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Salary Cap Nuggets - No. 8: Rookie Contracts

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This series is called Salary Cap Nuggets because ‘nuggets’ is such an interesting word in English. It calls to mind chicken nuggets - tasty, bite sized and easy to eat. But it also calls to mind gold nuggets - small, but valuable.
The salary cap is a product of the Collective Bargaining Agreement (CBA), which is a 301-page contract between the NFL Owners and the NFL Players Association. In these articles, I try to explore just one or two small parts of the NFL salary cap defined in the massive CBA. Hence, Salary Cap Nuggets - small, bite-sized, easy to digest, yet valuable information for NFL fans.
The goal is to, one bite at a time, get a clear understanding of the salary cap.

Click this link for handy access to all the Salary Cap Nuggets


The book Crunching Numbers devotes an entire chapter (Ch 8) to rookie contracts.

To make the topic “nugget sized” I will try to remove a lot of the explanatory detail, and focus on the key points. I also plan to link to four other nuggets in order to flesh out some of the details — expect those nuggets to be published one at a time over the next few days.

The 2002 CBA and the 25% rule

Let me start with one rule that was originally written into the 2002 CBA: the 25% rule. Here’s the explanation from Crunching Numbers:

The 25% rule prohibits a rookie’s salary from rising by more than 25% over the previous year’s amount.... This means that, if a player’s salary in year one worked out to $1,000,000, his second year figure could be no more than $1,250,000, and the following year no more than $1,562,500.

While that sounded good in practice, agents and teams immediately found loopholes...to grossly inflate rookie contracts....

The system for controlling rookie wages wasn’t working; in fact, by 2009 the system was quite ‘broken’ and in need of repair.

The 2011 CBA made significant changes to correct the issues created in 2002.

CURRENT ROOKIE WAGE SYSTEM

  • The 2011 CBA instituted changes regarding contract length, option years, void provisions, escalators, incentives, and almost any other possible tactic that was used in the prior CBA to increase the value of a contract.
  • The 25% rule still exists and is now backed with multiple other rules to maintain that it will be enforced under all possible circumstances.

Rookie Compensation Pool

Step One

The first step in the process is the NFL calculating the Total Rookie Compensation Pool, which identifies all of the cash that can be committed to the entire rookie pool on a league-wide basis.

  • This pool includes any and all potential salary to be paid to rookies over the course of their contract.
  • The number includes both drafted players and UDFAs.

Step Two

The second calculation is the Year One Rookie Compensation Pool (discussed in Nugget 8E), which determines the total amount of salary that can be paid on a league-wide basis to drafted and undrafted rookies in the first year of their contract.

For purposes of this pool, only the prorated portion of a signing bonus counts as salary rather than the full cash value of the bonus.

CALCULATING A ROOKIE CONTRACT

The actual value of the rookie contract is quite simple to forecast and in turn to negotiate.

  • Every player earns the minimum P5 base salary in the first year of their contract and slotted salary cap charge.
  • By knowing these two numbers, we can calculate the total contract by using the 25% rule, which limits the increase of salary cap charges by 25% of the first year cap hit.
  • This 25% structure will hold for players selected in the first and second-round of the draft.
  • In the third-round, there are slight raises given above the minimum salary while almost everyone selected in the fourth-round and later will only receive the minimum salary for each year he is under contract.

Example - Dwayne Haskins compared to 2018 15th overall draft pick, Kolton Miller

Dwayne Haskins contract

Contract of Kolton Miller (15th overall pick in the 2018 draft)

Total contract value & calculating Year 1 & 2 amounts

  • Haskins was drafted at 15th overall, so his entire contract is fully guaranteed.
  • Haskins total deal ($14.416m) is 7% higher than Kolton Miller’s deal ($13,471,308) from 2018

YEAR 1 CALCULATION

  • Year 1 calculation for Haskins contract is easy (rookie min salary + prorated bonus)

YEAR 2 CALCULATION

  • Haskins was paid the max allowable in Year 2 (125% of Year 1) 125% x $2,621,202 = $3,276,503
  • Year 2 base salary is calculated as (Total Cap Hit - Prorated Bonus) $3,276,503 - $2,126,202 = $1,150,301

Setting Year 3 & 4 Amounts for Haskins

Year 3 & 4 compensation will be limited in two ways:

  1. Neither year can be greater than 125% of the previous year (in fact, both are less than the 125% limit); and
  2. The total value of the 4-year contract cannot exceed the amount slotted for the 15th overall pick.

In this case, assuming that $14,416,614 paid to Dways Haskins is the maximum allowed for the 15th pick, then, the total amount payable to Haskins in Years 3 & 4 (combined) would be (Total contract value - Year 1 value - Year 2 Value)

$14,416,614 - $2,621,202 - $3,276,503 = $8,518,909

In this calculation, the maximum that could be paid to Haskins in Years 3 & 4 of his contract (combined) would be $8,518,909.

CALCULATING THE MAXIMUM CAP CHARGE ALLOWED IN YEAR 3

Using the 25% rule, the maximum payable in Year 3 would be (125% x Year 2) 125% x $3,276,503 = $4,095,628

CALCULATING THE YEAR 4 CAP CHARGE

Year 4 would be calculated as ($8,518,909 - Year 3)

  • If Haskins had taken the maximum Year 3 salary, then his Year 4 earnings would have been limited to (8,518,909 - 4,095,628) $4,423,281.
  • Instead, Haskins took a slightly lower amount in Year 3 ($3,931,804), so his Year 4 amount was correspondingly higher at $4,587,105.

Growth of rookie pool from 2011 onwards

  • The amount contained in each pool is tied to the rise or fall of the unadjusted salary cap each year.
  • The initial values were set at $874.5 million (Total Rookie Compensation Pool) and $159 million (Year One Rookie Compensation) respectively in 2011, a total that does not include compensatory or undrafted selections, as those numbers are added at a later date.
  • A recent 2019 Forbes Magazine article estimated this year’s Total Rookie Compensation Pool at $1.33 billion, which gives some idea of the growth since the 2011 CBA was signed.

The growth in the rookie pool is tied to the yearly increase or decrease in the salary cap up to a maximum of 5% plus half of any increase/decrease over 5%.

What this means is:

  • if the salary cap rises by 3%, the rookie pool will rise by a corresponding 3%.
  • If the salary cap falls by 3%, the rookie pool will also fall by 3%.

If the increase is large, say 8.5%, the NFL will:

  1. increase the rookie pool by the maximum 5%; and
  2. add half of the amount over 5% (in this example, half of 3.5% = 1.75%)
  3. leading to a total increase (in this example) of 6.75% (5 + 1.75).

Slotted salaries

In the prior (2002) CBA, agents were free to negotiate contracts with teams, leading to situations where the thirteenth selection in the draft could, in theory, obtain a higher salary than the tenth selection. This (2011) system stripped agents of that ability. Now each selection is slotted a salary cap figure and total contract value that is a percentage of the overall pool numbers.

Year One Formula Allotment & Total Rookie Allocation

As noted at the top of this Nugget, to set up a rookie contract for a drafted rookie, it is necessary to know, not only the Total Rookie Compensation Pool (which accounts for the full 4-years of a drafted player’s contract), but also the Year One Rookie Compensation Pool, which sets limits on each drafted player’s rookie year compensation.

This Year One Pool is discussed separately in Nugget 8E. In combination with the 25% rule and the Total Rookie Compensation Pool, it creates the constraints that limit each slotted contract under the 2011 CBA.

The Year One Pool also limits the money that can be paid to UDFAs, which is also discussed in Nugget 8E.

Slots are attributed to position in the round, not overall draft position

When we discuss slotted salary, it is worth noting that the signing bonus is attributed to the slot within the round, not the overall selection number, which can vary due to compensatory selections and forfeited selections.

In other words, the tenth selection in the seventh round may be the 210th selection in one draft year and the 220th selection the following draft year, but the bonus money in the contract will be equal and their Year One allocation will be the same percentage of the Year One pools each time.

Compensatory draft selections will all receive the same salary per round regardless of the order of selection.

Special rules applied to draft picks based on round selected

There are some special rules related to draft position and UDFAs that will be discussed in other Salary Cap Nuggets:

  • First round draft picks and the 5th year option is discussed in Nugget 8B
  • 3rd to 7th round picks and the Proven Performance Escalator will be discussed in Nugget 8C.
  • Salary rules for Undrafted College Free Agents (UDFAs) will be discussed in Nugget 8D.

Second-round draft selections are not able to share the same luxuries as players drafted in the first-round or players drafted in rounds three through seven.

Why? Here are some notes from the authors of Crunching Numbers:

Second-round draft selections are not eligible for either the fifth-year (team) option given by teams to first-round selections and are not eligible to receive Proven Performance Escalator (PPE) regardless of how much playtime they earn in their first three years.

Second-round selections still sign a four-year rookie contract, with the opportunity to renegotiate following their third season.

Being drafted in the second-round is like being in an exclusive fraternity. Naturally, these players will be paid more than lower drafted selections, but some of the back-end years on their rookie contracts may not be fully guaranteed each year, like most first-round selections. It will be interesting to watch these players going forward and how many players from the second-round get extensions before their other drafted counterparts.

Guaranteed Salary for drafted players

Notes from Crunching Numbers:

Currently the rule of thumb is that the first twenty overall selections will have their contracts fully guaranteed, but beyond those players, the guarantees are negotiable.

The remainder of the first-round will have portions of their fourth-year salary guaranteed, or at a minimum, their first three seasons.

Second-round selections vary in their guarantees with the earliest selections receiving partial third-year guarantees and the last ones receiving just one year of guaranteed salary.

These points are all negotiable and no guarantees are slotted.

The only rule in place on guaranteed salary is that if salary is to be guaranteed in the third or fourth year of a contract, it must also be guaranteed in the preceding season.