NFL Capology 101: Salary Cap Basics of the National Football League

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NFL Capology 101: Salary Cap Basics of the National Football League
Jonathan Daniel/Getty Images
Goodell and Tagliabue are part of why the NFL has a salary cap in the first place

While most people love the NFL for its X’s and O’s, there is a business side to the league based around the dollars and cents. The biggest thing in relation to the dollars and cents is the NFL salary cap. Due to the NFL-NFLPA Collective Bargaining Agreement, the salary cap is determined by the revenues that the NFL will generate, as well as a percentage of the income going towards the teams for a stadium credit.

The cap is determined by taking the NFL’s total revenues and allocating 47 percent to 48 percent of them towards the players’ salaries and less a 1.5 percent stadium credit. So for an industry that made over $9 billion last year, that means anywhere from $4.2 billion to $4.5 billion in salaries towards the players. Taking those numbers into account that means the salary cap could be anywhere from $130 million to $140 million per team this year.

What people don’t know about is anywhere from $10-12 million per team is donated to the legacy fund for the retired players created by the new collective bargaining agreement. This means the cap for 2012 should be anywhere from last year’s $120 million to the $130 million range.

A couple of things that are going to affect the cap in future years are the huge television contracts that will raise the NFL’s total revenue by $1.865 billion a year, or another $20-30 million per team in cap money. The cap will affect a lot of the contracts signed this offseason. Expect to see a lot of contracts with low first two-year cap hits and then higher third and fourth-year cap hits.

Another interesting thing is how cap hits are determined. Contracts consist of many elements: salaries, roster bonuses, signing bonuses, incentive and escalator clauses and workout bonuses. Salaries are what the players are paid for those specific years; roster bonuses are paid if the player is on the roster on a particular day.

Signing bonuses are paid the day they sign the contract, but are pro-rated over the first five years. Incentive clauses are paid if the player is hits certain stats, and escalators raise the value of the whole contract based on an incentive. Workout bonuses are normally small, but will get paid if the player works out at the team facilities that offseason. Cap hits are determined based on these elements.

Rob Carr/Getty Images
The Salary Cap was put in to make sure guys like Jerry Jones don't buy championships like the Yankees do

Cap hits will take into account many things; the first is the actual salary for that year. The next will be a signing bonus pro-ration for that year, and then any sort of other bonus or escalator hit will also be there. Incentives also qualify as far as likely to be earned (LTBE) vs. not likely to be earned (NLTBE).

So let’s say it’s in Michael Vick’s contract that if he plays all 16 games in a year, he gets an extra $100,000 bonus. It would be considered NLTBE because he didn’t play in all 16 games last year, and therefore, would not qualify towards the cap.

Let’s take a look at a hypothetical example contract for a veteran player that could be incentive laden. For this example, we’ll use Atlanta’s John Abraham. Let’s say he signs a deal that is three years long and will pay him $20 million over the life of the contract, with potential for him to make up to $23.3 million, structured as such:

Signing Bonus: $6 million

Roster Bonus on Aug. 15, 2013: $3 million

Roster Bonus on Aug. 15, 2014: $3 million

Base Salary 2012: $2 million

Base Salary 2013: $3 million

Base Salary 2014: $3 million

Incentives: $1 million if he gets 10 sacks in any of the three years of the contract.

Workout Bonuses: $100,000 every year if he works out at the team facilities in the offseason any of the three years.

So looking into this contract, the Falcons would have cap hits broken down like this:

2012 cap year: $2 million base salary, $2 million signing bonus pro-ration, $100,000 workout bonus: $4.1 million cap hit

Note: If Abraham gets 10 sacks and gets paid the $1 million, it won’t apply to the cap for 2012 because he didn’t do it in 2011. However, the $1 million would apply to the 2013 cap year because it would be LTBE in 2013

Streeter Lecka/Getty Images
John Abraham could make more money than what is counted towards the cap for the life for his contract?

2013 cap year: $3 million base salary, $2 million signing bonus pro-ration, $3 million roster bonus, $100,000 workout bonus, $7.1 million cap hit

Note: If Abraham gets 10 sacks in 2012, an extra $1 million would be added to his cap hit for 2013.

2014 cap year: $3 million base salary, $2 million signing bonus pro-ration, $3 million roster bonus, $100,000 workout bonus, $7.1 million cap hit

Note: If Abraham gets 10 sacks in 2013, an extra $1 million would be added to his cap hit for 2014.

So as you can see, the contracts will create a cap hit that isn’t just the salary. When taking into account the cap hits of all 53 players on the team, they have to add up to around 120 million dollars. That’s just a shade over $2 million per player towards the cap every year.

So when your team signs a guy to a six-year, 45 million dollar contract this offseason, make sure you understand just exactly what it means for your team, because they can structure the cap hits however they want to over the long term.

These are just basics on the cap as well, so if you have any more advanced questions, feel free to ask them here or contact me on my writer’s page.

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