News broke on Monday that the Cowboys had restructured the contracts of Tyron Smith and Travis Frederick, thereby freeing up roughly $17.3 million of cap space and easily getting the team under the 2017 salary cap.
But there may be more moves in store for the Cowboys, and the Cowboys will not be alone with these moves. Most teams around the league have to do some creative accounting to get under the salary cap by March 9. For most teams, this will mean restructuring contracts, signing cap-friendly contract extensions, asking players to take pay cuts or downright releasing players.
Over the next few days, you'll hear lots of numbers about player salaries, prorated signing bonuses, dead money, cap hits and more. To get you ready for that, we offer you this primer on the basics of salary cap management, and we'll walk through most of the moves the Cowboys could make over the coming days.
The key to understanding the NFL salary cap, and one of the chief reasons why the salary cap appears complicated, is that the NFL allows signing bonuses to be spread out over the life of a contract. In salary-cap terms, signing bonuses are prorated over the length of a contract, as described in the CBA:
CBA, Article 16, Section 6, Paragraph 5: Proration: The total amount of any signing bonus shall be prorated over the term of the Player Contract (on a straight-line basis, unless subject to acceleration or some other treatment as provided in this Agreement), with a maximum proration of five years, in determining Team Salary and Salary.
In today's primer, I'll take you through the many different salary cap options teams have. And in order to make that exercise as simple as possible, I'll use the same contract to illustrate all the different options, which I hope will make the presented options easier to understand and makes the differences between the options more readily apparent.
Our basic contract will be a 5-year, $30 million contract, $10 million of which the player receives as a signing bonus. That basic framework is a pretty standard NFL contract. For salary cap purposes, the player's base salary is $1 million in 2015, but that base salary increases to $4 and $7 million in 2016 and 2017, and then tapers off with $4 million each in 2018 and 2019. Again, not at all unusual for an NFL contract.
For salary cap purposes, here's what that contract would look like:
Signing bonuses are paid out immediately, so the player would get his $10 million signing bonus right away. Add $1 million in base salary for year one (in this case, 2015) and our fictitious player walks home with $11 million in real money for the first season of his contract.
But for salary cap purposes, the full amount of the signing bonus doesn't count against the cap immediately. Instead, the $10 million are prorated over five years. In this example, that adds $2 million to the player's cap amount for each of the five years of his contract. The yearly cap charge (the red figures in the graph above) for our player is his base salary in a given year plus the prorated bonus allocated to that specific year.
The basic contract in this example can be described as a "cap-friendly contract," because the team is backloading the contract by pushing more money into the outer years, and the contract is designed to be restructured in 2017, but more on that later.
Let's now assume that after the 2016 season, the team decides it wants to change the player's contract. This can be for any number of reasons: the team needs cap space in 2017, the player is under-performing his contract or some other reason. This happens to NFL teams all the time. The Cowboys find themselves in this position with a number of contracts this offseason. And like all other teams, they have basically three options: restructure the contract, cut the player or renegotiate the contract. All of which we'll look at below.
Restructured Contract (Tyron Smith, Travis Frederick):
We will use our fictitious player to look at what the Cowboys did with Smith and Frederick. Our fictitious player counts $9 million against the 2017 cap, with a $7 million base salary and a $2 million prorated cap charge from the signing bonus paid out in 2015. From the beginning of the contract, 2017 was meant as a year in which a restructure could take place if the team needed the money. NFL contracts often contain language that gives the teams full discretion over such a restructure, making them almost automatic.
In our case, the team needs to create cap space, so it restructures the contract by converting $6 million of the player's 2017 base salary into a signing bonus.
The benefit for the player is that $6 million of his 2017 salary is turned into a signing bonus, and therefore guaranteed. The benefit for the team is that it can once again prorate that signing bonus over the remaining years of the contract, as the following graph shows:
By restructuring the contract, the team has lowered the player's 2017 base salary from $7 to $1 million by converting $6 million of the original base salary into a signing bonus. That $6 million signing bonus (marked here in yellow as 'Prorated Bonus 2') is prorated over the remaining three years at $2 million each year. Versus the original contract, the team lowered its 2017 cap charge from $9 million to $5 million and created $4 million in cap space. However, the team also increased its cap charge for 2018-19 by $2 million each year.
This type of contract restructuring is a no-brainer for the player. He doesn't lose any money at all, and even gets a large part of his 2017 salary guaranteed because it's now a signing bonus.
However, the language used around the NFL (by fans, by the media, and sometimes even by the teams themselves) is pretty sloppy when it comes to restructuring contracts, because the word 'restructuring' is also often used to describe a situation where a player is asked to take a pay cut, which should accurately be called a renegotiated or reworked contract.
In this situation, the team is unhappy with the contract it has signed with the player, and asks the player to take a pay cut. This is not an unfamiliar situation for the Cowboys, who asked Brandon Carr to take a pay cut last year, and asked Doug Free to do the same thing in 2013.
Renegotiated contracts go beyond a simple restructuring of an existing contract. The two sides, team and player, have to renegotiate and agree to a new or reworked contract at a lower salary. This is what that could look like for our fictitious player:
This looks a lot easier than it is in real life. In our example, the team and the player agree that $7 million in 2017and $4 million each in 2018 and 2019 are too much, and agree to a pay cut that reduces the player's base salary to $2 million per year.
In our example, this saves the team $9 million in real money, and reduces the cap hit in 2017 by $5 million and $2 million each in 2018 and 2019. Importantly, the team remains on the hook for the cap hit from the unamortized part of the original signing bonus. If the player doesn't agree to the proposed pay cut, the team has the option of releasing him or trading him.
Player cut, traded or retires (Tony Romo)
If a player is cut before the end of his contract, the entire unamortized signing bonus money (the remaining prorated bonus money) accelerates immediately and counts against the 2017 salary cap.
The same rule applies when a player is traded or retires. The unamortized signing bonus remaining on the player's contract accelerates into his old team's salary cap in 2017. In the case of a trade, the new team takes no cap hit whatsoever.
In our example, the $6 million remaining unamortized signing bonus accelerates immediately as follows:
In essence, trading or cutting a player saves the old team from paying the player's base salary, but that comes at the price of taking a cap hit from the accelerated signing bonus. In our example, the $6 million of the unamortized signing bonus left on the contract ($2 million each in 2017, 2018, and 2019) all accelerates into 2017.
The money left on the cap from the cap hit teams take by cutting players is called dead money. In this example, the team would be left with $6 million of dead money on their 2017 cap. But the team has an additional option at its disposal.
June 1 cuts
If a player is cut before June 1, 2017, the remaining signing bonus accelerates immediately and counts against the 2017 salary cap. But if a player is cut after June 1 this year (or designated a "June 1 cut"), only the 2017 part of the unamortized signing bonus counts against the cap in 2017, while the remainder counts against the 2018 cap. Teams can designate up to two players as "June 1 cuts" even if they cut them before June 1, 2017. This is what the cap situation would look like if our fictitious player was designated a June 1 cut:
By designating the player a June 1 cut, the team lowers its 2017 cap hit to $2 million, but will have $4 million in dead money counting against its 2018 cap.
We've run through the various options using our fictitious player on a five-year contract, now let's use Tony Romo's contract as a real-life example. Because Romo has had his contract extended and restructured multiple times, there were actually three different prorated bonuses counting against the cap, a signing bonus, an option bonus and multiple restructure bonuses, all conveniently summarized in the graph below.
By now, you're probably familiar with some of the numbers on this graph; Romo's $24.7 million cap hit in 2017 for example has been widely discussed.
Assuming Romo doesn't retire (and possibly renegotiate his contract before retiring), the Cowboys have the choice of either cutting him or trading him. As we saw above, a straight trade or cut means the unamortized signing bonuses left on his contract accrue immediately. In our graph, those are the orange and light blue parts, which total $19.6 million (5.0 + 5.7 + 5.7 + 3.2). That's the dead money the Cowboys will have remaining on their books from Romo. Compared to the cap hit of $24.7 million, that's a saving of $5.1 million.
If the Cowboys were to make Romo a June 1 cut, only the 2017 unamortized bonuses would accrue immediately (5.7 + 5.0 = 10.7) while the unamortized bonuses for 2018 and 2019 (5.7 + 3.2 = 8.9) would only accrue in 2018. A June 1 designation would lower Romo's cap hit from $24.7 million in 2017 to $10.7 million, a cool $14 million saving, though that would come with $8.9 million worth of dead money in 2018.
We've seen that a team has a variety of options for lowering its cap hit. In our examples, an original cap hit of $9 million was reduced to $6, $5, $4, and $2 million with a variety of different measures.
The salary cap was initially designed to limit the amount of money a team can spend on player salaries. But teams quickly recognized that the best way to stay under the cap was by working around it. One way of doing this is by backloading contracts and pushing chunks of salaries into future years with the expectation that a rising cap in future years will create more room under the cap.
The Cowboys have traditionally tried to use every last dollar of the cap to their advantage, even if, as BTB-member redsoxu571 explains, their hand was also forced by NFL penalties and an aging team with bad contracts. But squeezing every last cent out of the cap is part of the Cowboys business model, part of the way they do business, just like some real-life companies have a high gearing ratio (a high proportion of debt to equity) and others have a low gearing ratio (a low proportion of debt to equity).
As sports fans we often get into seemingly endless debates about the salary cap, and sometimes don't reflect enough that what we're heatedly discussing is nothing more than a set of accounting procedures.
The salary cap is an accounting tool aggressively used by Cowboys, which often leads to the perception that the Cowboys are in "cap hell". They are not.
Thankfully, a knowledgeable fanbase increasingly familiar with the salary cap has long realized this, even if the occasional uneducated troll will try to convince you otherwise.