In the hours following the announcement that the Cowboys had agreed to a contract with Henry Melton, there was a lot of confusion and uncertainty about what the deal meant, specifically what the cap hit would be in 2014.
Some observers initially thought the cap hit would be $5 million in 2015, others thought it was going to be $3.5 million, others yet again claimed it was $2.7 million. What all these guesses had in common was that the number got progressively lower the more time elapsed.
Late last night, the always reliable Todd Archer gave the most comprehensive rundown of Melton's contract available so far, and he has Melton's cap hit set at $1.734 million. That's quite a significant difference to some of the early numbers bandied about.
So how does a four-year, $29 million contract in which Melton can earn up to $5 million in 2014 end up with such a low cap hit in 2014? Let's deconstruct that contract to find out.
Here are the first-year components of Melton's deal, as per Archer:
- $1.25 million base salary
- $1 million signing bonus
- $78,125 per week for every week he is on the 46-man roster, with a maximum of $1.25 million
- $1.5 million in incentives for playing time and sacks in 2014.
Base Salary: Let's start with the simple part. Melton's $1.25 million base salary counts against the 2014 salary cap in its entirety. But that still leaves a gap to the $1.734 million cap hit that needs to be accounted for.
Signing Bonus: If you've read our recent Salary Cap Primer (and if you haven't, go back and do it now), you'll know that Melton's $1 million signing bonus will be paid out in 2014, but for salary cap purposes, the full amount of the signing bonus doesn't count against the cap immediately. Instead, it is prorated over the four years of the contract . In Melton's case, that adds $0.25 million to the cap amount in each of the four years of his contract. Adding those $0.25 million to Melton's 2014 base salary gives us a $1.5 million cap hit, which is still short of the $1.734 million cap hit reported by Archer.
Incentives: This is where it gets a little complicated. Melton has a total of $2.75 million built into his contract as incentives. In the NFL, incentives are classified as "Likely To Be Earned" and "Not Likely To Be Earned".
"Any team performance will be automatically deemed to be "Likely to be earned" if the Team met or exceeded the specified performance during the prior League Year, and will be automatically deemed to be "not likely to be earned" if the Team did not meet the specified performance during the prior League Year."
Importantly, LTBEs count against the 2014 cap, NLTBEs do not. Instead, the NLTBE incentives are applied to the cap retroactively after the season. Also, just as importantly, whether an incentive is classified as LTBE or NLTBE is determined by Melton's performance in 2013. Not his performance in earlier years or a cumulative performance or something of that sort. Just 2013.
And in 2013, Melton played in three games and recorded zero sacks.
Melton has $1.5 million in incentives for playing time and sacks written into his contract for 2014. We can safely assume that both the playing time and sacks written into the contract are higher than they were in 2013, so every dollar of those $1.5 million is classified as Not Likely To Be Earned.
The other incentive built into Melton's contract is the weekly 46-man roster incentive. Because Melton played three games in 2013, three games @ $78,125 per week are LTBE, while the remaining 13 games are NLTBE. Add that three-game total of $234,375 to the cap hits already identified above, and you get the $1.734 million cap hit Archer quotes. In summary:
|Henry Melton's 2014 Cap Hit|
|Base Salary||$1.250 million
|Prorated Signing Bonus||$0.250 million|
|LTBE Incentives||$0.234 million|
Balancing the Salary Cap Books: Just because an incentive is classified as NLTBE doesn't mean it just disappears from the salary cap accounting ledgers. But it's also not simply added as a cap hit in 2015. Instead, at the end of the year, a team has to balance the sum of the un-achieved LTBEs in its contracts with the sum of the achieved NLTBEs in its contracts.
- If the un-achieved LTBE credits are greater than the NLTBE credits that actually were achieved, the difference will be added to the next year's salary cap.
- If the NLTBE incentives that are achieved are greater than the LTBE incentives that are not achieved, the difference will be deducted from the following year's cap.
Melton has a total of $2.516 in NLTBE incentives written into his 2014 contract. Because of the accounting method outlined above, there is no way of saying how much of that will accrue in 2015. Whatever the figure ends up being will be accounted for in the Cowboys cap without us ever knowing the specifics of how and where it was accounted for.
The remaining years of the contract are pretty straightforward, as Archer explains:
The Cowboys have to exercise the option on the final three years of the deal by the first day of the 2015 league year. If they don't, then they would have $750,000 in dead money on the cap and Melton will be an unrestricted free agent. If they do, then Melton's cap number in 2015 would be $9.25 million, which the Cowboys could easily restructure to create salary-cap room.
If the Cowboys extend the contract, Melton makes $9 million in 2015 and $7.5 million in each of the following years. For cap purposes, each year will contain $0.25 million of the prorated signing bonus Melton received. This is what the contract structure would look like:
|Henry Melton's Contract Structure, Out Years|
||Prorated Signing Bonus
As has been extensively discussed, Melton effectively signed to a one-year prove-it deal with a club option for three more years. But there are two other aspects in the out years that make this a noteworthy contract.
- First, even if the Cowboys pull the option for the extra three years, they could get out of the contract after 2015 with a puny cap penalty of just $0.5 million. This is highly unusual for a contract of this magnitude - especially for the Cowboys.
- Second, if the Cowboys need extra cap space in 2015 and are happy with Melton, they can easily restructure the contract and create up to $5.5 million in cap space. In fact, the contract probably contains specific language that would make such a restructuring almost automatic.
Here's how a potential restructuring would work: The Cowboys would convert most of Melton's 2015 $9 million base salary into a signing bonus, leaving him with just the veteran minimum of $0.745 million. The remaining $8.255 million would be converted into a signing bonus, and for salary cap purposes the money would be spread out over the remaining three years of the contract at $2.752 million per year. Which would lead to the following contract structure:
|Henry Melton's Contract After Restructuring in 2015|
Even in this restructured scenario, the Cowboys could release Melton after the 2015 season. They would be hit with $6 million in dead money, but would not be on the hook for the $10.5 million cap hit, so for cap accounting purposes, releasing Melton after 2015 would reduce the Cowboys cap by $4.5 million, not that that would be something we'd advocate around here.
Overall, this is a contract that gives the Cowboys a maximum of financial flexibility with regard to the salary cap, but also allows Melton to be paid like a top defensive tackle - if he proves he is a top defensive tackle.
Given that the Cowboys still have about $5 million in cap space left in 2014 (and that's excluding the $5.5 million they'll get from Miles Austin's release on June 2nd) the real question now becomes, what are they going to do with all that remaining money?