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17 Jun 2009

Under The Cap: Day Two Deals

by J.I. Halsell

With Mark Sanchez signing a reported maximum value contract of $60 million with $28 million guaranteed, I'm sure readers of Football Outsiders are eager to read the analysis of that contract; while I have yet to see the official contract details, know that as soon as I do, I will be posting an entry regarding the deal.

While the Sanchez and Matt Stafford first-round contracts garner the most attention, there are other draft picks from the 2009 draft class who have signed contracts. Of course all of these picks are from rounds three through seven and their dollar amounts aren't as intriguing as the first-round contracts, but what you may find interesting is how their contracts are structured.

In terms of the mechanics of the deal, the first-round contracts are the most complex. Second-round contracts are not as complex as first-rounders; however, second-round contracts are structured differently than those of rounds three through seven. Contracts for third- through seventh-rounders all have pretty much the same structure, with the only difference being the duration of the contract.

Seven clubs (Arizona, Baltimore, Detroit, Kansas City, New Orleans, Pittsburgh, and St. Louis) sign their third- through seventh-rounders to three-year contracts; the remaining 25 clubs sign their respective picks to four-year contracts. When you compare and contrast the three-year deal versus the four-year deal, obviously, the three-year deal gets the player to free agency sooner -- albeit restricted free agency -- while the four-year deal gets the player a higher signing bonus than if the same player had signed a three-year deal. Basically, in exchange for an additional year, the team has to give up more coin.

Years one through three of both contracts are for a minimum annual salary; in year four, though, things get interesting. In Year Four of the four-year rookie contract, there is a salary escalator that, in the majority of instances, allows the player's salary of $565,000 in 2012 to adjust to the restricted free agency Original Round Tender (in 2012 this amount is $1,308,000) if they achieve certain performances in the first three years of the contract. Additionally, some clubs allow for escalation to other dollar amounts or other RFA levels such as the First Round Tender (in 2012 this amount is $2,846,000). The performance mechanism to induce the escalation is a combination of the player's participation percentage and the club's improvement in one of three negotiated statistical categories.

For example, in order for a player's 2012 salary of $565,000 to escalate to the Original Round Tender of $1,308,000, the player must, in two of the first three years of the contract, play in 35 percent of the offensive snaps (let's say this player is a wide receiver) In addition, during those first two seasons, the team must improve its league rank in any one of the following three statistical categories: Points Scored by Offense, Total Offense (net yards), or Average Net Yards per Passing Play. Additionally, for the player's salary to escalate to the First Round Tender of $2,846,000, the player must participate in at least 35 percent of the offensive snaps, the team must improve in one of the three statistical categories (in the same season), and the player must be elected on the original ballot to the Pro Bowl (being selected as an Alternate does not count). The player can only achieve one of the two levels, $1,308,000 or $2,846,000.

So as you can see, it's not exactly a gimme. Some teams will even structure the language such that the player will not receive credit if the statistical improvement still ranks the team in the bottom five of the league, meaning the team went from 32nd in the league to 29th in the given category. Some teams only require the statistical improvement in one of the two playtime years; so some team's escalator language is easier than others, but again, none of it is a gimme.

A player can be a significant contributor to a team from a participation percentage standpoint, but if the team doesn't improve in one of those categories, then it all goes for naught in terms of escalating the player's Year Four salary. So, like most things related to contract negotiations, it's a matter of risk by both parties to the negotiation. From the player's perspective, they can take (as an example) $40,000 for a late seventh-rounder to sign a four-year contract, in lieu of $30,000 to sign a three-year contract; however, if they turn out to be a Pro Bowler, then in Year Four they're playing under the First Round Tender of $2,846,000, or even worse, the Original Round Tender of $1,308,000. If they would have done a three-year deal, they would have been playing under the First and Third Round tender of $3,616,000 potentially. From the team's perspective, they're gambling on giving the player a little more money on the front end to save a bunch of money on the back end, but if the player sucks, then they spent additional money unnecessarily. However, one could make the argument that if you have four draft picks who receive four-year contracts, and one of them turns out to be a contributor to the point where he earns his escalator while the other three picks are out of the league by Year Two, then the savings on the player who made it pays for the additional signing bonus expenses of the three players who didn't.

In short, teams are buying even more control of the player's fourth year on the front end. Also, keep in mind that it's not actually a decision for a player and his agent to make in terms of three years versus four years; teams take the position of "This is how we do business, this is non-negotiable". So, in the case of a four-year rookie contract team, you can either sign a four-year contract or not sign one at all; after all, is a sixth-round pick really going to hold out of training camp because he doesn't like the duration of his contract? So the real negotiation lies on the terms of the escalator language; i.e., Bottom 5 language, Original Round tender vs. First Round tender, and the three statistical categories.

Given that it sounds like this four-year contract structure is tilted favorably towards the clubs, why don't all clubs sign their picks to four-year contracts? Well, I'd say that cash is a small part of the issue; let's face it, some owners are trying to save as much money as possible, particularly on players who have yet to prove themselves. However, I think the bigger issue is that the three-year clubs believe that if a player turns out to be a stud, then the player probably is not even going to play under that Year Four salary anyway because either prior to or during Year Four, the team and player are going to agree to an even more lucrative contract extension. Moreover, if there is still uncertainty as to if the player is deserving of a lucrative extension, then the club will tender the player accordingly, and if they lose him via restricted free agency, they'll get a draft pick in return.

This transition to the majority of clubs utilizing four-year contracts has occurred over the past few seasons; in 2007, my first season in Washington, we made the switch. With cap guy Kevin Demoff now in St. Louis, historically a three-year contract team, coming from Tampa Bay-- a four-year contract team -- it'll be interesting to see if they make the switch this year to four-year contracts.

All of this said, when you see that your local team just signed their seventh-round pick to a four-year contract with a $50,000 signing bonus, understand that there's a lot more to that contract than just how much the guarantee is.

Webinar

It's that time of the month again, I'm conducting a Salary Cap 101 Webinar, where you'll have the opportunity to learn about the components of player contracts and how those contracts are accounted for under the rules of the salary cap. For more information and to register, visit www.SalaryCap101.com.

Posted by: J.I. Halsell on 17 Jun 2009

19 comments, Last at 19 Jun 2009, 4:02pm by The Ninjalectual

Comments

1
by DFJinPgh (not verified) :: Wed, 06/17/2009 - 12:56pm

Good stuff.

How long have the 3/4-year contracts been standard for non-highly-drafted players? Salary Cap era? Since the draft went to 7 rounds?

You hint that teams are moving from mostly 3-years to mostly 4. Do you foresee any movement towards 5? What circumstances do you think would lead teams back to 3, if any?

3
by tuluse :: Wed, 06/17/2009 - 1:50pm

I think the new CBA limits late round picks to 4 year deals.

2
by The Ninjalectual :: Wed, 06/17/2009 - 1:07pm

I am curious what players have recently hit either escalator in the 4th year of their rookie contracts.

"Just look at that pumpkin."
-John Madden, looking at the moon.

8
by Joseph :: Wed, 06/17/2009 - 5:07pm

I'll bet Marques Colston & Jahri Evans of the Saints did. I bet that the safety that Washington took in the 7th round does also. (Just off the top of my head).

11
by Bobman :: Thu, 06/18/2009 - 2:31am

But if a guy does Colston-well in his first couple years, a team may well renegotiate/extend him into a second contract well before that 4th year kicks in. Instead of (round numbers) $1M or $2M, he may well end up with a front-end bonus of $5M when he signs after Year 3.

What happened with Brady? I cannot imagine that the 7th rounder, after winning the SB MVP in his soph campaign, was still on that rock-bottom rookie contract the next year.

12
by tuluse :: Thu, 06/18/2009 - 3:13am

I could see a guy like James Jones getting this.

4
by CoachDave :: Wed, 06/17/2009 - 2:21pm

Another excellent article that is information I've never been able to find on the internet anywhere else.

Thanks a lot!

5
by Karl Cuba :: Wed, 06/17/2009 - 2:22pm

Mr Halsell: Ay chance you could have a look at the 49ers recent extensions for Gore, Staley and Haralson? The Gore contract in particular is interesting.

6
by Keith (not verified) :: Wed, 06/17/2009 - 2:27pm

I typically enjoy reading your articles. You take the complicated language of the contracts and put them in low-level terminology for the rest of us. Thank you for that.

However, I think most of all, I enjoy reading your writing because you write correctly. That is to say, you use hyphenated modifiers correctly and, as is my preference, you use the Oxford comma. It makes it easier to read the writing of somebody else that writes similarly to the way I would if I wrote such articles.

7
by Enigma (not verified) :: Wed, 06/17/2009 - 3:22pm

re: #1

The current CBA limits draft picks to the following maximum contract lengths:

Picks 1-16: Six years.
Picks 17-32: Five years.
Picks 33-256: Four years.

9
by Jimmy :: Wed, 06/17/2009 - 5:19pm

Yet another great article.

10
by Parker W. (not verified) :: Wed, 06/17/2009 - 11:17pm

The best "Under the Cap" yet... by far! J.I., personally I would like to read more stuff like this from you, discussions of general practices and the philosophies behind teams' operations rather than specific contract evaluations.

Thanks for the great stuff and, please, keep it coming.

19
by The Ninjalectual :: Fri, 06/19/2009 - 4:02pm

I second the request for a philosophy-driven approach, but hey, it's your column, and I will probably enjoy it either way!

"Just look at that pumpkin."
-John Madden, looking at the moon.

13
by Jake (not verified) :: Thu, 06/18/2009 - 3:19am

Just wanted add my voice to the choir singing the praises of this article. Good analytical stuff not seen elsewhere, thanks!

14
by Dave M. (not verified) :: Thu, 06/18/2009 - 11:46am

What do elite units do about the unit improving clauses for rookies? If you were a WR drafted by NE last year your first in every category.

16
by tuluse :: Thu, 06/18/2009 - 3:09pm

My guess would be remain in the top 5.

15
by Bad Doctor :: Thu, 06/18/2009 - 1:55pm

So, in the case of a four-year rookie contract team, you can either sign a four-year contract or not sign one at all; after all, is a sixth-round pick really going to hold out of training camp because he doesn't like the duration of his contract?

As I recall, the Eagles cut Raheem Brock pretty soon after selecting him in the 7th round in 2002, and the reason was that he had unreasonable contract demands and/or was threatening a hold out. Does anybody remember the details?

17
by Enigma (not verified) :: Thu, 06/18/2009 - 4:08pm

re: 15

The media articles from the time all state or otherwise imply that the Eagles simply ran out of money in their rookie pool:

Eagles president Joe Banner is considered one of the league's top managers of the salary cap. But he made a big boo-boo in signing the club's rookies. The Eagles ran out of money in their rookie pool allotment and didn't have enough to sign seventh-round pick Raheem Brock, a defensive end of Temple. They ended up having to release Brock, who was immediately gobbled up by the Indianapolis Colts.

"I've never heard of a team doing this, just letting go of a player they drafted, "said one of Brock's agents, George Mavrikes. "Not unless the player got arrested or something.

"The Eagles will look bad if one of two things happen: if Raheem turns out to be a player at a position that's hard to find good players, or if one of the Eagles' defensive linemen gets injured."

However, it is hard to believe that a team wouldn't know how much it needed / how much it had left to sign draft picks. A possible explanation could be that Brock was asking for more than the Eagles had left under their rookie cap and thus was released.

18
by Bobman :: Thu, 06/18/2009 - 5:03pm

Interesting. I've never heard a bad word about Brock in all his time with the Colts. His flexibility to play DE or DT is highly valued. Personally, I still like his rookie year technique of leaping through the air for sacks (call the move "the flying squirrel"). I have not seen is since, but if he was being chipped low by a RB blocker, he'd essentially half-hurdle the guy and half-dive for the QB (if the QB was close enough). It worked at least once that I saw and was pretty damn surprising.

Thank God the Eagles stumbled there and the Colts were on the ball to pick him up.