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Salary cap for dummies

OrangeCrush

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http://www.askthecommish.com/salarycap/faq.asp

Salary Cap FAQ
Updated on February 9, 2005

Senior Editor
Al Lackner

Question 1.1
How much does each team have to spend against the NFL Salary Cap?

Answer: In 2004, it was set at $80.582 Million. This year it is projected to be $85.5 Million.

Question 1.2
How is the NFL Salary Cap determined?

Answer:The Cap is determined through a complicated calculation system. The Cap is based on income that the teams earn during a League Year. A percentage of that income, termed Defined Gross Revenues (DGR), is allocated for player expenditures. The DGR is based on ticket sales, merchandise sales, and broadcasts. The DGR is divided equally amongst all 32 teams.

For all of you nerds out there, here is the actual mathematical calculation:

Projected DGR x CBA Percentage = Players Share DGR

Players Share minus Projected League wide Benefits =
Amount Available for Player Salaries

Amount Available for Player Salaries / Number of Teams =
Unadjusted Salary Cap per Team

The CBA Percentages were agreed upon in the 1998 and 2001 extension to the CBA are as follows:

1998-2001 63%
2002 64%
2003 64.25%
2004 64.75%
2005 65.5%
2006 64.5%
2007 Uncapped Year

NOTE: Minimum Team Salary (MTS) is 56% for the remainder of the CBA. If a team does not allocate at least 56%, then the players on the team roster for that year will be directly paid the shortage.

Question 1.3
How do you define "Salary"?

Answer: Salary means all compensation paid to a player, including money, property, investments, loans or anything else of value. Salary, however, does not include benefits. Furthermore, a player’s salary will also include compensation for non-football-related services if such payment does not seem to represent an approximate fair market value. This broad definition of salary becomes complicated because it is affected by numerous rules which are used in computing the precise nature of the system.

Question 1.4
Who falls under the Salary Cap?

Answer: The "Team Salary" falls under the Salary Cap. Team salary includes the amount a team must pay its current or former players under their player contracts. Notice emphasis on the word PLAYERS. The salary cap does not apply to coaches, assistants, trainers, and other personnel. Only the top 51 player salaries for a team count against the salary cap in the offseason. During the season, all player salaries count toward the salary cap.

Question 1.5
How does the NFL Draft impact the Salary Cap?

Answer:Team salary includes the Rookie Minimum Active Salary as of the day of the draft for all drafted rookies. The salary for drafted rookies will stay at this amount until the player is signed, the team’s rights are relinquished through waivers, or until the Tuesday following the tenth week of the regular season if the player remains unsigned.

Question 1.6
Do unsigned free agents have any impact on the Salary Cap?

Answer: For Restricted Free Agents (RFA), a Qualifying Offer is included in the team salary. This amount remains in team salary until the player is signed, the Qualifying Offer is withdrawn, or a “June 1st tender†is made. If the player is unsigned and the Team makes a June 1 or June 15 offer, this offer will be included in team salary until the player is signed, the team gives up their rights to the player, or until the Tuesday after the tenth week of the regular season if the player is unsigned.

For Unrestricted Free Agents (UFA), if a June 1 offer is made, the amount afforded will be included in team salary as of July 15.

For transition and franchise players, an offer will be included in team salary when it is made.

These offers for UFA, transition players, and franchise players will remain included in team salary until the player is signed, the offer is withdrawn, the team gives up their rights to the player, or until the Tuesday following the tenth week of the regular season if the player is unsigned. All offer sheets will be included in team salary when the offer is made until the player is signed to a contract with any NFL Team or the offer sheet is withdrawn.

Question 1.7a
If a player earns a contract that is 5 years and pays him a total of $20 Million, he counts $4 million per year against the cap, right?

Answer: If it were only that simple.

Teams with heavy payloads learned quickly that the best way to combat the Salary Cap was to circumvent it. They did this by back loading contracts, pushing all of the big money to the end of the contract. For example, a 5-year, $20 million contract (not counting a signing bonus) signed in 2003 as described above would probably allocate the money in the following manner:

Year 1 (2003): $450,000 (min. cap given to players with 4+ years experience)
Year 2 (2004): $1 million
Year 3 (2005): $1.5 million
Year 4 (2006): $5 million
Year 5 (2007): $12 million

Note: This particular example is for illustration purposes only. It actually violates the league's "30% Rule". The "30% Rule" governs veteran contracts that are entered into in a capped year and extend into the final year of the CBA. The rule states that these contracts cannot have an annual increase of more than 30% of the salary, excluding amounts treated as a signing bonus, provided for in the FINAL CAPPED YEAR. 2007 is the final capped year unless the NFL and the NFLPA agree to an extension of the CBA.

Question 1.7b
Okay...this helps the team in the first three years of the contract, but what happens when Year 4 hits and the salary begins to escalate?

Answer: The team can do one of two things.

They can either outright release the player (to avoid having to pay his salary all together) or they can renegotiate a more "cap friendly" contract.

Question 1.7c
Hold on. You said the team could release the player BEFORE the big money kicks in. Are you telling me that the contracts are NOT guaranteed?

Answer: That's right. The team is not obligated to fork over the money for remaining years of the contract if they cut the player.

Question 1.7d
If that is true, why would any player be willing to sign such a back loaded contract if they will most likely never see the big money at the end of the contract?

Answer: Ah. That is where signing bonuses come into play.

In order to convince the player to sign such a cap friendly contract, the team will fork over a large signing bonus. The signing bonus is guaranteed, so that money is the player's to keep if the team decides to release him later.

Question 1.7e
That's cheating! How can you have a real salary cap if all you have to do is give a player a signing bonus to get around it?

Answer: Now we come to the tricky part. The signing bonus IS part of the player's salary. So it counts against the cap. When determining team and player salary, the signing bonus will be prorated over the length of the contract.

For example, if a player signs a four-year deal with a $1 million signing bonus, $250,000 of that bonus will count toward team salary for each contract year ($1 million divided evenly over the four-year contract is $250,000 per year). If a team releases a player, the unamoratized bonus money (the remaining prorated bonus money) counts immediately against the cap.

In our example above, if the player is released after Year 1, the remaining $750,000 (the prorated signing bonus money for years 2-4) counts against the cap in Year 2 -- even though the player is no longer on the team's roster.

Question 1.8a
How difficult is it for a player to renegotiate his contract?

Answer: Salary renegotiations help teams greatly in getting under the salary cap in a given year. But they also lead to peril down the line. Indeed, every NFL team that is facing salary cap problems in 2005 can trace their problems back to overuse of this practice.

The first renegotiation of a veteran contract can take place at any time. However, a veteran may not renegotiate to raise his salary for twelve months after the most recent renegotiation. Additionally, no player or team can agree to renegotiate a term of a previously signed contract for a prior year. No contract can be negotiated for a current season after the last regular season game. Furthermore, rookie contracts cannot be renegotiated for one year after the signing date or the following August 1, whichever is later.

No player can agree to a contract, renegotiation, or extension that expires before the last day of a season. If a player wants to terminate his contract, he must do so before the first day of any season. Moreover, renegotiated contracts are revalued for Salary Cap purposes at the time of the renegotiation. If at the time of the renegotiation an incentive bonus has already been reached, that bonus is considered Likely To Be Earned (LTBE). Also, any new or changed incentive bonuses renegotiated after the start of the regular season are automatically considered LTBE. Finally, if a player is paid any more than the minimum amount for off-season workout programs or classroom instruction, then the payment will be treated as a renegotiation.

Question 1.8b
If a player decides to renegotiate his contract, how does the bonus money he received in the original contract count against the cap?

Answer:If a player renegotiates his contract and gets a new signing bonus, the new signing bonus is prorated over the remaining years of the original contract AND over the extension. The allocation of the original signing bonus remains unchanged.

For example, Player X is currently in the third year of a four-year deal (1999–2002) that paid him a $1 million signing bonus. In 2001, Player X renegotiates his deal extending his contract to the 2004 season while getting a $2 million signing bonus. The original $1 million signing bonus is allocated at $250,000 per year over 2001 and 2002 just as it would be if there were no renegotiations. However, the new $2 million signing bonus is allocated at $500,000 per year over the remaining two years of the original contract (2001–2002) and the extended two years (2003–2004).

Question 1.9a
When must teams come in compliance with the Salary Cap?

Answer: March 2nd.

Question 1.9b
If that is the case, why are so many players cut AFTER June 1?

Answer: After June 1, the team can stretch their salary cap liability over the next 2 seasons. Let's look at our example above, where a player signs a big contract for 4 years, including a $1 million signing bonus.

If the player is cut after the first year of the contract, the remaining $750,000 of the "un-amoratized" signing bonus hits the cap immediately (accelerates). However, if he is cut after June 1, the team can spread that money over Year 2 and 3 of the contract instead of taking the full brunt of the cap hit in Year 2.

Doing this will save $500,000 against the cap hit for Year 2.

Clearly, this practice is a nice way of freeing up cap space in a given year. Note, however, that the money still has to be repaid and the remaining $500,000 will hit the cap in Year 3. In essence, many NFL teams have mortgaged their future by overusing this practice, whereby they continue to pay against the cap for players who have not been on the roster for over a year.

Question 1.10
How do voided years work when amortizing signing bonuses?

Answer: Many contracts in the NFL these days included clauses for "voided years". These are typically incentive-laden additions to contracts that will allow the player to file for Free Agency sooner if certain goals are obtained.

The likelihood of voiding years can be included when determining the term of years for the prorated signing bonus. However, if the player meets the goal that voids the year (or years) of the contract, any amount of the signing bonus that was allocated to the voided year (or years) will be accelerated and added immediately to team salary. If the accelerated signing bonus puts the team over the Salary Cap, the amount that the team is over the cap will be deducted from the team’s Salary Cap for the next year.

If a player can void a contract based on a “Likely To Be Earned" incentive, and the player is on the roster at a later time, there will be no acceleration.

If a contract is renegotiated to reduce the number of years of the contract, the portion of the signing bonus that has not been allocated is included in team salary at the time of the renegotiation.

Question 1.11a
How does the NFL Salary Cap treat cash incentives?

Answer: All incentives are included in team salary if they are "likely to be earned" (LTBE). LTBE incentives are performance levels that the player or team has reached in the previous year.

For example, if a quarterback threw twenty touchdowns last year and his incentive clause for this year is set at fifteen touchdowns, then this incentive is “likely to be earned.†Also, incentives that are in the sole control of the player, like non-guaranteed reporting bonuses and off-season workout and weight bonuses, are considered LTBE.

An impartial arbitrator will hear disputes between the owners and the players concerning what should be considered LTBE (especially for rookies or veterans who did not play in the prior year). Conversely, if a player did not reach the performance incentive in the previous year, the incentive is deemed "not likely to be earned" (NLTBE) and is not included in team salary.

To determine whether a clause is LTBE or NLTBE for Salary Cap purposes (i.e., not whether the player actually earned the incentive), it is necessary to look at the performance of the team in the prior season, not the current season.

For example, assume Player X receives an incentive bonus if he participates in 50% of the team’s offensive plays this season. Assume further that last season the team had 1,000 offensive plays. Therefore, as soon as Player X plays in 500 plays in the current season (or 50% of last year’s 1,000 plays), the incentive will be considered earned for Salary Cap purposes.

The same incentive is considered "not earned" if the same player in the current year only participated in one of the team’s first 502 offensive plays. In this situation, it would be impossible for the player to achieve the 50% incentive based on last year’s performance of 1,000 plays. It is important to remember that looking to last year’s performance level is only for Salary Cap purposes and will not affect the player's right to receive a bonus for his performance in the current year.

Question 1.11b
So cash incentives work almost like signing bonuses, right?

Answer: The short answer to this question is that incentives are considered signing bonuses.

While we're on the topic, let's talk a bit more about signing bonuses

Also included in the “signing bonus†are guaranteed reporting bonuses and guaranteed workout bonuses. Roster or reporting bonuses earned or paid before preseason training camp are also considered signing bonuses. Guaranteed salary advances or advances that do not have to be repaid are treated as signing bonuses. Money guaranteed or paid for option years, contract extensions, contract modifications, individually negotiated rights of first refusal, and option buyouts are considered signing bonuses. Reporting bonuses are treated as signing bonuses if the contract is signed after the start of training camp. Roster bonuses are also considered signing bonuses if the contract was signed after the last preseason game. Finally, individually negotiated relocation bonuses are treated as a signing bonus.

The non-guaranteed amount of any salary advance, off-season workout bonus, off-season roster bonus, or off-season reporting bonus is included in the team’s salary in the year it was earned. These bonuses cannot be prorated. “Guaranteed†refers to those bonuses that are fully guaranteed–regardless of skill, injury or termination of the contract.

Contracts signed, renegotiated, or extended in the final capped year are governed by a somewhat special set of rules if the signing bonus is to be paid to the player in the final capped season. In this situation, a salary advance that the player is not obligated to repay is considered a signing bonus. Any off-season workout bonus that calls for a player to participate in less than thirty-two days of the team’s program is also considered a signing bonus. Finally, all off-season reporting and roster bonuses are considered signing bonuses.

Whew!

Question 1.11c
What is to prevent a player from signing a huge contract, commanding a large (guaranteed) signing bonus, then never playing a single down in the NFL?

Answer: I call this the "Barry Sanders Rule".

Due to the Salary Cap, owners are now investing a greater amount of money up front for players in the form of guaranteed signing bonuses. Thus, the owners must try to protect their investments by including language in the contract that calls for a player to return a portion of the signing bonus to the team if the player “fails or refuses†to practice or play with the team.

In certain situations, a team will be repaid some of the signing bonus it paid to a player (i.e., a refund), or a team will fail to pay part of a signing bonus that was already allocated toward team salary. If this happens, the amount previously included in team salary will be added to the team’s Salary Cap in the next year.

Question 1.12
What happens if a player is traded or retires?

Answer: We already know that if a player is waived on or before June 1, the remaining signing bonus that has not been included in salary “accelerates†and is included in that year’s team salary. Acceleration also occurs when a player is traded or waived and picked up by another team. The new team is not responsible for any of the original signing bonus. The team that waived or traded the player is responsible for the accelerated signing bonus (in the same manner as described above).

In most cases, if a player retires, the remaining signing bonus that has not been included in salary “accelerates†and is included in that year’s team salary. Thus, the team will take an immediate salary cap hit of the remaining signing bonus.

Question 1.13
So...what happens if a team goes over the Salary Cap?

Answer: The short answer is simply that no team CAN go over the Salary Cap. Note that every contract must go through the NFL League Office before the deal can be made official. Presumably, one of the things the league must do at this time is determine whether or not the contract would violate the NFL's Salary Cap. If the deal does violate the cap, then the NFL will reject it.

There have been instances in which a team has managed to sneak a cap evading contract by the league. Upon further review, the violations were caught by the league and the respective teams were penalized. Penalties include fines and/or forfeiture of draft picks. In recent history both the Pittsburgh Steelers and San Francisco 49ers have been penalized draft picks, while the 49ers' front office personnel (Carmen Policy and Dwight Clark) were also fined.

Truncated----
 

Merman

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Excellent Salary Cap FAQ I always recommend it to beginners. Did you just find it or are you recommending the board read it??? :lol:

Whenever trying to simplify a complicated subject mistakes are made. My pet peeve with this FAQ is:

Question 1.11b
So cash incentives work almost like signing bonuses, right?

Answer: The short answer to this question is that incentives are considered signing bonuses.

Wrong.
 

ch19079

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alot of info there, but i would rather get my cap info from clumpy...
 

Philter25

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Good Basic FAQ read..... im suprised no one has asked about 2007 being an uncapped year. :lol: ......... which it will never be.
 

finmann

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Great read, very interesting.
 

OrangeCrush

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Merman said:
Excellent Salary Cap FAQ I always recommend it to beginners. Did you just find it or are you recommending the board read it??? :lol:

Whenever trying to simplify a complicated subject mistakes are made. My pet peeve with this FAQ is:

Wrong.

It was for the general audience...but mainly for those so called GM wannabe who think they can just wheel and deel whomever whenver. ie. When Surtan was on the trading block and fans wanted Madison to go instead, but after repeating just over a billion times that Madison can't be traded due to his 2 year cap hit, still didn't understand nothing.
 
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