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Salary Cap ... Explained!

We’ll hear plenty about contract restructuring and extensions this offseason. But in their haste to get under the salary cap, teams will set themselves up for future failure. Here’s our guide to understanding the NFL’s most confusing topic

In the year-round coverage of the NFL, there is no topic more misunderstood than the salary cap.  Cap room, cap numbers and cap consequences often aren’t what they appear to be, and at times alleged “smart” cap management is merely salvaging the present to complicate the future.

It's a heavy subject matter, so let's divvy up the topics and dive in:

What is the salary cap?

The official NFL team salary cap number for 2014, which will be announced next week, is expected to be somewhere between $130-133 million.  If so, it would mark the first time the number has exceeded the 2009 threshold of $128 million.

That, however, is not really “the number.”  Each NFL team has an adjusted cap number modified due to: 1) cap room carryover from the previous year—a new feature of the 2011 CBA; and 2) netting out of the previous year’s earned unlikely incentives and unearned likely incentives (yes, it’s complicated). Thus, while every team theoretically will be operating under, say, a $130 million cap, no team actually will have a cap number of exactly $130 million.

Further, the announced cap number applies to negotiable dollars for player contracts, not pre-negotiated benefits that are a growing part of the CBA—health and pension benefits, the player performance pool, the minimum salary benefit, etc.  With those secured benefits as part of the cap, the true 2014 cap number might be closer to $150 million.

How do teams manage the cap?

The best-managed teams, in my opinion, operate with all three prongs of the football operation—coaching, evaluation and cap/contract management—working in sync.  All three must buy in to the team-building vision set by the decision-maker, a common example being to: draft well (scouting); develop young players (coaching); and identify and extend core performers prior to their free agency leverage points (cap/contract management).  Like any successful organization, the best-managed NFL teams have skilled people who stay in their lanes, focusing on what they do best and allowing others to do the same.

The job of managing a team’s player payroll and cap often is misperceived to be primarily about numbers.  The numbers work themselves out; a well-oiled calculator can do most of that.  The more important part of the job is the people part: professionally and tactfully handling internal and external conflicts. 

Cap/contract managers not only deal with agents and their sometimes delusional views of their clients' worth, they also balance the present and future in assessing what is best for the organization. In my role with the Packers—I was the vice president from 1999 to 2008—I tried to be a voice of reason to those primarily worried about the present, or a voice of action to those largely worried about the future. 

In simplest terms, an NFL cap manager must serve as a calming presence to both the football and business sides of the organization.  And now is the time of year where such difficult conversations happen.

With his recent contract extension, Terrell Suggs benefited financially not necessarily because of on-field performance, but due in part to the Ravens' need for 2014 cap relief. (Patrick Smith/Getty Images)

With his recent contract extension, Terrell Suggs benefitted financially not necessarily because of on-field performance but due in part to the Ravens' need for 2014 cap relief. (Patrick Smith/Getty Images)

Why do teams extend/restructure contracts?

One of the great myths about the NFL salary cap is that it is a hard cap. It is not; it is soft. The primary reason is allowing for the proration of signing bonuses, allocating for greater short-term cash than cap distribution while depositing the cap leftovers into the future.

Let’s use the Terrell Suggs' recent extension with the Ravens as an example.  Suggs was in the last year of his contract and scheduled to make $7.8 million.  The Ravens increased that $7.8 million to $12 million with a completely different structure: $11 million signing bonus and $1 million salary.  With the signing bonus now prorated over this year and four additional years, Suggs' cap number—excluding previous unamortized proration—went from $7.8 million to $3.2 million, calculated as follows: $2.2 million of proration on the new bonus and $1 million salary. 

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Now, Suggs’ 2014 cash allocation is $12 million while his 2014 cap allocation is $3.2 million, a nearly $9 million “cash over cap” discrepancy on one player! This is how teams spend over the cap on a cash basis while staying under the cap. If and when Suggs is released in the next five years, which is more likely than not (he's 32), his $2.2 million annual proration will accelerate, leaving the Ravens with a large cap charge for a player no longer there.

My sense is the Ravens would not have pursued an extension with Suggs but for their cap issues; it's not a good reason to sink money into an older player. Facing a likely soft free agent market next year for an aging defensive end, Suggs and his agent were only too happy to take an extension with almost $8 million more in guaranteed money. The Ravens’ issues from a bloated cap made Suggs a fortunate beneficiary.

Beyond extensions like Suggs', teams have begun the perilous annual ritual of “hide the cap,” which means converting cap charges previously “contained” in 2014 to charges now piled onto players' future cap numbers. The Panthers converted such monies this week for Jonathan Stewart and Ryan Kalil, and the Cardinals have once again reworked Larry Fitzgerald's contract. Fitzgerald, who has truly maximized his income from the Cardinals with three top-of-the-market wide receiver contracts, will once again be solicited to adjust his enormous cap charge at this time next year, giving him further continued leverage.

What mistakes do teams make?

Larry Fitzgerald recently restructured his contract to give Arizona cap relief in 2014. (Norm Hall/Getty Images)

Larry Fitzgerald recently restructured his contract to give Arizona cap relief in 2014. (Norm Hall/Getty Images)

When I managed the Packers cap, I felt an obligation to our shareholders to resist the continuous temptation to “push out” high cap charges of players like Brett Favre for short-term needs. I had seen teams part with franchise quarterbacks and have $10-15 million leftover cap charges as a result of stacked prorations from multiple cap conversions.  I wanted to make sure that when there was a parting with Brett, we would not be in cap jail.

I get it; teams want to go for it in their window of time, but only one team wins every year and it often leads to a vicious cycle. Short-term gain leads to long-term pain; deals that are cap friendly now are often cap unfriendly later. Players with numerous cap restructures, such as Fitzgerald and Ben Roethlisberger, might leave behind tens of millions of cap charges, limiting the teams’ future ability to compete.

The reality in the business of football is very few long-term contracts last to completion.  The team terminates most contracts with years remaining.  And when they do, all remaining cap charges accelerate. These dead money charges have drastically affected teams like the Raiders and Redskins, and teams like the Steelers, Panthers and Cowboys will soon feel the effects as well.

What's the best way to manage the cap?

How, then, do teams avoid the need for cap conversions that constrain their future? It is easier said than done, but the answer is simple: Do not prorate.

For example, say a team and player agree on a $10 million cash spend in the first year of a contract. With optimal cap management, the team would not use a signing bonus but rather pay the $10 million in monies not subject to proration (salary, roster bonus, etc.) This would contain the cap cost, giving the deal a clean cap–no remaining charges—if things ever went south with the player.  This pay-as-you-go strategy—with cash and cap aligned—puts teams ahead of the curve.

The hard part, of course, is for teams to be in position to operate this way.  It requires discipline that must be supported by all layers of the organization. Once there, though, paying as you go creates desired flexibility for the present and future.  Cap will become secondary, instead of primary, for decision making; the flexibility will be there.

Which teams are able to do this?  The teams with players’ cap numbers very close to their cash numbers. The teams not making noise in cap management with conversions and restructures these next two weeks.  The teams with clean caps and no need for the credit card spending.

It is now, in these dark days of winter, when teams set a course in cap and contract management that can affect them, negatively or positively, for years to come.