Defining Salary Cap Management

Last month, I described the two distinct decision-making processes that each NFL front office must continually undertake: talent evaluation and resource allocation. As I explained, talent evaluation can broadly be separated into subjective methods (scouting/film analysis) and objective methods (analytics). Similarly, I think that resource allocation can broadly be separated into what I will refer to as “strategic football judgment” and “salary cap management.”

The term “salary cap management” seems to be used in any context or in relation to any topic associated with NFL contracts. I am of the view that such usage causes the term to encompass concepts it should not. I propose to clarify which concepts should be considered salary cap management, and which concepts would more appropriately be analyzed as strategic football judgment. My thesis is that resource allocation decisions as to the quantity and the subject of salary cap allocation should be analyzed separately from resource allocation decisions as to the structure of such payments within the salary cap regime described in the CBA.

I am a corporate attorney, and I primarily practice in the area of Mergers & Acquisitions. The lawyers working on an M&A transaction must remain aware that some aspects of the transaction are legal issues, and other aspects of the transaction are business issues. The clearest example of a business issue is the purchase price. The client hires bankers or other advisors – not lawyers – to help determine which company the client should attempt to acquire and the amount of money that would make sense to pay for the acquisition.

I think this type of specialization of roles is illustrative of the distinction I am drawing and is important to consider in the context of an NFL front office deciding whether and/or how to sign a given player. A GM is essentially the client with final say, the “football people” (scouts and/or analytics personnel) are comparable to bankers evaluating the target, and the salary cap manager is comparable to a corporate legal team. The salary cap manager guides the transaction through the CBA rules and negotiates for contractual terms as favorable to the team as possible (based on the considerations described below), but it is the responsibility of the football people to evaluate the player and for the GM to then make the strategic football judgment as to the amount of resources (i.e. the “purchase price”) worth allocating.

Under this framework, the following considerations should be analyzed as strategic football judgment, rather than salary cap management:

1. The amount of money, amount of guarantees, or percentage of the salary cap to allocate to a specific player.

This issue is the clearest example of a resource allocation decision that should be considered strategic football judgment, and yet also the issue seemingly most often conflated with salary cap management. Salary cap management would include informing the GM that top tier players at a given position generally sign contracts that look like X and that second tier players generally sign contracts that look like Y (or that such contracts may soon look like X + A or Y + B). However, the decision as to whether the team should allocate X or Y salary cap resources to a specific player is entirely a strategic football judgment. The football people will watch the tape and evaluate the analytics, and the GM will use the results of such evaluation to determine the amount of assets worth expending to acquire the player’s services. This process would take place even in the absence of the salary cap regime. Only once such a decision has been made does salary cap management take place.

To the extent that a team turns out to have overpaid a player, it is not an issue of poor salary cap management, but rather an issue of poor strategic football judgment (possibly as a result of poor talent evaluation). The same is true of a deal that turns out to be a great value for the team. In either case, the salary cap management may or may not have been excellent within the context of the purchase price determination made by the GM.

2. The allocation of salary cap space as between position groups.

There is a notion that teams should not sign players who play certain positions to particularly large contracts, and that doing so is an example of poor salary cap management. However, any difference in the relative value of position groups is not a consequence of the salary cap. It must be true that each player produces a certain amount of value. The method that each team utilizes to determine player value presumably reflects in some way the relative value of each position, whether universally or with respect to the given team’s schemes/system. As a result, if a team determines that Player A is worth X Value Units, this conclusion would necessarily already incorporate a positional consideration that may make it more or less difficult for the player to achieve the quantity of X Value Units.

Decisions as to the nature of such positional value adjustments are strategic football judgments, not salary cap management decisions. A subsequent assertion that the team should or should not allocate a certain amount of salary cap resources to the player based on his position would constitute a double counting of position in the analysis, and it would negate the strategic football judgment that has already been made.

To summarize, salary cap management involves neither resource allocation decisions based on a ranking of players within a positional grouping nor resource allocation decisions based on a ranking of positions as compared to one another. Both of these considerations would still exist even if the salary cap disappeared and teams operated on basic budgets in the absence of a complicated accounting regime as MLB teams do.

The following considerations should be analyzed as components of salary cap management:

1. The tradeoff between contractual risk, potential for surplus value, and optionality.

Every contract represents a tradeoff between the team and the player as to contractual risk, potential for surplus value, and optionality. The team incurs more contractual risk if more guaranteed money is included in the contract, the team obtains more potential for surplus value if the yearly cap/cash amounts are lower, and the team retains more optionality if the contract contains more nonguaranteed contract seasons. In each case, the opposite is true from the player’s perspective. Under the NFL salary cap rules, teams and players have significant flexibility to design contracts that emphasize the mutually desired contract characteristics.

One aspect of salary cap management is utilizing the available contract-structuring tools to strike an efficient balance between these three considerations. In some cases, it may be advisable to offer to pay more total money (therefore increasing yearly cap/cash amounts and thus reducing potential for surplus value) in order to convince the player to accept less guaranteed money (therefore reducing contractual risk). In other cases, it may be advisable to offer to provide more guaranteed money (therefore increasing contractual risk) in order to convince the player to accept more nonguaranteed contract seasons (therefore maximizing team optionality). In still other cases, it may be advisable to offer fewer contract seasons (therefore reducing team optionality) in order to convince the player to accept less total cap/cash (therefore maximizing potential for surplus value).

One can imagine many different permutations of this balancing act. The effect of these decisions is zero-sum with respect to the determined purchase price; the objective value should remain more or less the same even though the form may look different based on the subjective preferences of the team and player. Salary cap management involves making decisions affecting the outcome along these three continuums within the context of the strategic football judgments that have already been made.

2. The tradeoff between present flexibility and future flexibility.

Every team faces constant tension between the desire to maximize the talent level of the current roster and the desire to maintain the ability to maximize the talent of its future rosters. Due to the fact that signing bonuses can be prorated, teams are much more constrained in terms of current-year spending by their tolerance for reducing future salary cap flexibility than they are by the NFL salary cap in the current league year. And because salary cap space can be freely transferred from one league year to the next, any amount of salary cap space allocated to the current roster is salary cap space that could have been allocated to a future roster but which has instead been permanently exhausted.

Salary cap management involves make decisions as to where the given team will sit along the continuum of borrowing future cap space to pay current players via signing bonus (thereby maximizing the talent level of the current roster at the expense of the ability to maximize the talent level of future rosters) to preserving current cap space to carry forward to future seasons (thereby maximizing the ability to bolster future rosters at the expense of maximizing the talent level of the current roster).

Decisions related to this aspect of salary cap management may affect whether a contract concentrates its guaranteed money in the form of a signing bonus or in the form of non-prorated contract component types (roster bonus, base salary, etc.), as well as the degree to which the contract is front-loaded or back-loaded, or even whether to sign a specific player or certain tier/quality of player at all. These decisions can be distinctly identified as salary cap management issues because they are independent of the strategic football judgment as to total purchase price. These decisions are also independent of the team-player tradeoffs as to contractual risk, potential for surplus value, and optionality. This aspect of salary cap management is a matter of temporally distributing cap dollars across league years.

To summarize, salary cap management involves structuring contracts so as to efficiently balance the considerations of contractual risk, potential for surplus value, optionality, maximization of the talent level of the current roster, and the ability to maximize the talent level of future rosters, all within the context of talent evaluation determinations and strategic football judgments that have already been made. These considerations are of unique importance given the NFL salary cap rules, and a team can be effective or ineffective at making such decisions independently of whether it effectively decides which players to sign and for how much. A given team’s salary cap situation or outlook at any point in time is the culmination of all salary cap management decisions made in the past, with more recent decisions weighing more heavily.

The number of considerations and the degree of unpredictability of real-life outcomes make salary cap management comparable to investment portfolio management. As such, there is not necessarily one correct method or strategy; the best that can be done is to develop a philosophy that seeks to achieve an efficient balance. While we can generally identify the degree to which each team has prioritized each of the considerations, a holistic method for measuring and/or ranking the effectiveness of each team’s salary cap management practices remains elusive.

Finally, to say that salary cap management, strategic football judgment, and talent evaluation can be analyzed as distinct processes is not to say that they do not have any effect on each other. For example, a salary cap management decision to focus on maximizing potential surplus value for a certain contract may be based on the talent evaluation determination made with respect to the applicable player. Poor strategic football judgment may lead to salary cap management decisions that amount to the least bad of the alternatives presented. Inefficient salary cap management can almost always be overcome by particularly strong talent evaluation in the draft. But despite the effect that the different processes have on each other, focusing on the nuanced distinction between them will lead to more productive and sophisticated salary cap analysis, theory and practice.