Salary Cap Manipulation in the NFL
The NFL is more than just a professional sports league. It has become an integral part of American culture. Of the thirty most watched television events in American history, two of them aren’t Super Bowls (series finale of M*A*S*H* in 1983 and the Spinks vs. Ali II Fight in 1978) (Tuzzeo, 2020). The Tampa Bay Buccaneers, a perennial loser for most of the 21st century, recently won the Super Bowl in 2020 and saw a 29% increase in value in that one year. The owners of football teams recognize this popularity, and try to win at all costs. It is no surprise that some of the most successful franchises of the last 30 years are the most valuable. The Dallas Cowboys and New England Patriots are the most valuable franchises in the NFL, valued at $6.5 billion and $5 billion respectively (Ozanian, 2021). Given the stakes at which organizations are competing, every team is trying to find the best way to reach the pinnacle of the sport, the Super Bowl.
In a simple sense, a team should win when it has the best players, so why don’t owners and general managers just go out and hire all of the best talent? The NFL institutes a salary cap that prohibits each team from spending over a certain amount of money in a season. However, this isn’t the case in all North American professional sports. In the MLB, a luxury tax is placed on teams that decide to go over the cap. While this additional tax is somewhat helpful in preventing the domination of winning by select teams, the New York Yankees have a total payroll of ten times that of the Baltimore Orioles for the upcoming 2022 season. In the NFL, however, the difference between the highest spending team and the lowest spending is about 18% (Fitzgerald, 2021). It would seem that this would create some parity, but the New England Patriots have represented the AFC in five of the last 10 Super Bowls, while only four other teams have reached the Super Bowl more than once in that time.
Although luck certainly plays a role in a team’s success, savviness in salary cap management can give a team a large leg up on less strategic franchises. Most of these tricks take advantage of the accrual accounting structure used in salary cap calculations. In an accrual accounting system, revenues and expenses are recorded when a transaction occurs rather than when the cash actually changes hands (Hogan, 2019). For instance, if a company were to sell a product in October but not receive payment for their product until December, the revenue would be recorded in October. In this case, revenue is acknowledged when the sale was made and not December when the cash actually changed hands.
One ploy that leverages this accrual accounting system is a signing bonus. If a player signs their contract that contains a signing bonus, the player receives that money as soon as they sign. However, this bonus can be split up across the years of the contract. For instance, let’s say that a player signs a three year contract with a nine million dollar signing bonus. As soon as their pen leaves the paper, they are eligible to receive the signing bonus. On the other hand, the team only takes a three million dollar hit to this year's salary cap for this bonus. The remaining six million dollars is then assigned to the next two years of the salary cap. This strategy has some immediate benefits along with some less obvious ones. One advantage is that in the current year, the player receives more money than the team loses from their salary cap. This leaves them with more capital to build a more competitive team.
Another technique that accomplishes a similar goal is to backload a contract. This involves paying the player less money in the first few years of their contract but increasing their annual earnings as the contract progresses. The goal with each of these two strategies is to allow the team to spend more upfront, even if that means being more restricted later. Most teams are comfortable reducing their salary cap down the road because there is no guarantee that they will have as good an opportunity to win in the future. Despite this trick, issues arise when a team makes too many of these contracts. At some point in the future, the team is left with aging veterans and massive annual salaries that prevent them from being valuable trade pieces. Nonetheless, some teams have been successful with this strategy.
A large determinant of this success is the team’s negotiation of guaranteed money versus non-guaranteed money in a contract, along with the ability to trade or cut the player. NFL owners and general managers ultimately want to protect their team from sinking capital into losing investments, and at the same time, players want to ensure that their money is protected. When it comes to guaranteed and non-guaranteed salaries, the team wants to avoid guaranteeing money. When money is guaranteed, the quality of play or even the health of the player does not impact their salary. On the other hand, non-guaranteed money creates an incentive for a player to play well and allows the team to move on from that player if their performance takes a turn for the worse. Another consideration when negotiating a contract is the ability for a player to be traded. If a player can guarantee that they cannot be traded, the team can only really cut the player if they aren’t performing well. To some extent, this protects the player because in order to get cut, they need to play very poorly, while at any point, they may be traded if an enticing offer arises.
That’s not to say, however, that non-guaranteed money can’t benefit both parties. Many contracts involve some amount of guaranteed money early in the season while contributing the rest later on in their contract. This is beneficial to the player because, in the first few years, the player is able to develop instead of being forced to perform immediately. With this structure, the player and their agent are able to sign seemingly extraordinary contracts by putting non-guaranteed money in the last few years, even though the player will probably never see it. As for the team, the non-guaranteed money makes it easier to cut the player. If the money is guaranteed, the player will receive such compensation whether or not they are on the team. By not guaranteeing the money, the team is free to cut the player and does not have to pay the rest of the contract.
In recent times, some teams have suffered mightily at the hands of money they have guaranteed. Take the Philadelphia Eagles as an example. In June 2019, their quarterback, Carson Wentz, signed a four-year $128 million contract (Newell, 2021). The very next season, Wentz led the NFL in interceptions and posted career lows in pass completion percentage as well as passer rating. Due to Wentz’s shortcomings and the success of backup Jalen Hurts, the Eagles traded Wentz to the Indianapolis Colts earlier this year. With how Wentz’s contract was structured, the Eagles still had to put aside $33 million of their $206 million salary cap to pay Wentz even though he was no longer on the roster.
Clearly, there is no right answer to negotiating contracts. A team cannot forecast a player’s performance and both parties are trying to maximize their own profit, creating conflicting goals. Even so, if a team is able to leave itself flexible through non-guaranteed money and leaving an open salary cap in the present, they are able to compete. By employing strategies to manipulate the salary cap, teams can win in the margins and separate themselves from the rest of the pack.
Referances
Newell, Nat. 2021. “What Are the Contract Details, Salary Cap Implications for Colts Quarterback Carson Wentz?”
The Indianapolis Star, https://www.indystar.com/story/sports/nfl/colts/2021/02/18/carson-wentz-trade-what-contract-details-salary-cap-implications/4491819001/.
Ozanian, Mike. 2021. “The NFL's Most Valuable Teams 2021: Average Team Value Soars to $3.5 Billion as League Shrugs off Pandemic Year.” Forbes, https://www.forbes.com/sites/mikeozanian/2021/08/05/the-nfls-most-valuable-teams-2021-average-team-value-soars-to-35-billion-as-league-shrugs-off-pandemic-year/?sh=3a84a555654e.
Fitzgerald, Jason. 2021. “Salary Cap Space.” Over the Cap, https://overthecap.com/salary-cap-space/.
Tuzzeo, Sal. 2020. “Super Bowl LIV Draws Nearly 100 Million TV Viewers, 44 Million Social Media Interactions.” Nielsen https://www.nielsen.com/us/en/press-releases/2020/super-bowl-liv-draws-nearly-100-million-tv-viewers-44-million-social-media-interactions/.
Horgan, Bill. 2019. “Reprint: Playing GM - A Primer on Salary Cap Management.” Hogs Haven, https://www.hogshaven.com/2019/1/15/18183366/reprint-playing-gm-a-primer-on-salary-cap-management.