Understanding the Salary Cap
Welcome to the first installment of my new series, where I’ll be diving deep into the 2020 NFL/NFLPA Collective Bargaining Agreement (CBA) and breaking down key aspects of the NFL salary cap. This series is designed to help you better understand the financial framework that governs player contracts, team payrolls, and the overall balance of competition in the league. I’ll provide a high-level overview of how the salary cap works, setting the stage for more detailed discussions on topics like dead money, signing bonuses, incentives, and other contractual nuances.
The NFL salary cap is the cornerstone of team management and player contracts. It serves as a financial boundary, ensuring that no team can significantly outspend others. In this article, we'll explore how the salary cap works, why it matters, and how it affects everything from player signings to roster decisions.
What is the NFL Salary Cap?
The salary cap is a limit on the total amount of money a team can spend on player salaries in a given year. This cap is agreed upon by both the NFL and the NFL Players Association (NFLPA) in the collective bargaining agreement (CBA). The salary cap is determined based on the league's revenue, with a specific percentage allocated to player compensation. NFL revenue comes from 3 sources: league media, NFL ventures/postseason, and local revenues. (Article 12, Section 6)
League media is the largest revenue bucket, primarily driven by the NFL’s media rights deals with broadcasters and streaming platforms. It includes money from national TV contracts, digital media deals, and radio. This revenue is distributed equally among all NFL teams, making it a critical component of the salary cap system.
NFL ventures are the media/marketing branches of the NFL, like NFL Network, NFL Films, etc. This includes revenue from NFL-related business ventures (e.g., licensing agreements, sponsorships, and merchandise sales) and postseason games.
Local revenue is team-specific revenues that come from local sources like ticket sales, stadium naming rights, local sponsorships, concessions, and parking. Unlike the other two buckets, local revenues are more varied across the league, as they depend on each team’s market size, fan base, and stadium arrangements. Teams keep a larger share of their local revenues, though some of it is subject to revenue sharing.
How is the Salary Cap Calculated?
The salary cap is calculated using a formula outlined in the CBA. Essentially, it's based on a percentage of the league's revenue from the previous year. For example, Article 12, Section 1 of the 2020 NFL/NFLPA CBA states that the cap is set by dividing the "Player Cost Amount" by the number of teams in the league. The Player Cost Amount is the total revenue allocated to player salaries, benefits, and other compensation.
Player Cost =
(55% x League Media)
+ (45% x NFL Ventures/Postseason)
+ (40% x Local Revenues)
- (47.5% x Joint Contribution)Joint contribution refers to contributions made by both the NFL and the NFL Players Association (NFLPA) toward player benefits, specifically as it pertains to programs such as pensions, insurance, health care, and other post-career benefits.
Salary Cap = (Projected League Revenue x Player Cost Percentage) - Projected Benefits / 32
Projected League Revenue: This is the estimated total revenue for the NFL for that year, which includes sources like media rights, sponsorship deals, ticket sales, and other business ventures.
Player Cost Percentage: Under the 2020 CBA, the player cost percentage is between 48% to 48.5% of league revenue. This percentage is allocated to cover player salaries.
Projected Benefits: These are contributions to player benefits like healthcare, retirement, and other programs. These benefits are subtracted from the total revenue before calculating the cap.
Divided by 32 Teams: The final step is dividing the player cost pool (after benefits are deducted) by 32, as the NFL has 32 teams, to establish the team-specific salary cap.
This formula is adjusted each year based on the actual revenue earned by the league and any carryover salary cap space teams may have from previous years.
The formula may look complex, but the key takeaway is that the salary cap is designed to grow as the league's revenue grows. This means that when the NFL makes more money, players can expect higher salaries, and teams have more flexibility in managing their rosters.
Impact on Contract Structure
NFL contracts are often structured to manage the salary cap effectively. For instance, signing bonuses are prorated over the length of the contract (up to 5 years) for cap purposes, meaning a $10 million bonus on a five-year contract only counts as $2 million per year against the cap. This allows teams to reward players with significant upfront money while spreading out the cap hit over several years.
However, this strategy can lead to complications if a player is released before their contract ends. The remaining prorated bonus money accelerates onto the current year's cap, creating dead money. This is why teams are cautious when structuring contracts, especially with older players or those with injury histories.
Minimum Spending
In the 2020 NFL/NFLPA Collective Bargaining Agreement (CBA), teams are required to meet a minimum spending threshold to ensure competitive balance and fair compensation for players. Over each three-year and four-year period during the term of the CBA, teams must spend at least 90% of the salary cap in cash spending on player salaries. This rule prevents teams from consistently under-spending and ensures that the cap dollars allocated to each team are actually used to pay players rather than being hoarded for financial flexibility.
Additionally, teams can carry over unused cap space from one year to the next. If a team doesn’t spend its full salary cap in a given year, they can apply those unspent dollars to their cap for the following season. This carryover provision allows for greater flexibility in managing the cap across multiple seasons, giving teams the ability to strategically rollover space to pursue free agents or extend key players in future years. However, even with the carryover ability, teams still must meet the 90% cash spending requirement over the specified multi-year windows to ensure fairness across the league.
Conclusion
Understanding the NFL salary cap is essential for grasping the intricacies of NFL contracts and team management. The cap influences every decision a team makes, from signing free agents to extending star players. As we dive deeper into topics like dead money, incentives, and signing bonuses in future articles, keep in mind how the salary cap serves as the framework for all these elements. The next time you hear about a blockbuster trade or a surprising player cut, you'll have a better understanding of the financial chess game that teams are playing behind the scenes.
By grounding your knowledge in the salary cap, you'll be better equipped to analyze the many facets of NFL contracts and how they impact the game we all love.