As the names of young men are called from the podium on the Radio City Music Hall stage tonight, draft experts and team’s front offices will consider how their picks will impact their team’s salary cap. The 2013 NFL salary cap is set at $123 million. The rookies a team drafts and subsequently signs to a contract will have salaries that will be counted under their respective team’s salary cap. Given this, an understanding of the salary cap and the role rookies’ contracts play in it is important going into the NFL Draft.
First, one must consider how the NFL arrives at its salary cap. The salary cap is a collectively bargained amount that is a percentage of what the NFL calls “all revenues.” Article 12 of the NFL collective bargaining agreement defines what is considered “all revenues.” Essentially, “all revenues” equals gate receipts + copyright royalties + concession revenues + parking revenues + local advertisement and sponsor revenues + internet operations and program sale revenues + novelty revenues + NFL Ventures revenues + barter income + equity instruments + revenues related to stadium releases based on non-NFL activities + recoveries under business interruption insurance policies + expense reimbursements from government entities + proceeds from rights to receive.
After accountants determine the “all revenue” number, that amount is subdivided into three categories to calculate something called the “player cost amount.” We’ll discuss the “player cost amount” in greater detail below, but it is one factor used in calculating the NFL’s salary cap. The three sub-categories that “all revenue” is divided into are: league media, NFL Ventures/postseason and local all revenue. Specific revenues that make up “all revenue,” as calculated above, are put into each of the three buckets.
Once “all revenue” is subdivided into the three buckets, “player cost amount” is calculated. “Player cost amount” equals 55% of league media all revenue + 45% of NFL Ventures/postseason all revenue and 40% of local all revenue.
Accountants also calculate the amount of benefits teams pay to players. These benefits include: pensions, insurance, injury protection, workers’ compensation, preseason per diem accounts, travel expenses for offseason workouts, rookie orientation program expenses, postseason pay, medical costs, moving and travel expenses, severance pay, annuity programs, tuition assistance, minimum salary benefits, performance based pools, health reimbursement accounts, payments to players suffering from dementia, legacy benefits and the neuro-cognitive disability benefit.
The salary cap can be calculated once the values described above are determined. The salary cap amount equals the “player cost amount” for the year – the projected benefits for the year divided by the number of teams in the league for the given year.
Once the salary cap is determined, teams must begin working to comply with the salary cap. The collective bargaining agreement defines salary as “the compensation in money, property, investments, loans or anything else of value to which an NFL player. . . is entitled to. . . but not including benefits.” Teams must comply with the salary cap on the first day of the league year. No team can exceed the amount of the salary cap. Additionally, the new collective bargaining requirement requires each individual team to spend at least 89 percent of the salary cap’s limit.
While a team must comply with the terms of the salary cap, there is a sub-category of the salary cap that relates especially to rookies. Teams must not only be under the NFL salary cap, but they cannot spend an amount greater than the “rookie compensation pool.” The rookie compensation pool was a term negotiated during the course of the most recent collective bargaining negotiations, which essentially limits the amount of money all NFL rookies can earn during the course of their first four seasons in the NFL. Each year, the NFL designates an amount for the total rookie compensation pool and teams are told, based on their draft slots, how much money they get from the pool. Teams are given enough from the pool to pay players at least the NFL minimum salary ($405,000 in 2013) plus, if applicable, bonuses based on a sliding scale depending upon a player’s draft spot. Thus, teams must work to comply not only with the salary cap, but to ensure that the contracts they offer rookies are within the limits of the rookie compensation pool is applicable to their team.
Upon drafting a rookie, a team is charged with that rookie’s salary under its cap space immediately. The amount charged to the team is the minimum active list salary. This year, that amount is $405,000. For each rookie a team signs, this amount will count against its cap space until the player, the team waives the player or the player remains unsigned through the tenth week of the regular season. If the player is signed, the amount of cap space taken by the rookie could increase, as bonuses or incentives may be included in the player’s contract. If the player is waived or unsigned, the $405,000 will not count against the team’s cap space.
The fact that only the minimum active list salary counts against a team’s salary cap space upon drafting a rookie is notable. There are a handful of teams that have very limited salary cap space presently available. Thus, if these teams had to add in bonuses they plan on paying rookies at this point, they would be over the salary cap. Furthermore, it is also of note that only the salaries of a team’s top-51 paid players count against the team’s salary cap during the off-season. Thus, teams have a fair amount of time to cut players, renegotiate contracts or make trades to get under the salary cap before all players’ salaries count against the cap when the NFL season begins. It is for this reason that although drafted by a team, most rookies do not sign contracts until later in the summer or after training camp.
While the NFL salary cap is a complicated topic which takes years of training to understand, the basis of it and how it impacts a team’s rookies is relatively simple. Given this, it will be interesting to watch and see when teams actually sign their rookies and the amount of bonuses they receive.