Writers of Pro Football Prospectus 2008

06 Aug 2010

Under the Cap: Rookie Contracts

by J.I. Halsell

Rookie contracts are a hot topic these days, with most first-round picks already in the fold. It's one thing to hear that Sam Bradford is getting $50 million guaranteed on a contract worth up to $78 million, but you rarely hear about the contract dynamics that go into finalizing such a deal. Here are some of the key issues addressed in signing a first-round pick:

Rookie Pool Number vs. The 25-percent Rule

Despite the absence of a salary cap in 2010, the rookie pool system remains and caps the amount of money that a team can spend on draft picks and undrafted free agents. Each team is assigned a lump-sum amount by the league, based on the team's draft position and its number of picks. However, this pool of money does not distinguish the amount of money to be spent on each pick.

The 25-percent rule is similar to the 30-percent rule that has been documented in this space regarding veteran contracts. The 25-percent rule, as the name suggests, limits the annual increase of rookie salaries 25 percent. "Salary" does not take signing bonuses into consideration.

To illustrate these dynamics, let's use a hypothetical contract that is six years in length but, by virtue of an easily achievable voidable final year, is truly a five-year deal with a $25 million guarantee. The team that is negotiating this hypothetical first-round contract has $2.3 million left in its rookie pool when it signs its first round pick. The contract would look like this:

Hypothetical first-round rookie contract
  2010 2011 2012 2013 2014
Guaranteed salary $320,000 $2.875 million $3.45 million $4.025 million $4.6 million
Roster bonus $1.98 million        
Total value $2.3 million $5.175 million $8.625 million $12.65 million $17.25 million
25-percent rule "salary" $2.3 million $2.875 million $3.45 million $4.025 million $4.6 million
25-percent rule threshold $575,000 $575,000 $575,000 $575,000 $575,000

The table shows how it is possible for a contract reported to contain $25 million guaranteed can actually be worth $17.25 million guaranteed on signing. The maximum increase to remain compliant with the 25-percent rule in this case is $575,000 each year. Given that math, there is no way of getting to $25 million guaranteed at the time of signing.

The Post-Option Guarantee

As we continue to analyze our hypothetical contract, you'll notice that a vast majority of the guaranteed money is not paid in the first year. In fact, only $2.3 million of it is paid in the first year, while the remaining $22.7 million is paid out in the second year and on. However, the only way $22.7 million is earned in the second year is if the player achieves his one-time "Log" incentive based upon his performance in his first year. Until he achieves this, his post-option guarantee is illustrated as follows:

Hypothetical first-round rookie contract
    2010 2011 2012 2013 2014 2015
Guaranteed salary   $320,000 $405,000 $980,000 $1.55 million $2.13 million $2.705 million
Roster bonus   $1.98 million          
Option bonus $12.35 million   $2.47 million $2.47 million $2.47 million $2.47 million $2.47 million
Total value   $2.3 million $15.055 million $16.035 million $17.59 million $19.72 million $22.425 million
25-percent rule salary   $2.3 million $2.875 million $3.45 million $4.025 million $4.6 million $5.175 million
25-percent rule threshold   $575,000 $575,000 $575,000 $575,000 $575,000 $575,000


The table shows the club exercising its option to add 2015 to the original contract. In exchange, they agree to pay an option bonus of $12.35 million (if the club chooses not to exercise its option, then these contracts contain non-exercise fees equal to the option bonus amount to ensure the player gets the money either way). This option bonus is prorated over the remaining years of the contract at $2.47 million per year. The option exercise also adjusts the guaranteed salaries in 2011-2015 to be compliant with the 25-percent rule "salary." For example, because the 25% rule considers option bonus proration as part of "salary," the post-option 2011 guaranteed salary has been adjusted from $2.875 million to $405,000. The resulting $405,000 guaranteed salary plus the $2.47-million option bonus proration equal the $2.875-million 25-percent rule compliance "salary."

When you combine the Year 1 payout and post-option guaranteed salaries with the option bonus, the guarantee becomes $22.425 million. Therefore, if this player does not achieve his one-time incentive, then he could miss out on $2.575 million.

Given a one-time "Log" incentive of $9.945 million, the reason why there is $2.575 million at risk is because the post-option guarantees from 2012-2016 only total $7,370,000. The significance of the 2012-2016 P5 guarantees are that they "backup" the one-time incentive, meaning these guarantees are included in the deal to ensure the player receives the one-time amount. In our example, the post-option P5 guarantees are limited by 25-percent rule compliance, and as a result cannot be fully "backed up."

In 2009, neither No. 2 overall pick Jason Smith nor No. 3 pick Tyson Jackson achieved his one-time "log" incentive. While these incentives are considered easy to achieve, they're not always achieved in the rookie year. One way to ensure 25-percent rule compliance does not prevent the one-time from being fully "backed up" is by increasing the first-year "salary" that calculates the 25% rule threshold. However, our first-year "salary" is capped by a rookie pool number of $2.3 million.

This shows how the rookie pool system wasn't designed for guarantees that are being given out now. Rookie pools are not increasing at the same rate as guarantees, so the resulting contracts will have more financial risk from a player's perspective. This is yet another reason why the rookie contract system must be overhauled by a rookie slotting system.

The Base Package: One-Time Achievement

Assuming the player achieves the one-time payment in Year 2 by playing in 35 percent of the plays in his rookie year, the club improving statistically in a category such as wins, and the player being on the 80-man roster on the first day of training camp in 2011, then the player will achieve a one-time roster bonus in the amount of $9.945 million. This achievement is illustrated as follows:

Hypothetical first-round rookie contract
    2010 2011 2012 2013 2014 2015
Salary   $320,000 $405,000 $980,000 $1.55 million $2.13 million VOID
Roster bonus   $1.98 million          
Option bonus $12.35 million   $2.47 million $2.47 million $2.47 million $2.47 million $2.47 million
Non-guaranteed salary escalation         $934,000 $1.401 million  
Non-guaranteed salary escalation     $750,000 $750,000 $750,000 $750,000  
Total value   $2.3 million $25.75 million $27.48 million $30.719 million $35 million  
25-percent rule salary   $2.3 million $2.875 million $3.45 million $4.025 million $4.6 million  
25-percent rule threshold   $575,000 $575,000 $575,000 $575,000 $575,000  

The playtime and club improvement contract mechanism is commonly referred to as the "qualifier" for one-time achievement. Once this qualifier has been met, it allows the player to reach his full guarantee and base package amount. In the illustration above, the qualifier achievement unlocks the $9.945-million one-time roster bonus, workout bonuses, and $2.335 million in non-guaranteed salary escalation. The bolded amounts in the table show the amounts that make up the $25 million guarantee.

In our hypothetical contract, the achievement of the one-time incentive voids the guarantees of the salaries in 2012-2014. The player can still earn these amounts in these years, but they are no longer guaranteed to him by virtue of the one-time payment of $9,945,000. The "backing up" mechanism is no longer needed once the one-time is achieved.

The salary escalation of 2013 and 2014, the workout bonus amounts, and 2012-2014 salaries that became non-guaranteed total $10 million, which when added to the $25 million guaranteed results in a base package of $35,000,000. In essence, the "base package" is the amount of money the player can earn over the life of the contract if he simply earns the qualifier and honors his contract. It should be noted that the 2015 contract year will void away as a result of the achievement of the qualifier, thereby making this contract a five-year pact.

The Max Package: Fluff Incentives

In addition to the base package, first-round contracts will contain "fluff" incentives -- $500,000 for Super Bowl MVP or $1 million for each year the player leads the league in a particular statistical ranking, etc. For illustrative purposes, let's say our hypothetical contract contains a maximum of $10 million of fluff. This increases the maximum value of the contract to $45 million.

In the media, our deal above would probably be sold as a five-year deal with $25 million guaranteed with a total value of $45 million. While these numbers are accurate, they don't tell the whole truth.

The Risk of a Lockout in 2011

Given the possibility of a lockout in 2011, a risk associated with the illustrated first-round contract structure is that $22.7 million ($405,000 in salary, $12,350,000 option bonus, and $9,945,000 one-time) could be due to be paid in a year in which the owners aren't cutting checks.

An alternative structure that mitigates this risk is to put a lot of guaranteed money into the first-year signing bonus. However, due to the math involving the 25-percent rule, where none of the signing bonus proration counts towards the 25-percent rule calculation, this signing bonus structure carries with it increased financial risk with the one-time bonus, meaning the player's risk would go from $2.575 million under the illustrated example to $9,449,997 under signing bonus structure that would pay him $11 million in the form of a signing bonus. Therefore, both structures (the option bonus structure illustrated and the signing bonus structure) have their respective risks. However, one could make the argument that a player should try to pocket as much money ($11 million in the aforementioned example) as he can while he still can.

Follow Halsell on Twitter at @SalaryCap101, and learn more about player contracts from Halsell at www.SalaryCap101.com.

Posted by: J.I. Halsell on 06 Aug 2010

3 comments, Last at 09 Aug 2010, 8:42am by Theo

Comments

1
by FooBarFooFoo (not verified) :: Fri, 08/06/2010 - 8:04pm

Can anybody please explain why the 25/30 percent rules exist, if there is an easy way to circumvent them. If they only had a salary cap, plus rookie pool, plus the bonus proration, then what would be different?

2
by Theo :: Mon, 08/09/2010 - 8:23am

My guess is to prevent excessive backloading of a contract, effectively giving a player the vets minimum + bonus.

3
by Theo :: Mon, 08/09/2010 - 8:42am

Bradford doesn't hold the ball on the laces in that picture...