Mr. Laz
07-01-2005, 01:45 PM
repost ... for forum search purposes
Salary Cap 101
By Ron Del Duca
HOW TO COMPUTE A SALARY CAP NUMBER
The football fan is constantly bombarded with the phrases such as 'salary cap' and 'cap number.' Unlike most people, you, the reader of these columns, know that these phrases have nothing to do with hats. Incident to my ongoing objective to help you better understand the business side of the NFL, the following is a summary of the nuances of how a player's Salary cap number is computed.
SIGNING BONUSES
Signing bonuses and any amounts treated as signing bonuses are prorated equally over the length of the player's contract for purposes of calculating the player's salary cap number. For example, if a $5 million signing bonus is paid on a five-year contract, the signing bonus will count $1 million annually against the team salary for each of the five years even though the player receives the full $5 million in the first year. The amount of the signing bonus is simply divided by the number of contract years. Note, however, if a player is released or retires before the end of the contract period, the general rule is that the remaining portion of the salary cap is accelerated so that the entire remaining portion of the bonus amount is recognized against the team's salary in the year the player's employment terminates.
RENEGOTIATION / SIGNING BONUSES
If a signing bonus is given in conjunction with a renegotiation and/or extension of a previously existing contract, the new signing bonus is
prorated over the length of the new contract years, including the year that the renegotiation takes place. For example, if a player was signed to a two-year contract for 1998 and 1999 and then receives a new signing bonus in 1999 in exchange for adding two additional years (2000-2001) to the contract, then the new signing bonus is prorated (one-third in each year) equally over 1999, 2000 and 2001, not just in 2000 and 2001.
PARAGRAPH SALARY
A player's paragraph 5 salary ('base salary') is always counted against team salary in full in the year that it is earned. If a player is scheduled to make a base salary of $500,000 in 2000, then all of the $500,000 counts against his team's salary cap that year.
LIKELY TO BE EARNED (LTBE)
Other amounts players earn count against the salary cap only if they are likely to be earned ('LTBE'). These other amounts include, but are not limited to, performance and honors incentives, roster bonuses, reporting bonuses and off-season workout bonuses.
As noted in my previous column of July 14, 1999, to determine whether a performance or honor incentive is LTBE for veteran players, you need to examine the player's and/or team's prior year on-field performance. If a running back will earn a $100,000 incentive if he has 1,000 rushing yards in 2000, his 1999 performance must be analyzed to determine if the incentive is LTBE for 2000 and counts against his team's 2000 salary cap. If the player rushed for 1,000 or more yards in 1999 then the incentive is LTBE in 2000 (counts against the 2000 salary cap). If the player rushed for less than 1,000 yards in 1999 then the incentive is not likely to be earned (NLTBE) and does not count against the salary cap in 2000. The same rule applies for any team incentives that are negotiated. Note there are some exceptions to these basic rules.
Per the CBA, there are different sets of incentives for rookies in the NFL (see my previous article dated July 21, 1999). For example, an incentive for a third round wide receiver that entitles the player to $10,000 if he has 6 Receiving Touchdowns would count $6,666 against the team's Entering Player Pool and overall team salary cap via the rookie incentive chart contained in the CBA.
ROSTER BONUSES
Roster bonuses are treated in a manner very similar to performance bonuses. For veterans, the player's prior year is examined to determine to what extent a roster bonus is LTBE for the current league year. For example, if a player was a member of the 53 man roster for 14 games in 1999 and has a roster bonus for $50,000 if he is a member of the 53 man roster for the same or fewer amount of games in 2000, then the full $50,000 is LTBE in 2000 and counts against the salary cap. If the bonus is written for being on the roster for a greater number of games then the bonus is NLTBE in 2000. However, unlike performance incentives, NLTBE roster bonuses will count against a team's salary cap immediately once it is actually earned by the player.
For rookies, the chart noted in the CBA is utilized; generally a regular season roster bonus that a drafted player receives if he makes the team will count 100% against the team salary cap in the contract year in which it is earned while undrafted players' roster bonuses count only 30% (of the total bonus amount) against the salary cap.
Regardless if the player is a veteran or rookie, any roster bonus that is guaranteed is treated as a signing bonus and thus prorated equally over the length of the contract for salary cap purposes.
REPORTING BONUSES
All non-guaranteed reporting bonuses are LTBE and count in full against team salary in the year they are earned. This is true for both veterans and rookies. If a reporting bonus is guaranteed, then it is treated as a signing bonus and prorated equally over the length of the contract for salary cap purposes.
WORKOUT BONUSES
Workout bonuses are automatically LTBE and count in full against team salary in the year they are earned. If the workout bonus is guaranteed, then it is treated as a signing bonus and prorated equally over the length of the contract for salary cap purposes.
EXAMPLES
Compute the salary cap number for the following three players.
Example 1:
Rookie Player A
2000 Base: $400,000
Signing Bonus: $2,000,000 (5 year deal)
2000 Reporting Bonus: $500,000
2000 Workout Bonus: $50,000
Answer: Cap Number = $1,350,000
($400k base + $400k sign bonus proration (2 million - 5 yrs) + $500k rpt bonus + $50k w/o bonus = $1.35m)
Example 2:
Veteran Player B
2000 Base: $600,000
Signing bonus: $1,800,000 (3-year deal signed in 1999)
2000 Roster bonus: $200,000 (Note: was on team's roster for all of 1999)
2000 LTBE's: $150,000
Answer: Cap Number = $1,550,000
($600k base + $600k signing bonus proration (1.8 million — 3 yrs) + $200k roster bonus + $150k LTBE's = $1.55M)
Note: If the roster or reporting bonuses were guaranteed they would be treated as signing bonus and the results would be different (i.e., they would be prorated over the term of the contracts).
Example 3
Assume player B renegotiates his contract prior to the start of the 2000 season and
(a) receives a new $1,000,000 sign bonus,
(b) extends the original contract for two additional years, and
(c) lowers his 2000 base salary to $200,000.
What is his new 2000 cap number?
Answer: $1,400,000
($200k new base + $600k old sign bonus proration + $250k new sign bonus proration ($1,000,000 — 4 yrs. (2000-2004)) + $200k rost + $150k LTBE's = $1.4m)
Note: In a renegotiation the old signing bonus proration does not change.
As the reader now realizes, the astute Contract Advisor, in order to better represent his clients, has to be able to not only understand the salary cap rules but also be able to perform the actual calculations to determine the salary cap ramifications of any contract terms he proposes.
[/edit]
Addendum A - (thanks coryt :) )
Escalation
Regarding the escalation of signing bonuses for terminated contracts, if the player is released prior to June 1st, then ALL remaining portion of the bonus counts that year (as stated above). However, if the player is released after June 1st, then only the regular annual portion of the bonus counts that year, and all remaining years will count the next season.
Teams also have a choice now ... when releasing a player after june 1st they can choose how the cap % hit is spread out for the team.
40/60 -- 50/50 --- 60/40
(40% cap hit this year and 60% the following ... 50/50 etc)
Trades
Any player trade results in an immediate cap hit, whether the trade occurs before or after june 1st.
No dividing % option is available to team that trades a player.
Rookie Salary Cap Pool
The rookie pool is, essentially, a cap within a cap. It represents the maximum amount that a team can spend, in terms of salary-cap room, on its draft choices and undrafted rookies. A franchise's rookie allocation is part of, not in addition to, its overall spending limit.
Teams aren't required to spend their entire rookie pool. But agents normally seek about a 10 percent raise from the previous year's slot. The rookie pool increased about 5 percent from last year's league total.
Salary Cap 101
By Ron Del Duca
HOW TO COMPUTE A SALARY CAP NUMBER
The football fan is constantly bombarded with the phrases such as 'salary cap' and 'cap number.' Unlike most people, you, the reader of these columns, know that these phrases have nothing to do with hats. Incident to my ongoing objective to help you better understand the business side of the NFL, the following is a summary of the nuances of how a player's Salary cap number is computed.
SIGNING BONUSES
Signing bonuses and any amounts treated as signing bonuses are prorated equally over the length of the player's contract for purposes of calculating the player's salary cap number. For example, if a $5 million signing bonus is paid on a five-year contract, the signing bonus will count $1 million annually against the team salary for each of the five years even though the player receives the full $5 million in the first year. The amount of the signing bonus is simply divided by the number of contract years. Note, however, if a player is released or retires before the end of the contract period, the general rule is that the remaining portion of the salary cap is accelerated so that the entire remaining portion of the bonus amount is recognized against the team's salary in the year the player's employment terminates.
RENEGOTIATION / SIGNING BONUSES
If a signing bonus is given in conjunction with a renegotiation and/or extension of a previously existing contract, the new signing bonus is
prorated over the length of the new contract years, including the year that the renegotiation takes place. For example, if a player was signed to a two-year contract for 1998 and 1999 and then receives a new signing bonus in 1999 in exchange for adding two additional years (2000-2001) to the contract, then the new signing bonus is prorated (one-third in each year) equally over 1999, 2000 and 2001, not just in 2000 and 2001.
PARAGRAPH SALARY
A player's paragraph 5 salary ('base salary') is always counted against team salary in full in the year that it is earned. If a player is scheduled to make a base salary of $500,000 in 2000, then all of the $500,000 counts against his team's salary cap that year.
LIKELY TO BE EARNED (LTBE)
Other amounts players earn count against the salary cap only if they are likely to be earned ('LTBE'). These other amounts include, but are not limited to, performance and honors incentives, roster bonuses, reporting bonuses and off-season workout bonuses.
As noted in my previous column of July 14, 1999, to determine whether a performance or honor incentive is LTBE for veteran players, you need to examine the player's and/or team's prior year on-field performance. If a running back will earn a $100,000 incentive if he has 1,000 rushing yards in 2000, his 1999 performance must be analyzed to determine if the incentive is LTBE for 2000 and counts against his team's 2000 salary cap. If the player rushed for 1,000 or more yards in 1999 then the incentive is LTBE in 2000 (counts against the 2000 salary cap). If the player rushed for less than 1,000 yards in 1999 then the incentive is not likely to be earned (NLTBE) and does not count against the salary cap in 2000. The same rule applies for any team incentives that are negotiated. Note there are some exceptions to these basic rules.
Per the CBA, there are different sets of incentives for rookies in the NFL (see my previous article dated July 21, 1999). For example, an incentive for a third round wide receiver that entitles the player to $10,000 if he has 6 Receiving Touchdowns would count $6,666 against the team's Entering Player Pool and overall team salary cap via the rookie incentive chart contained in the CBA.
ROSTER BONUSES
Roster bonuses are treated in a manner very similar to performance bonuses. For veterans, the player's prior year is examined to determine to what extent a roster bonus is LTBE for the current league year. For example, if a player was a member of the 53 man roster for 14 games in 1999 and has a roster bonus for $50,000 if he is a member of the 53 man roster for the same or fewer amount of games in 2000, then the full $50,000 is LTBE in 2000 and counts against the salary cap. If the bonus is written for being on the roster for a greater number of games then the bonus is NLTBE in 2000. However, unlike performance incentives, NLTBE roster bonuses will count against a team's salary cap immediately once it is actually earned by the player.
For rookies, the chart noted in the CBA is utilized; generally a regular season roster bonus that a drafted player receives if he makes the team will count 100% against the team salary cap in the contract year in which it is earned while undrafted players' roster bonuses count only 30% (of the total bonus amount) against the salary cap.
Regardless if the player is a veteran or rookie, any roster bonus that is guaranteed is treated as a signing bonus and thus prorated equally over the length of the contract for salary cap purposes.
REPORTING BONUSES
All non-guaranteed reporting bonuses are LTBE and count in full against team salary in the year they are earned. This is true for both veterans and rookies. If a reporting bonus is guaranteed, then it is treated as a signing bonus and prorated equally over the length of the contract for salary cap purposes.
WORKOUT BONUSES
Workout bonuses are automatically LTBE and count in full against team salary in the year they are earned. If the workout bonus is guaranteed, then it is treated as a signing bonus and prorated equally over the length of the contract for salary cap purposes.
EXAMPLES
Compute the salary cap number for the following three players.
Example 1:
Rookie Player A
2000 Base: $400,000
Signing Bonus: $2,000,000 (5 year deal)
2000 Reporting Bonus: $500,000
2000 Workout Bonus: $50,000
Answer: Cap Number = $1,350,000
($400k base + $400k sign bonus proration (2 million - 5 yrs) + $500k rpt bonus + $50k w/o bonus = $1.35m)
Example 2:
Veteran Player B
2000 Base: $600,000
Signing bonus: $1,800,000 (3-year deal signed in 1999)
2000 Roster bonus: $200,000 (Note: was on team's roster for all of 1999)
2000 LTBE's: $150,000
Answer: Cap Number = $1,550,000
($600k base + $600k signing bonus proration (1.8 million — 3 yrs) + $200k roster bonus + $150k LTBE's = $1.55M)
Note: If the roster or reporting bonuses were guaranteed they would be treated as signing bonus and the results would be different (i.e., they would be prorated over the term of the contracts).
Example 3
Assume player B renegotiates his contract prior to the start of the 2000 season and
(a) receives a new $1,000,000 sign bonus,
(b) extends the original contract for two additional years, and
(c) lowers his 2000 base salary to $200,000.
What is his new 2000 cap number?
Answer: $1,400,000
($200k new base + $600k old sign bonus proration + $250k new sign bonus proration ($1,000,000 — 4 yrs. (2000-2004)) + $200k rost + $150k LTBE's = $1.4m)
Note: In a renegotiation the old signing bonus proration does not change.
As the reader now realizes, the astute Contract Advisor, in order to better represent his clients, has to be able to not only understand the salary cap rules but also be able to perform the actual calculations to determine the salary cap ramifications of any contract terms he proposes.
[/edit]
Addendum A - (thanks coryt :) )
Escalation
Regarding the escalation of signing bonuses for terminated contracts, if the player is released prior to June 1st, then ALL remaining portion of the bonus counts that year (as stated above). However, if the player is released after June 1st, then only the regular annual portion of the bonus counts that year, and all remaining years will count the next season.
Teams also have a choice now ... when releasing a player after june 1st they can choose how the cap % hit is spread out for the team.
40/60 -- 50/50 --- 60/40
(40% cap hit this year and 60% the following ... 50/50 etc)
Trades
Any player trade results in an immediate cap hit, whether the trade occurs before or after june 1st.
No dividing % option is available to team that trades a player.
Rookie Salary Cap Pool
The rookie pool is, essentially, a cap within a cap. It represents the maximum amount that a team can spend, in terms of salary-cap room, on its draft choices and undrafted rookies. A franchise's rookie allocation is part of, not in addition to, its overall spending limit.
Teams aren't required to spend their entire rookie pool. But agents normally seek about a 10 percent raise from the previous year's slot. The rookie pool increased about 5 percent from last year's league total.