Free Agency 101: An Intro to Contracts

Veteran free agency is fast approaching and many fans are dreaming of the star players their favorite team will hopefully acquire. Once the free agency bell has rung, reports will begin trickling in about Player A getting this contract and Player B getting that contract. In the end, every top player wants to be the highest paid player at their position. That’s a simple fact of life. Every agent will tell teams, or if it’s Drew Rosenhaus, anyone who will listen, why their player deserves to be the highest paid player at their position. Every GM will delicately tell the player’s agent why that’s not entirely true. Negotiating an NFL contract is a very nuanced dance indeed. Toeing the line between value and need. Hoping to maintain the delicate balance while not allowing everything to come crashing down.

While I do not have any actual experience negotiating an NFL contract, I’ve diligently tracked free agency and have seen how different contracts affect the salary cap. So let me give you a little insight into Free Agency 101: An Intro to Contracts.

Just as a precursor, NFL contracts are not like the contracts in the other major sports. NBA and MLB contracts are fully guaranteed, as in the number you see is the number they get. NFL contracts are not fully guaranteed, which is why most agents and some analysts focus on getting the most guaranteed money possible in the form of signing bonuses and guaranteed years. For ease and clarity, I won’t be discussing roster or performance bonuses in this article.

The way a contract is negotiated has a direct relation to its salary cap implications. As a general matter, Signing Bonuses are not counted in full against the salary cap. To determine how a signing bonus affects the salary cap, the value of the signing bonus is divided by the term (number of years) of the contract. This is called the “pro-rated” or average signing bonus,” and it plays a larger role in negotiations than one may think. Each year the pro-rated signing bonus is applied to the salary cap, unless the player is released. In that case, the remainder of the pro-rated signing bonus is accelerated to the next year’s salary cap.

Base Salaries count entirely against the cap if the player is on the team’s roster at the beginning of the “league year,” which usually is marked by the start of veteran free agency. Some Base Salaries become fully guaranteed after a certain date, but again for ease and clarity, that won’t be dealt with in this article.

In this example, we have three players, Player A, Player B and Player C. Each player is of equal value and will command the exact same amount of money over the same period of years, i.e., the same “average” salary. For sake of argument, let’s assume it’s a 4 year contract worth about $40 Million, so an average of $10 Million per year, with $20 Million guaranteed. While each agent and most media outlets will only report the “average” yearly value and guaranteed money of each contract, each player’s contract will be negotiated slightly differently and the way their salary cap “hit” is calculated differently as well. Also, each team will have ample cap room their first two years but be up against the salary cap after year two so each player will be released after the second year of their contract.

Player A: The Big Signing Bonus with Gradually Increasing Base Salaries

The agent for Player A negotiates Player A’s contract so Player A receives a $16 Million signing bonus and the following base salaries:
Year 1: $2 Million (fully guaranteed)
Year 2: $4 Million ($2 Million guaranteed)
Year 3: $8 Million
Year 4: $10 Million

Added together, Player A gets the $40 Million contract with $20 Million guaranteed that he’s always dreamed about. However, it’s highly unlikely Player A will actually see all of that money. Using the formula mentioned earlier, the pro-rated signing bonus would be $4 Million per year added to the salary cap on top of the base salary.

The Salary Cap hits for Player A would be:
Year 1: $2M Base + $4M Signing Bonus = $6 Million Cap Hit
Year 2: $4M Base + $4M Signing Bonus =$8 Million Cap Hit
Year 3: $8M Base + $4M Signing Bonus =$12 Million Cap Hit
Year 4: $10M Base + $4M Signing Bonus =$14 Million Cap Hit

As mentioned earlier, Player A gets cut after his second year. When you look at the base salaries, it looks great. The team is completely free of $18 Million. However, Player A received a large signing bonus so his cap hit in Year 3 will be $8 Million even though he is no longer on the roster because of the accelerated $4 Million per year for the last two years of his contract. A hefty fee for poor contract negotiating by the GM and Player A loses $18 Million in base salaries for those final two years.

Player B: The Moderate Signing Bonus and Slow Increasing Base Salaries

The agent for Player B negotiates Player B’s contract a little differently from Player A. Player B instead gets an $8 Million signing bonus and the following base salaries:
Year 1: $3 Million (fully guaranteed)
Year 2: $6 Million (fully guaranteed)
Year 3: $9 Million ($3 Million guaranteed)
Year 4: $14 Million

Added together, Player B, like Player A, gets the $40 Million contract with $20 Million guaranteed that he’s always dreamed about. However, just like Player A, it’s highly unlikely Player B will actually see all of that money. Using the formula mentioned earlier, the pro-rated signing bonus would be $2 Million per year added to the salary cap on top of the base salary.

The Salary Cap hits for Player B would be:
Year 1: $3M Base + $2M Signing Bonus = $5 Million Cap Hit
Year 2: $6M Base + $2M Signing Bonus = $8 Million Cap Hit
Year 3: $9M Base + $2M Signing Bonus = $11 Million Cap Hit
Year 4: $14M Base + $2M Signing Bonus = $16 Million Cap Hit

Player B, like Player A, gets cut after his second year. Once again, looking at the base salaries, this doesn’t look so bad for the team, as they save $20 Million in those final two years, because $3 Million of Player B’s year three was guaranteed. Since Player B received a moderate signing bonus, the accelerated cap hit would only be $4 Million in year three, for a total cap hit of a $7 Million. In this instance, Player B ends up losing $20 Million in base salaries by “backloading” his contract.

Player C: The Low Signing Bonus with the Big Initial Cap Hit

The agent for Player C negotiates Player C’s contract very differently from Players A and B. Player C receives a low signing bonus of $4 Million with gradually decreasing base salaries of:
Year 1: $14 Million (fully guaranteed)
Year 2: $12 Million ($2 Million guaranteed)
Year 3: $6 Million
Year 4: $4 Million

Added together, Player C, like Players A and B, gets the $40 Million contract with $20 Million guaranteed that he’s always dreamed about. Unlike Players A and B, Player C has a much bigger chance to see the majority of the $40 Million. Using the formula mentioned earlier, the pro-rated signing bonus would be $1 Million per year added to the salary cap on top of the base salary.

The Salary Cap hits for Player C would be:
Year 1: $14M Base + $1M Signing Bonus = $15 Million Cap Hit
Year 2: $12M Base + $1M Signing Bonus = $13 Million Cap Hit
Year 3: $6M Base + $1M Signing Bonus = $7 Million Cap Hit
Year 4: $4M Base + $1M Signing Bonus = $5 Million Cap Hit

Player C, like Players A and B, gets cut after his second year. The team saves about $10 Million in base salaries. However, since Player C received a rather low signing bonus, the accelerated cap hit would only be $2 Million in year three and a total cap hit of only $2 Million as well since the base salaries in years three and four were not guaranteed. Player C would then receive $30 Million of the $40 Million contract, which is a rather large increase over the money Players A and B ended up receiving.

Conclusion

As you can see, negotiating NFL contracts is a very nuanced dance. Generally, the best strategy is to opt for the Player C negotiating strategy because it provides both parties exactly what they want. The team gets a quality player and it is not cap prohibitive to cut the player once production wanes or injuries occur. Further, the Player receives the most money when negotiating a contract like the one for Player C. Recognize though, that not all teams have the cap space, and some the general intelligence, to negotiate contracts this way. However, for the long-term viability and manageability of a team’s salary cap, GMs should definitely rely upon the Player C model when tangoeing with agents.

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