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24 May 2010

Under The Cap: The 30-Percent Rule

by J.I. Halsell

A couple of weeks ago, 49ers linebacker Patrick Willis signed a five-year extension worth $50 million in new money with $29 million guaranteed. Throughout the offseason, we have heard about how the 30-percent rule would preclude young talented players from receiving lucrative extension. In spite of these reports, we saw the 49ers and Willis' agent Ben Dogra employ a contract structure that made Willis a very wealthy man.

So how did they navigate the 30-percent rule? Below is an illustration of Willis' 2009 terms under his rookie contract. His new contract could not increase or decrease his annual "salary" amount by more than 30 percent in each year. For the purpose of 30-percent rule calculation, "salary" is defined as base salary plus amounts not treated as signing bonus (for example, option bonus proration and roster bonuses). Willis' 2009 salary of $500,000 plus $1.16 million comprised of amounts not treated as signing bonus resulted in a 30-percent rule "salary" of $1.66 million. This "salary" is then multiplied by 30 percent, resulting in an increase/decrease threshold of $498,000.

Rookie Contract -- 30-Percent Rule Threshold Base
Year Base Salary Option Proration Roster Bonus "Salary" 30 Percent Threshold
2009 $500,000 $1.06 million $100,000 $1.66 million $498,000

Given this $498,000 threshold, Willis' contract is structured as follows, where Year-Over-Year (YOY) Increase illustrates 30-percent rule compliance:

New Contract -- 30-Percent Rule Threshold Base
Year Base Salary Option Proration Roster/
Workout Bonus
"Salary" YOY Increase
2010 $1.098 million $1.06 million $0 $2.158 million $498,000
2011 $1.596 million $1.06 million $0 $2.656 million $498,000
2012 $1.904 million $0 $1.25 million $3.154 million $498,000
2013 $2.402 million $0 $1.25 million $3.652 million $498,000
2014 $2.900 million $0 $1.25 million $4.15 million $498,000
2015 $3.398 million $0 $1.25 million $4.648 million $498,000
2016 $3.896 million $0 $1.25 million $5.146 million $498,000
New Contract -- Amounts Not
Considered in 30-Percent Rule
Signing Bonus $15.5 million
2011 Supercede
Signing Bonus
$4.8 million
2014 P5
Escalator
$2.385 million
2015 P5
Escalator
$3.667 million
2016 P5
Escalator
$4.039 million

The first thing you will notice is that Willis' signing bonus of $15.5 million does not factor into 30-percent rule compliance, nor does his 2011 supersede signing bonus in the amount of $4.8 million. A superseding signing bonus is used in lieu of an option bonus and simply is a part of a re-executed contract. This superseding signing bonus is very useful in navigating the 30-percent rule since it is not part of the calculation.

In every year of Willis' new contract, the $498,000 YOY Increase threshold is fully maximized by virtue of base salary, roster bonuses, and workout bonuses.

To increase the value of the contract to a level fit for a premier linebacker, contract years 2014-2016 contain easily achievable escalators totaling slightly under $10.1 million. To achieve these escalators, the 49ers defense must improve its year-over-year ranking in any CBA approved defensive category, and this improvement only needs to occur once for achievement.

The Willis deal gives Titans running back Chris Johnson a framework to secure a lucrative extension. However, there must be two willing parties in order to execute a contract, and it does not look as though the Titans are interested at this point.

Hypothetically, if both parties were to work towards an extension, the tables below show Johnson's 30-percent rule calculation.

Rookie Contract -- 30-Percent Rule Threshold Base
Year Base Salary Option Proration Roster Bonus "Salary" 30-Percent Threshold
2009 $385,000 $965,000 $0 $1.35 million $405,000

In creating a hypothetical deal for Johnson, you must gauge the top-tier running back market. Two players to analyze would be the Jaguars' Maurice Jones-Drew and the Rams' Steven Jackson, both of whom have received extensions in the past two years. In 2009, Jones-Drew received a four-year extension worth $7.6 million per year with a guarantee per year of $4.4 million. In 2008, Jackson received a five year deal worth $8.6 million per year with a guarantee per year of $4.1 million.

The tables below illustrate a Johnson extension that utilizes the Willis structure.

New Contract -- 30-Percent Rule Threshold Base
Year Base Salary Option Proration Roster/Workout Bonus "Salary" YOY Increase
2010 $790,000 $965,000 $0 $1.755 million $405,000
2011 $945,000 $965,000 $250,000 $2.16 million $405,000
2012 $1.35 million $965,000 $250,000 $2.565 million $405,000
2013 $1.97 million $0 $1 million $2.97 million $405,000
2014 $2.375 million $0 $1 million $3.375 million $405,000
New Contract -- Amounts Not
Considered in 30-Percent Rule
Signing Bonus $6.75 million
2011 Supercede
Signing Bonus
$2.25 million
2013 P5
Escalator
$1.5 million
2014 P5
Escalator
$2.13 million

This hypothetical deal represents a two-year extension worth $19 million in new money for an average per year of $9.5 million. The deal guarantees $11 million with a guarantee per year of $5.5 million. The 2013 and 2014 P5 Salary Escalators would be achieved, similar to Willis, if the Titans improve in any CBA approved offensive category once over the term of the deal.

This deal and the Willis deal are primarily achievable due to the presence of option bonus proration in their rookie contracts. Option bonus proration helps increase the 30-percent rule "salary" number, which in turn provides for a higher 30-percent rule threshold. Unfortunately for the Eagles' DeSean Jackson, he did not have an option bonus in his rookie contract because he was picked in the second round.

The running back market isn't very lucrative, but if a defensive tackle like Albert Haynesworth can secure a mega contract, then surely Chris Johnson will command a market premium deal as well -- if his productivity continues at this clip.

The issues of timing and precedent-setting have been at the heart of the Chris Johnson extension debate. Teams do not like setting precedents that come back to bite them down the road. Willis has been a Pro Bowl linebacker since entering the league in 2007, and yet played in that third year for $600,000. At this point, the Titans seem to expect Johnson to play his third year at a salary comparable to Willis', $550,000. This offseason, the 49ers had no problem opening up Willis' deal with two years remaining, and I suspect (assuming a clearer labor environment) the Titans would have no qualms about opening up Johnson's deal after the 2010 season when he'll also have two years remaining on his rookie deal.

Some make the argument that a player should honor his contract, but if that player fails to perform to expectations, there is no requirement for the club to honor the contract. More often than not, a club will simply terminate the contract. When a player is outperforming his contract, he does not have that same option. Without guaranteed contracts, the system strongly favors the clubs, which is why a 2,000-yard running back like Chris Johnson has a holdout as his only recourse. As we just illustrated, the contract structure is in place to make this deal possible. There just have to be two willing parties.

Follow J.I. Halsell on Twitter: @SalaryCap101

Posted by: J.I. Halsell on 24 May 2010

34 comments, Last at 09 Jun 2010, 3:50am by ghost of Darko

Comments

1
by Sunil (not verified) :: Mon, 05/24/2010 - 12:18pm

Math is only half the puzzle on the CJ contract. The key to CJ renegotiating will likely be his BATNA. His options are quite limited. He can continue to hold-out but if the Titans don't play ball; it's not that he can force some team to trade for him.

As a Titans homer ever since they moved to Nashville (coincidentally the year I moved to Nashville too) I've exulted in CJ's performance. But I'd love to see the Titans trade for him this year and get some premium draft picks and talent on defense for CJ@peak. The O-line has been solid and will only get better with the move of Eugene Amano to center. Titans may not get 2K rush yards but even a 1500 yard season for RB by committee should be enough.

All that to say, any valuation exercise on CJ will only be as good as the underlying market demand and CJ's ability to tap it. Right now both are limited so you might have to throw some reality factor into the contract math.

3
by Bobman :: Mon, 05/24/2010 - 1:54pm

Sunil, Interesting perspective from a homer. Why do you want to say bye-bye to CJ--merely because you think he's at max value now and any draft picks you get would have value-growth potential? Or because you foresee trouble that would diminish his value more than just a regression to the mean (or merely 1,800 yards rushing)? By that I mean "clubhouse cancer" type stuff. Looking at premier RBs who were career-long malcontents like Corey Dillon and Dickerson, they certainly produced for 8-10 solid years, griping or not.

If I were a Titans fan, I'd miss watching him--pretty exciting guy.

I like your reasoning--with a very good OL, a random group of runners should be able to generate decent production, plus you'd strengthen the teamin multiple areas (potentially). Of course draft picks can go bust....

Like in poker, having 4 aces only pays well when the next guy has 4 kings (or at least a need to participate in escalated betting--if everybody folds, all you win is the ante), so for the Titans to maximize CJ's value, you need a really hungry buyer out there. I don't know who the candidates might be (aside from a gratuitous swipe at Al Davis and his speed hard-on).

As for BATNA, man, the agents should repeat that 24/7 to their guys, but a lot of top athletes seem to figure "I'll just sit on my ass and play Madden for a year--show them they can't push me around" is their BATNA, which it ain't.

13
by Sunil (not verified) :: Mon, 05/24/2010 - 6:59pm

I don't foresee trouble from CJ - I've watched many of his interviews and he seems to be level-headed in terms of attitude. I'm more concerned with regression to mean and therefore looking to the value I can extract by trading CJ at his peak. The biggest issue is RBs are a dime a dozen and the average potential of a small-frame runner like CJ is another 2-3 years of 1500+ yards / year. What team would fork out crazy amounts of draft picks and talent to acquire CJ that's got 2-3 good years in the tank? I don't think Dickerson or Dillon are good comparables for CJ - they have radically different frames and running styles.

Totally agree with you on BATNA.

At heart I hope CJ stays on with Titans and gets a fair valuation and produces 2-3 solid years. But my sentiments as an armchair Monday morning GM are diffrent.

6
by Jimmy :: Mon, 05/24/2010 - 2:28pm

At the risk of seeming really dense, who or what is a 'BATNA'? (for all I know it is a rare breed of dog)

7
by dedkrikit (not verified) :: Mon, 05/24/2010 - 2:31pm

Sunil -
1) what is "BATNA"?
2) while your statement makes sense in a "numbers" way, it doesn't guarantee success. As mentioned by the other poster, draft busts aren't locks (as a homer, you know about the success so far with Cook - and if you follow other Titans blogs, you can see how successful past drafts have gone for the team). Furthermore, CJ is a unique talent. His presence on the field will only help a quarterback like VY. VY is not a pocket passer and needs to use his legs to make a play; and with CJ running around in tandem with him, the defense needs to account for two explosive players (maybe 3 or 4 if Britt and Cook come off).

Plus, CJ gives the fans someone to root for. Yes, winning is important, and a more solid overall team helps that, however, an amazing offense will sell tickets and bring in a national audience. Trade him off now for the risk of slight improvement elsewhere and the team will guarantee lose fan excitement.

8
by Tom Gower :: Mon, 05/24/2010 - 3:32pm

BATNA = Best Alternative To Negotiated Agreement, or words or similar meaning and initial letter. Basically, "what can CJ get if the Titans don't agree to give him what he wants."

16
by Sunil (not verified) :: Mon, 05/24/2010 - 7:22pm

Thanks Tom.

dedkrikit - point taken about rooting interest and VY support. But if you look at the games that the Titans lost last year with VY and CJ in the mix, it was for lack of defense. Sure we can take the short-term perspective and keep CJ; but teams will quickly learn to scheme for CJ and VY. That plus CJ's potential regression would mean the Titans aren't making any game-changing improvment.

Since we're talking hypotheticals my dream trade would be CJ + 3rd round pick going to
a) Pittsburgh for a premium linebacker (Woodley / Harrison) + Rashard Mendenhall + 2nd round pick (to get an elite CB next year) OR
b) Baltimore for Terrel Suggs + Ray Rice + 2nd round pick

{/daydream}

18
by Jimmy Oz (not verified) :: Mon, 05/24/2010 - 8:43pm

HEY With the BATNA thing, i've just discovered this amazing website called 'google' where you can type anything (and i mean anything!!) into it and it looks it up and suggests websites to look at to aid in further understanding.

I didn't even have to search the other websites cos it was right there in the suggested websites!! Instead of asking everyone else what something means, you can actually look it up for yourself in future!! Its amazing!!

21
by Dean :: Tue, 05/25/2010 - 10:24am

Maybe he'd rather piss off douchebags who get uptight when someone actually has the audacity to ask a question instead of being a knowitall?

28
by Tron (not verified) :: Tue, 05/25/2010 - 7:16pm

They only virtually had the audacity. Its the internet, not real life.

23
by dedkrikit (not verified) :: Tue, 05/25/2010 - 10:44am

It is usually good writing ettiquette to explain new (or fairly uncommon) terms when using them. In every main article on this site, the FO staff always links to a page explaining the terminology used. But according to your standards, they shouldn't do that.

Explaining acronyms just makes reading easier - and therefor reaches a wider audience. People can just use text typing and start using pretty obscure abbreviations from different communities (this one, gaming, middle school, etc).

So in other words, get over yourself.

29
by billy goat gruff (not verified) :: Tue, 05/25/2010 - 8:42pm

google is quicker. you don't have to ask the board. you can ask the board and wait, or you can google it yourself and get the answer timed. no need to get touchy about it. sorry for trip-trapping across your message board.

31
by Jimmy :: Wed, 05/26/2010 - 10:43am

OK I went and googled batna. Turns out it is in Algeria.

19
by dryheat :: Tue, 05/25/2010 - 7:58am

While you're at it, you should ask for a pony.

22
by dedkrikit (not verified) :: Tue, 05/25/2010 - 10:38am

Sunil -
While that trade would vastly improve the Titans (and I doubt the Ravens would make such a trade since they already have a young talented RB), as a fan, I would hate to lose another favorite player to that vile team.

24
by Sunil (not verified) :: Tue, 05/25/2010 - 11:19am

Amen - ever since the Eddie George-Ray Lewis days I'm sick of the Ratbirds!! I'd rather see CJ go to an NFC team (Chicago?)

26
by staubach (not verified) :: Tue, 05/25/2010 - 12:35pm

I see why you would like this trade, but you are crazy if you think the Ravens or Steelers would take it. There is just not that big of a drop-off from CJ to Ray Rice or Mendenhall (or any starting quality RB) to warrant a premier (albeit aging) player and a second round pick (a future starter). If I were the Ravens or Steelers, I wouldn't give up more than Mendenhall/Rice and a marginal player (or a 4th round pick), especially given CJ's contract demands.

2
by dryheat :: Mon, 05/24/2010 - 12:18pm

Seems to me that "Supercede Signing Bonus" could be accurately re-named "Circumvention of Applicable Salary Rules Device".

I really can't believe the league approved the Willis contract. What was the point of doing the 30 percent rule in the first place if teams are allowed to render it impotent so easily?

4
by Bobman :: Mon, 05/24/2010 - 1:55pm

Agreed. They are now on double-secret probation.

5
by Anonymous Jones :: Mon, 05/24/2010 - 2:24pm

"[T]here is no requirement for the club to honor the contract." Did I miss something here? The club's termination right is *in* the contract, isn't it? How is terminating according to a bargained-for termination right (at least at the CBA level) not "honoring" the contract?

Maybe this was just a misleading choice of words?

In the bizzaro world where there are guaranteed contracts (e.g., the NBA), *players* bargain for ETOs. The players who exercise their ETOs are most certainly not failing to "honor" their contracts.

10
by bingo762 :: Mon, 05/24/2010 - 4:13pm

Perhaps, when the last CBA was up, the players should've thought long term and negotiated for guaranteed contracts rather than short term and 60% of league revenue.

9
by Walsh (not verified) :: Mon, 05/24/2010 - 3:39pm

Just looked it up and BATNA stands for "Best Alternative To Negotiated Agreement"
Linking the Wiki article because I don't think I'd explain it properly http://en.wikipedia.org/wiki/Best_alternative_to_a_negotiated_agreement

11
by Rich Conley (not verified) :: Mon, 05/24/2010 - 4:57pm

"Some make the argument that a player should honor his contract, but if that player fails to perform to expectations, there is no requirement for the club to honor the contract"

This is an absolute falsehood, and I hate hearing it. The team absolutely does have to honor the contract. The contract just has terms for cutting the player, which the player agreed to. Any player could bargain for a completely guaranteed contract if they wanted, its just going to be less overall money.

12
by Andrew Leger (not verified) :: Mon, 05/24/2010 - 5:48pm

And going on with that, if the team chooses to exercise their right to cut a player, they lose that player and he can go wherever he wants. If he's still worth that much money, then he can feel free to go make it anywhere else. If he's not worth that much, then he's got nothing to complain about..

Also, if a player feels he is one of the best at his position, maybe they shouldnt sign a 5 or 6 year contract worth a lot less, maybe only sign like a 3 year or whatever. It never fails to amaze me when someone (think TO) signs a 6 or 7 year deal and then bitches about it 2 years into it.

14
by dedkrikit (not verified) :: Mon, 05/24/2010 - 7:01pm

Wouldn't you say that a rookie contract is a different beast, though? The round/number they are drafted is a huge influence on the money earned. (Good if top 10, not so much later on.) But the team is usually taking a risk on the player's future performance.

All the same, when a player so completely outperforms the contract, it should be renegotiated to show good faith. (especially for the team)

15
by Sunil (not verified) :: Mon, 05/24/2010 - 7:03pm

I'm surprized more rookie contracts don't have escalator or performance contracts built in. Quite puzzled actually that a 1st round draft pick like CJ's contract is as ludicrious as it is.

17
by tuluse :: Mon, 05/24/2010 - 8:13pm

Only the top 5-10 picks get really big deals. They aren't even as big as they seem.

33
by Lola was a dude (not verified) :: Fri, 05/28/2010 - 11:47am

Yeah, I've kind of come around to that opinion too. I used to be in the "the player should shut up and honor the contract" camp, and I still am for players who are on their 2nd or later contract. But a player's first contract is almost entirely dictated by a slotting system based on their draft position rather than their on-field performance in the NFL. If that draft position turns out to be way off compared to the on-field performance, it does seem unfair to force someone to honor a 5-year contract that was drawn up based on out-dated information.

That said, for someone like Sheldon Brown, tough. It's entirely the player's choice whether or not to take a contract extension or to roll the dice for more in the future. If you sell yourself short, it was your choice.

20
by SW Warrior #41 (not verified) :: Tue, 05/25/2010 - 10:17am

Why don't top players insist on a clause in their 2nd contract that their salary be the average of the top 10 players at their position, instead of an actual fised (bad) deal e.g. when Adre Johnson redid his deal instead of having a fixed salary extension why not just say I'll sign for 5 years at the transiion / franchise salary to be calculated each year. This should not break the 30 percent rule and will ensure he's not massively underpaid?

25
by IanWhetstone :: Tue, 05/25/2010 - 11:59am

Well, it takes two to tango, and I imagine that teams want more cost certainty than that kind of model would provide.

27
by Anonymous19193 (not verified) :: Tue, 05/25/2010 - 1:29pm

The issue there is that such a contract would probably negatively impact a player’s signing bonus. I would imagine that most players would rather have a dollar today (in the form of a guaranteed signing bonus) over a dollar tomorrow (yearly base salary which can be hurt by terms in a new CBA and/or voided by a team). Frankly, until the league and the union come to some consensus about guaranteeing a portion of yearly salaries, I think the current system is the best for all parties. Players want to maximize their signing bonuses and agree to sign very long-term deals in order to get them. When they have outperformed their current deals, players have the opportunity to tear up their old deals and lobby for new ones in the form of holdouts. Teams like the arrangement because they can cut a guy at any time if production declines below expectations while only recognizing the sunk costs of the bonus and whatever yearly salaries the player earned during the years in which he performed as expected (presuming, of course, that they valued him correctly in the first place).

CJ’s BATNA is as attractive as you can get in today’s NFL. He’s the premier RB in the league, not an injury risk, a good teammate, and, as the team’s best player, the Titans know that without him their chances of winning decline. By withholding his labor, he’s betting on the Titans seeing the light and coming to terms.

30
by tuluse :: Wed, 05/26/2010 - 12:52am

In addition to this most contracts are mostly unguaranteed money.

So, I'm not sure how that would work out.

32
by Lola was a dude (not verified) :: Fri, 05/28/2010 - 11:21am

"The tables below illustrate a Johnson extension"

Ha! Am I the only one whose mind is sufficiently in the gutter to find that hilarious?

34
by ghost of Darko (not verified) :: Wed, 06/09/2010 - 3:50am

CJ is the Titans best player, the best running back in the NFL & he has greatly outperformed his rookie deal. given that he is one snap away from ending his career, he must exert any leverage at his disposal to realize his market value. CJ will not be settling for Ray Rice / Steven Jackson figures - Adrian Peterson (6-yrs, $40Mil w/$17Mil guaranteed) is the more appropriate target. and CJ should be paid more than Peterson.

part of CJ's agent's BATNA calculus is the recognition that success in football is a maximum exertion enterprise and to achieve maximum exertion the players throughout the roster must buy in. every player in the Titans organization will be watching to see how the front office treats its best player. if the Titans don't show Johnson the money, every other Titans player starts thinking "if they didn't take care of CJ, they're sure as heck not gonna take care of me." this line of thinking would have lasting negative on- & off-field consequences for the organization.

given that, it's likely to be more cost-effective & profitable to the Titans to re-do Johnson's deal than to not re-do it and accept the consequences of his absence.