Under the Cap: McNabb's Extension
by J.I. Halsell
The uncapped year has forced clubs and agents to structure deals more creatively, as illustrated by Donovan McNabb's extension this week. The Saints have used the "Completion Bonus" with multiple players, the 49ers used the Superceding Signing Bonus with Patrick Willis' extension, and the Jets have used vesting guarantees. The unique rules of the uncapped year such as the 30-percent rule and the guarantee reallocation rule have led to some interesting structures.
The McNabb extension introduced the creative use of the "Not Likely To Be Earned" escalator as a means to navigate the 30-percent rule.
In order to achieve the total contract value that both the club and agent are trying to get to, the threshold set by the 30-percent rule can be prohibitive. Therefore, the goal in navigating the 30% rule is getting money put into the deal that practically can be earned but does not count towards the 30-percent rule.
Fletcher Smith, McNabb's agent, acknowledged in a Monday night news conference that he negotiated this deal exclusively with Redskins VP of Football Administration Eric Schaffer. (I worked with him for two seasons and know him well.) In structuring this deal, Schaffer used a 2010 special teams incentive that practically is impossible to be achieved, but is "likely to be earned" from an accounting perspective and is treated as signing bonus. It's this special teams incentive that sets up the future year salary escalators that allow this deal to get to the value both sides had agreed upon without violating the 30-percent rule.
McNabb's "salary," with the 30-percent rule calculation, could increase or decrease by more than $4,081,250, as illustrated as follows:
2009 Last Capped Year "Salary" Components:
- Salary -- $9,200,000
- Roster Bonus -- $2,800,000
- Per Game Roster Bonuses, totaling $437,500
- Option Bonus Proration = $1,166,670
- Total "Salary" = $13,604,170
- 30 percent of "Salary" = $4,081,250
Applying the 30-percent rule threshold to a McNabb deal that both sides agreed should have a franchise tag-like value of $16.25 million after one new year results in the following package value, where "salary" consists of base salary, roster bonuses, and option bonus proration:
30-percent Rule "Salary" and Compliance:
- 2010 "Salary" - $4,000,000
- 2011 "Salary" -- $4,656,250, YOY increase of $656,250
- 2012 "Salary" -- $8,737,500, YOY increase of $4,081,250
- 2013 "Salary" -- $12,818,750, YOY increase of $4,081,250
- 2014 "Salary" -- $16,900,000, YOY increase of $4,081,250
- 2015 "Salary" -- $16,968,750, YOY increase of $68,750
- Total = $64,081,250
Using the 30-percent rule "salaries" above, this package would be valued for new money as follows:
Total New Money:
- Total of 30-percent rule "Salaries" -- $64,081,250
- Per Game Roster Bonuses Not Counted in 30-percent rule "Salaries -- $1,031,250 (because McNabb played in 87.5 percent of the games in 2009, only 87.5 percent of his per=game roster bonuses in his new deal count towards the 30-percent rule. Therefore, $1,031,250 represents the other 12.5%)
- Subtract 2010 Roster Bonus already existing in previous contract, otherwise known as old money -- $500,000
- Total New Money, based on 30% rule compliance = $64,612,500
- Average per year for five years = $12,922,500
The market for franchise quarterbacks in well in excess of $12.9 million per year. Given this, Schaffer had to create a mechanism to get the contract to $74.25 total (the reported $78 million value of the deal includes $3.75 million in incentives based on play time and making the postseason).
In order to add $9,637,500 of value to the contract that would not count against the 30-percent rule, Schaffer added 2012 to 2014 escalators of $5,668,500, $2,993,750, and $975,000 respectively. These escalators are added to the base salaries in the respective years if the 2010 "Likely To Be Earned" special teams incentive is not achieved. Therefore, the escalators are deemed "not likely to be earned" and do not count against the 30-percent rule.
To understand this structure, one must distinguish between what is likely and unlikely to occur from an accounting perspective versus what is likely and unlikely to occur from a practical standpoint. As mentioned earlier, the 2010 Special Teams incentive is likely to be earned from an accounting perspective, but it's practically unlikely to be achieved. Escalators are practically likely to be achieved.
When adding $9,637,500 of escalators to the 3-percent rule package amount of $64,612,500, you get McNabb's new money package of $74.25 million, which results in an average per year of $14.85 million.
Some will ask, What's the point of rules such as the 30% rule, if clubs and agents have found ways to circumvent them? In a year in the number of new deals is relatively lower, there would be even fewer new deals if clubs and agents couldn't creatively navigate these rules.
The Cap Impact of the Deal
If there is a salary cap 2011, then this McNabb deal is very favorable from a club perspective. Had a deal not been reached, the Redskins may have had to use the franchise tag on McNabb, which will be a guarantee between $16 million and $17 million. That would also be McNabb's cap number. Under the new deal, his cap number is $4.75 million but he is earning $6.25 million for on additional year under contract.
McNabb has contractual right to pay back $30 million to the Redskins to void his extension after the 2010 season. Practically, McNabb is not going to do this. But from an accounting perspective, this mechanism keeps his $5 million signing bonus and $9.6 million special teams incentive all in the uncapped 2010 league year. Without the mechanism (because the deal was executed after Week 10), the special teams incentive would have been treated as signing bonus and prorated over the term of the contract. As a result of his extension, McNabb's new 2010 team salary number is $18.6 million. By keeping all of the proration in 2010 and by negotiating an option bonus exercise window that extends up to the first game of the 2011 regular season, the McNabb contract can be traded or terminated with little impact to the Redskins, except for the $3.5 million of new money paid in 2010.
Including McNabb's new team salary number, the Redskins' total team salary number is $195 million. The next highest team salary is the Cowboys', at $169 million.
If there's a team that hopes there is not any retroactive penalty as part of a new CBA for those teams that exploited the uncapped year, it's the Washington Redskins. The question is, can they get to $200 million by season's end? With a possible Santana Moss contract coming before the Super Bowl, it's a distinct possibility.
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