The Warpath presents: Salary Cap 101

[MTK]

Brought to you by our resident capologist, CrazyCanuck. Hopefully this will help clear up some of the more common questions that we all have from time to time. Class is officially in session... pop quiz on Tuesday!

Cap 101

What is the salary cap?
- The salary cap is the max amount that NFL teams can spend on their players in a given year. In basic terms, the salary cap is set at 58% of total league revenues (TLR). To calculate the salary cap for an individual team the calculation would be: (TLR * 0.58) / 32 (teams). The salary cap for 2008 is $116M per team.

Is there a minimum salary cap?
- Yes. Each team must spend at least 85% of the salary cap on its players. This ensures that the players always receive at least 50% of the total revenue pie. So depending on how thrifty the owners are, the players will receive between 50% and 58% of total league revenues in any given year.

What comprises a player's salary cap amount?
- A player's salary cap amount is the sum of his:
1. Base Salary
2. Signing Bonus Allocations
3. Other Bonuses

What is Base Salary?
- Base Salary is not guaranteed. It is received in weekly installments during the season. A player's base salary counts in full against the salary cap while he is on the team. Once he is released or traded any future base salary amounts are wiped off the books.

What are Signing Bonus Allocations?
- Signing bonus is guaranteed. It is usually received in a lump sum payment upon signing a new contract, though sometimes signing bonus payments are scheduled one or more years into the future. Signing bonus does not count in full against the salary cap in the year it is received. Instead, the signing bonus amount is allocated equally amongst the remaining years of the contract (6 years max). This is only for salary cap purposes; the player still receives the entire signing bonus amount up front. If the player is released or traded, any future signing bonus allocations accelerate to the present, and this amount will still count against the team's salary cap even though the player is no longer with the team. This is usually referred to as Dead Cap.

What are Other Bonuses?
- Other bonuses include roster bonuses, workout bonuses, incentives, etc. Other bonuses are not guaranteed. They are usually received on a fixed date, and they count in full against the salary cap in the year they are received. If the player is released or traded, any future other bonus amounts are wiped off the books.

Example:

Player A signs a 5-year $20M contract in 2008. The contract pays him a base salary of $1M per year, a $10M signing bonus, a $3M roster bonus in 2009, and a $2M workout bonus in 2011.

The player’s salary cap hits would break down as follows, (salary in thousands)

2008
Base salary: $1,000
Signing bonus: $2,000
Other bonus: $0
Total cap hit: $3,000

2009
Base salary: $1,000
Signing bonus: $2,000
Other bonus: $3,000
Total cap hit: $6,000

2010
Base salary: $1,000
Signing bonus: $2,000
Other bonus: $0
Total cap hit: $3,000

2011
Base salary: $1,000
Signing bonus: $2,000
Other bonus: $2000
Total cap hit: $5,000

2012
Base salary: $1,000
Signing bonus: $2,000
Other bonus: $0
Total cap hit: $3,000

Total
Base salary: $5000
Signing bonus: $10,000
Other bonus: $5,000
Total cap hit: $20,000

What happens when a player restructures his contract?
- The typical restructure involves the player receiving a signing bonus payment in exchange for his current year’s salary or other bonus (i.e. roster bonus). The team benefits from this move from a salary cap perspective because instead of paying the player in the form of salary or roster bonus which counts towards the cap in full in the current year, the team pays him with a signing bonus which gets allocated to future years for cap purposes. In the example above, Player A might restructure his contract before the 2009 season when he is due a $3M roster bonus. By converting the $3M roster bonus to a signing bonus, he receives the $3M right away, but for cap purposes the money will be divided equally amongst the 4 remaining years of his contract, for a salary cap allocation of $750K per year. The team would save $2.25M ($3M - $750K) on the 2009 cap. The player is happy because he has his money guaranteed up front, and the team is happy because they saved money against the current year’s cap. Note that a restructure is not a pay cut. The player receives the same amount of money, only he gets it all right away instead of at a later date. He has no financial incentive to reject a contract restructure.

What is the Dead Cap?
- The dead cap is money that still counts towards the salary cap, even though the player is no longer with the team. Dead cap is incurred when a player is released or traded, but he still has signing bonus allocations remaining on his contract. These future allocations accelerate to the present and count in full towards the cap in the current year in the form of dead cap.

What is the June 1 exemption?
- Normally when a player is released or traded, any future signing bonus allocations accelerate to the present and count in full towards the cap in the current year in the form of dead cap. If the player is released or traded after June 1st, only the current year’s portion of the dead cap counts against the cap in the current year. The remaining portion of the dead cap counts against the cap in the following year. In the example above, if Player A was released on May 25 2010, his dead cap hit would be $6M in 2010 and $0 in 2011. If he was released on June 5th 2010, his dead cap hit would be $2M in 2010 and $4M in 2011. A new rule permits teams to designate certain players as June 1st cuts, even though they are actually released prior to June 1st.

What is the minimum player salary?
- The minimum player salary ranges from $295K to $830K depending on years of service.

What is the vet min exemption?
- Any veteran with 3 or more years of service who signs a 1-year contract at the minimum salary with a combined bonus less than $40K qualifies for the vet min exemption. The player will count against the cap at an amount equal to the minimum salary for a 3rd year player ($445K) plus any bonuses. This rule was implemented to make it less costly to keep veteran players at the minimum salary.

How does the salary cap treat incentives?
- Incentives are divided into 2 groups:
1. LTBE (likely to be earned) – these incentives count against the cap in full. If the LTBE incentive is not reached the team receives a cap refund the following year.
2. ULTBE (unlikely to be earned) – these incentives do not count against the cap. If the ULTBE incentive is reached the team receives a cap charge the following year.

When must a team comply with the salary cap?
- During the season a team must always be under the salary cap. Once the season ends they have until March 2 to comply with the following year’s salary cap.

What is the Rule of 51?
- During the off-season only the top 51 players on each team count towards the salary cap.

What is the Rookie Pool?
- The rookie pool is the max cap space a team can spend on signing draft picks and undrafted free agents. A team's rookie pool is based on the number and position of draft picks, with teams holding higher picks being allocated more dollars per pick than teams holding lower picks. The rookie pool counts against the salary cap until the players are signed or released.

What is the Barry Sanders Rule?
- Since signing bonuses have become so prevalent in contracts, owners run the risk of paying a player a large sum of guaranteed money up front, only to have the player retire prematurely. To protect against this, the Barry Sanders “rule” allows owners to be compensated in certain situations.

What is the Deion Sanders Rule?
- Basically the Deion Sanders rule limits the proportion of a contract that can be paid as signing bonus.

[dmek25]

good post. everyone should read

[Slingin Sammy 33]

Excellent stuff. I recommend putting this up in the drop-down under Team also, either as it's own page or under the "Salary Cap Info". That way it's always there for quick reference

[QBall]

Wow, thanks! That's detailed.

[FRPLG]

Thank goodness. This has been needed.

[SmootSmack]

Fantastic work.

[Redskins247]

Awesome....thanks Matty!

[CrazyCanuck]

This is the 1st draft, hope it helps answer most of the standard cap questions.

If you have any cap related questions that don't appear here send me a PM and I can add them to the list.

[Hijinx]

Very nice work.

[backrow]

Matty & CC, you guys are tops when it comes to understanding salary issues.

[CrazyCanuck]

I realized I forgot to include a section about incentives.

Thanks to Hijinx for pointing it out. I will add a section to discuss incentives in the next couple days.

[CrazyCanuck]

Originally Posted by backrow

Matty & CC, you guys are tops when it comes to understanding salary issues.

Thanks but don't forget about Schneed...

[MTK]

Originally Posted by backrow

Matty & CC, you guys are tops when it comes to understanding salary issues.

Schneed10 and CrazyCanuck deserve all the credit here for being our cap experts.

[Bill B]

Quick Question - concerning the Deion Sanders rule: With players usually recieving a crazy backloaded contract with money they will never see, I don't see the effectiveness of this rule. I would think the NFL would catch onto this and try to close this loophole if a lot of the lower revenue owners started complaining too much. Agree?

[BrunellMVP?]

i very much appreciate the post Matty, thanks.