A Layman's Introduction To The Salary Cap

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Happy New Year!

Or, at least, Happy New Year to the NFL!

For the NFL, the New Year arrives Thursday at 4 p.m., and it's really more like Christmas or Chanukah, with teams hoping to get a lot of shiny, new toys.

March 9 is also the date the league's salary cap* *begins to apply, and from that point until the end of the season, all teams much remain in compliance with the cap.

With that in mind, I'm here to give you an introduction to the salary cap* *in terms that should be a little easier to understand (this thing is complex).

First, Some History

The salary cap* is sort of the great equalizer, and is one of the major components in the league's plan for parity. First implemented in 1994, one of the aims of the salary cap *was to guard against the rise of dynasties like the San Francisco 49ers and Dallas Cowboys of the late 80's and early 90's.

The aim of the salary cap, along with league-wide revenue sharing, is to reduce the competitive imbalance between bigger spending, large market clubs and the lower revenue, smaller market clubs. * *

Salary cap Basics

Unlike salary cap* in other professional sports, the NFL's salary cap is a "hard cap," meaning teams are not allowed to exceed the league-wide Salary cap. The amount of salary cap *has grown from $34.6 million in 1994 to $167 million for 2017.

As dictated by the league's Collective Bargaining Agreement (CBA), the yearly overall salary cap* *is calculated based on the percentage of certain defined sources of league-wide revenue, including tickets sales and TV contracts. 

Each team's yearly salary cap* is made up of complex web of many key components and teams are now allowed to carryover excess cap space from one season to the next.* **

Contract Valuation

Each year of a player's contract is valued for salary cap* *purposes, and the total of those yearly valuations for each player (the player's "cap number") count against the team's salary cap.

A player's cap* *number is basically calculated by combining the yearly proration of a player's signing bonus (and option bonus, if any) and the player's base salary for that year, and can also include incentives and some other types of bonuses.

Unlike most other professional leagues, most notably the MLB and NBA, very few contracts in the NFL are fully guaranteed. In lieu of that protection, most NFL contracts include a signing bonus, which allows for a large immediate payout upon signing. But, since a team's salary cap* could not handle a $40 million signing bonus (as quarterback Joe Flacco received last offseason), the amount of the signing bonus is prorated over the years of the contract (up to a maximum of five years) and that proration counts against the cap *in each one of those years.

As an example, below is the yearly breakdown of a four-year, $14M contract that includes a $4 million signing bonus.

Year Bonus Proration Base Salary Cap Number
2017 1,000,000 1,000,000 2,000,000
2018 1,000,000 2,000,000 3,000,000
2019 1,000,000 3,000,000 4,000,000
2020 1,000,000 4,000,000 5,000,000

While the player received a $4 million signing bonus in 2017, that bonus only counts $1 million against the cap* *in each year of the deal.

When players are released, the team is relieved of having to pay any base salaries in future years (unless guaranteed), but do still have to account for the remaining bonus prorations that have yet to count against the cap.

So, in the above example, if the player is released in March of 2019, the team still has to account for the 2019 and 2020 bonus prorations, since those prorations are part of money that has already been paid to the player. As such, even though the player has been released, that $2 million still has to count against the cap. This is what is commonly referred to as "dead money."* *

Incentives

A player's cap* *number can also include incentives, which are a way of paying a player for performance, as the player only receives payment if certain statistical milestones are reached. Because of the way incentives are counted against the salary cap, incentives are also often used when players agree to accept a reduced salary via a paycut. 

A perfect example of this would be tight end Dennis Pitta agreeing last offseason to reduce his base salary from $5 million to $1 million, which reduced his cap* number by $4 million. In return for this salary reduction, the Ravens agreed to add incentives that would allow Pitta to earn back most of what he gave up if he reached certain playing time and statistical thresholds. The reason this reduced Pitta's cap number was because the incentives were categorized as "not likely to be earned" (NLTBE) incentives, meaning that Pitta had not reached those benchmarks in the prior season. Since Pitta did not play at all in 2015, it was easy to craft NLTBE incentives that would reduce his cap number. When a player earns NLTBE incentives, as Pitta did, the amount of the incentives is then charged to the following year's cap as a negative cap "adjustment" (it does not affect the player's actual cap *number the following year). 

There are also incentives that are termed as "likely to be earned" (LTBE). LTBE incentives do count against the present year's cap* *because the player reached the statistic thresholds during the prior year. If the player ends up not earning those incentives in the present year, the team is credited back that amount as a positive "adjustment" on the following year's cap.

Rookie Cap

The NFL also has a rookie cap, which controls the amount of compensation that draft picks can receive. The most recent version of the rookie cap* *was instituted by the 2011 CBA, which greatly reduced the compensation paid to first round draft picks. The present system is basically a slotted system that dictates the amount of compensation based on where in the draft the player is chosen.

Each team, based on the number of players drafted and where they are drafted, is assigned a "rookie cap" that dictates the yearly amount that can be spent on the team's draft class and the maximum total value of each draft pick's contract. * *

Adjusted Team Cap

The league-wide salary cap for 2017 has been set at $167 million. However, most teams will actual have a salary cap figure that is higher or lower than the $167M. This is what is known as the team's Adjusted Team Cap and includes the league-wide cap, plus any excess cap space carried over from the prior year and also includes the positive or negative incentives adjustment from the prior year. This adjusted team cap then operates as the maximum salary cap amount for the team.* *

Ravens' Current Cap Space

At present, the Ravens have $13.8M in cap space, based on the 54 players they currently have under contract. This number is going to decrease over the next week as the Ravens make tenders to their six restricted free agents (RFAs) and seven exclusive rights free agents (ERFAs). Adjustments for incentives (like the $3M in NLTBE incentives earned by Pitta) will also be applied. Once those tenders and adjustments are made, the Ravens will likely be in the $3 to $5 million under the cap range.

From there, the amount of cap space the Ravens will have on March 9 will depend on which players are released, and if they team is able to renegotiate any contracts (paycuts or extensions) to create cap space. The Ravens do have the ability to create ample cap space, it's just a matter of how much space the team wants to make and how deeply they want to make cuts.*
*

Brian McFarland started following the Salary cap in 2002 when there seemed to be very little explanation of why the Ravens had to go through their massive *salary cap *purge. Wanting to learn more to get a better understanding of how the *cap *affected the team's decision-making process, Brian began researching and studying the *salary cap and the league's CBA, while also compiling and analyzing player contract data. Since 2006, Brian, an estate planning attorney by trade, has been the* salary cap columnist for *Russell Street Report and can be followed on Twitter @RavensSalaryCap.*

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