team, that team may face a grievance if they release the player while still injured.
· The team either will keep the player on the roster or on Injured Reserve, or negotiate an injury settlement.
· The amount of an injury settlement will often be based on the length of time it is expected the player will need to recover from the injury and the player’s scheduled base salary. If the injury is expected to keep the player sidelined for four weeks, the injury settlement may be in the amount of four weeks of that player’s base salary.
· It should be noted that street free agents and undrafted rookie free agents may sign contracts that contain split base salaries. A rookie free agent might agree to a deal that pays the player $230,000 if he stays healthy and makes the team or $135,000 if he injures himself and the team decides to keep him on Injured Reserve.
· If a player files a grievance against a team, 50% of the amount claimed counts toward Team Salary until the dispute is settled or the League Year ends, whichever occurs first. An exception is that if the player filing the grievance is playing under a “Minimum Salary Benefit” contract, 50% of the player’s Cap Value, prorated over the remaining number of weeks in the season, will count toward Team Salary instead of 50% of the claim.
· If any award is made for a grievance, and the award is greater than the 50% attribution, the difference between the two values will be added to Team Salary when the award is paid.
· If any award is made for a grievance and the award is less than the 50% attribution, the difference between the two values will be subtracted from Team Salary when the award is issued.
· If at the end of the year, the total amount of the awards paid exceeds the 50% attributions and puts the team over the Salary Cap, the difference will be added to Team Salary in the following year. If at the end of the year, the total amount of awards paid is less than the 50% attributions and the team finishes the year at the Salary Cap or below the cap by less than the amount of the un-awarded attributions, then the difference will be deducted from Team Salary in the following year.
· What counts Team Salary during the NFL Football Season
o During the NFL season, additional money counts toward Team Salary
o The 53-man Roster
o The Cap Value of every player on the 53-man roster counts toward Team Salary. That includes every player’s P5, plus all prorata signing bonus and LTBE amounts.
o The Practice Squad
o Each player on the five-man Practice Squad will be paid, at the minimum, as follows:
§ The full amount of regular-season payments to Practice Squad players count toward Team Salary.
§ Post-season pay does not count toward Team Salary. An exception would occur if a player signed or renegotiated a Practice Squad contract after December 1 that called for more than the minimum Practice Squad salary. In that rare case, the player’s post-season salary would count toward Team Salary.
o Reserve Injured List
§ The Cap Values of players on the Reserve Injured list count toward Team Salary.
o Reserve Physically Unable to Perform List
§ The salary of players on the Physically Unable to Perform list counts toward Team Salary.
§ The only exception would be if a player is the final year of his contract and remains unable to perform as of the sixth game of the regular-season. In that case, the player’s salary would be tolled and not count toward Team Salary.
o Non-Football Injury/Illness List
§ The contract of any player on the Non-Football Football Injury/Illness List would be tolled, and thus would not count toward Team Salary.
§ The only exception is at the club’s discretion and relates to players in the final year of their contract. If such a player is physically unable to perform on or before the sixth regular-season game, then in order to toll the player’s contract the team must pay the player the prorated portion of his P5 for the balance of the season.
o Termination Pay
§ The P5 of certain veteran players who are released during the season may be guaranteed, and the balance of the P5 may count toward Team Salary
o The “Adjusted” Salary Cap, Dead Money, and Grievances
§ The charge or credit from incentives continues to impact Team Salary
§ Any and all Dead Money accumulated counts toward Team Salary
§ Any and all awards or attributions for grievances count toward Team Salary
· Other Salary Cap Topics
o Minimum Base Salaries
§ If a contract signed prior to the CBA extension reached in 2006 called for base salaries below the values listed above, then the player’s base salary will be increased to the level of the minimum.
§ Credited Seasons: a player earns a credited season for each season during which he was on, or should have been on, full pay status for three or more regular-season games not including games where the player was on IR, the Practice Squad, or Non-Football-Injury PUP list.
o Contract Length Restriction for Drafted players
§ The CBA limits the maximum length of the contracts clubs can give draft selections as follows: