Monday, March 5, 2012

The NFL's March Madness: The Salary Cap, Free Agency and the Franchise Tag

*Today’s post is authored by my husband, John.  He is much better at explaining the topics in this post than I am, so he was drafted by Naptime Huddle for this one.  Enjoy!

                March is the NFL’s warm-up to the NFL Draft, which occurs in mid/late April.  It is a time for NFL teams to get their rosters in shape.  Prior to March, the teams have probably been releasing players to free up “cap space,” i.e. to jettison players that cost too much money so they can sign players they need and stay under the salary cap.   Free Agency starts March 13, 2012.  The following is a very basic outline of the Salary Cap, Free Agency and the Franchise Tag.

The Salary Cap

                The salary cap is a number determined by a fairly complicated formula that sets the maximum limit that teams can spend on player salaries.  In 2011 it was about $120 million per team.  In 2012 it is expected to be just about the same.  Under the new Collective Bargaining Agreement (CBA), there is also a minimum payroll, i.e. teams cannot be cheapskates. 

Salary caps in a political context...
              Understanding how player salaries count against the cap is important to understanding the Franchise Tag and, to some extent, Free Agency.  One might think that if a player signs a 5-year, $100 million contract, then he counts against the cap for $20 million each year.  Unfortunately, it is not that simple.  

First, you have to factor in a signing bonus.  A signing bonus is money paid to the player up front.  So let’s take that 5-year, $100 million contract and say that $25 million is by way of a signing bonus.  That signing bonus gets prorated over the life of the contract so it will count against the team’s salary cap $5 million each year of the contract.

Second, you have to factor in the base salary, which is the remaining $75 million.  That’s probably not going to be broken up evenly either, and it is fairly typical for teams to have these contracts back-loaded.  This is because NFL contracts are not guaranteed and teams can release players prior to having to pay them a big payout.  See Peyton Manning—the Indianapolis Colts have until March 8th to decide whether to release him or pay him a contract-mandated $25 million bonus.
Manning clearly pensive about his future...

Because these contracts are not guaranteed there is one more twist.  If you release a player his remaining unpaid bonus will count against your cap immediately.  So if we release our guy after year 2, the remaining $15 million of his bonus will count against the cap in year three.  He’s gone, but you’re still paying for him. This is often referred to as “dead money.”

So what happens if a team goes over the cap?  Quite simply, it is very hard for them to go over the cap.  Every contract gets reviewed by the league to insure, among other things, that the team stays under the cap.  If a team manages to sneak something by the league they will most likely be fined and lose draft picks as punishment.

Free Agency

                So now that you understand the salary cap I’ll briefly discuss free agency.  Simply put, a free agent is a player whose is not under contract.  There are undrafted free agents, which are players who went through the draft but were not selected.  Then there are restricted free agents:  being signed by a new team can result in compensation to their old team, typically an extra draft pick.  And finally, there are unrestricted free agents, which are players who are free to go wherever they choose.

The Franchise Tag

                So now we get down to the business of the Franchise Tag.  Each team gets one Franchise Tag and this year they must use it by today, March 5, 2012.  With the Franchise Tag a team can lock up a player who would otherwise be a free agent.  When a team uses the Franchise Tag they get to keep that player for another year and must pay him the greater of:  (a) 120% of that player’s salary from the previous year; or (b) the average of the salaries of the top five players at that player’s position.  The Franchise Tag will make this player one of the highest paid players at his position for the next year.  This is an “exclusive” Franchise Tag.  No other teams can talk to this player.

                There are other variations of the Franchise Tag, including a non-exclusive tag which is similar to the exclusive except that other teams can negotiate with the player and, if they reach a deal, his original team gets a right of first refusal.  If his original team lets him go then they will get two compensatory first round draft picks.

                The Franchise Tag is often used as delay tactic, either to give a team more time to negotiate a new contract with its star player, or to trade him.  Players do not like the Franchise Tag because it forces them to stay for one year without getting to negotiate that big contract they want with a big signing bonus, while risking injury for another season. 

                One big piece of news in advance of today’s deadline is the “tagging” of Philadelphia Eagles wide receiver DeSean Jackson.  From the statements of Eagles management and Jackson himself, it appears that this is a mutually beneficial arrangement (Jackson even said he was “honored” to be the team’s Franchise Player.  However, it is widely known that Jackson was disgruntled this past season by his contract terms.  Hopefully, this will give the two sides time to work things out.

                So those are the basics of the Cap, Free Agency and the Franchise Tag.  These topics are really much more complicated when you dive deeper and, because they tend to change some with every new CBA, there’s really no point in learning all the ins and outs.  But at least this should give you enough background to navigate the stormy pre-Draft seas in the NFL.

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