Guaranteed Salary, Short Term Contract and Other CBA Ramblings

Earlier today Chargers offensive tackle Russell Okung posted a series of tweets regarding NFL contracts, the CBA, and guarantees and it was a pretty thought provoking series of tweets.  We don’t often see players articulate these points so clearly in a public forum and it gave me some food for thought to write about. You can click on the link so you can read his own words but the main bullet points were that players should get more of a percent of the revenue, contracts should be guaranteed, the salary cap should be removed, and the CBA has lots of language that is negative to the players. So I wanted to discuss a few of these points.

I think the first thing to make mention of is the salary cap. The concept of the salary cap is to promote competitive balance in the NFL. The general concept is designed to create a system that prevents a team like the Cowboys or 49ers of the early 90s from engaging in an arms race that depletes the rest of the league of talent. The worry is that the NFL would turn into a few “superteams” like we see in the NBA. The NBA playoffs are great because of the few superteams but the regular seasons are a chore.  The NFL’s money is really made because of the regular season and idea that every year basically 27 or 28 of 32 teams have a legit chance at the playoffs.

The question is does the salary cap contribute to this anymore?  I’m not 100% sure that it does. When the 2011 CBA was agreed upon there were changes that impacted the league.  For one the union tied spending to the cap on a per team basis. This more or less prevents a team from tanking for too long of a period by not spending on a roster (you can get away with a cheap year but that’s probably it). The agreement also had a new rule that allowed teams to just carry over as much cap room as they wanted year by year, something only the more shrewd organizations did in the past. There were changes to the rookie scale (more on that in a minute).  Teams were able to use these things to move away from traditional salary cap management that made it difficult to manage a roster to all cash systems that have more or less rendered the cap meaningless for a large portion of the NFL. Of course that doesn’t stop teams from telling agents that they are cap strapped  but in most cases that’s on the agent for not seeing through the BS.

That said the salary cap is such an integral part of the NFL that Im not sure its something that can be negotiated out of the CBA or worth going to fight over it. There are ways that players can use the salary cap to their advantage which can be done by tweaking rules related to proration and just better educating the player side about the cap. That leaves more room for fighting about revenues and other issues, one of which could be guarantees.

Okung makes the excellent point that these is nothing that prevents agents from negotiating guaranteed deals (he points to Kirk Cousins as an example and obviously draft picks are a great example as well) but they don’t do it. This is a big problem with the movement in the league in general and something that I think is worth discussing and brings me also to the first point on rookie contracts.

There was a time when agents really had more control over the NFL. There was far more creativity that existed pre 2011 in particular from the rookie contracts that were negotiated for the top 10 picks in the draft. From escalators to incentives to buyouts and everything in between agents controlled the discussions. Salaries for top picks escalated to the point where salaries far exceeded expectations on the field.  The contracts were relatively iron clad and in many cases helped put teams into a bind with their salary cap which forced them into bad contracts elsewhere (see the Detroit Lions of Suh, Stafford, and Johnson) that virtually guaranteed more and more contract years for players.

Fast forward to 2011 and the NFL took control via a rookie wage scale.  Salary cap charge increases were modest at a straight 25% per year per player. Teams never had to deal with a massive cap charge in year 2 or year 5. It was easy budgeting. Growth was controlled by salary cap inflation preventing bad salary cap managers from screwing up the comps for the rest of the NFL.  You no longer had positions that would see immediate growth from a player being drafted such as Suh becoming the highest paid defensive tackle in the NFL before stepping foot onto the field. I think this really hurt players more than they realized. With those big deals gone agents also have become far too eager to negotiate extensions early rather than necessarily fighting more for the contract. It really shifted who held all the leverage in a number of areas when it came to negotiations. Players I think would get better deals if they found ways to regain this strength at the negotiating table.

Okung’s solution would be to basically not put the faith in agents and instead just make contracts guaranteed. I do think that this is fine but there would need to be an acceptance in the agent/player/media community that the contract dynamics will change with a fully guaranteed system. There comes a point where carrying too much dead weight (players with reduced skill) or dead money (the cap charge from cutting the reduced skill player) significantly hurts the product on the field. While the NFL may be slower than other sports to embrace analytics they are well aware of the limited lifecycle of the NFL player. This varies position by position (QBs and offensive linemen can have longer careers while cornerbacks and running backs are often shorter careers) but that lifecycle will impact the contract offer. Even if the cap was removed teams simply are not going to sign a big name 27 year old back to a 5 year, $45 million fully guaranteed deal. That’s not going to make a team competitive.

Looking around today’s NFL I would say that most contracts that are five or more years would now be three year contracts, four year deals would be reduced to two years, and everyone else would be on a one year contract.  That doesn’t mean that this is bad for the players but it does limit the impact of the guaranteed contract since we are really going year by year in most cases. Initial cash flows will likely be lower compared to today’s contracts because the team is now assuming all risk in a contract. Based on the Cousins contract I think a fair amount will likely be 90% of the current system contract, with that number moving a bit up or down based on the position.

A player in theory could earn more without those guarantees, even on a short term deal, if teams are using the guarantee as a tradeoff. The 1st year guarantee is bogus in all cases because no team signing a player to a big contract is cutting him in the first year. There should be almost no discount for that guarantee at all because its zero risk for the team. It just sounds great when ESPN reports it. GMs also look to protect themselves by getting anything out of a big deal because it reflects badly on them when a player flops badly so they chase deals regardless of guarantees. The point is agents should not get all hyper on guarantees if it is costing them in the long run, but that’s a story for a different day.

While the 90% maybe doesn’t sound as great as many think, it forces the players to accept a far more aggressive nature when it comes to contracts and free agency which is good. Players and agents are too accepting and conforming to the NFL system with few exceptions such as Cousins. Okung makes the point about how poor a valuation metric like APY is but it has become a benchmark. That’s fine for doing a long term contract or for sites like mine to try to put some context behind it but from an agents/players perspective they should be taking a much deeper view of the contract which is in line with what he is discussing.

When I work with people on contracts I always deal with cash flows, which is the most important thing with a contract. But when mapping out a career plan we need to dig deeper. We should be looking at either the guaranteed portion or virtually guaranteed portion of a contract and valuing deals in that manner.

Now by guarantees we need to clarify that contracts that are guaranteed for skill is what we are talking about as that is the primary reason why a player is released. Injury guarantees are nothing much more than an optical illusion used by teams and agents to make something sound impressive when in reality it isn’t. When we look at virtual guarantees we can look at favorable vesting schedules (i.e. a players 2019 and 2020 salary become fully guaranteed next February) or the salary cap consequence of cutting a player being so high that it makes no sense to cut the player. That really gives us our market values.

For example when we look at Olivier Vernon we say he is a $17 million player. In reality a player like Vernon is worth more. Why do I say that?  The Giants virtually guaranteed him $41 million for two seasons. That was the risk the Giants were willing to take on for his contract. They felt confident enough to pay him for those two years and then see where things go. If you feel that the third year is virtually guaranteed then we are looking at a contract worth about $17.7M a season. Those numbers are all not considering cap inflation. If we inflate the numbers into 2018, 2019, and 2020 terms we are talking $46.5 million over two and $61 million over three years. What that tells me is that if a proven player can continue to hit free agency we need to use those future estimates to project true earning potential.

Remember the NFL contract is all about risk and what this illustrates is that the long term contract is not indicative of the NFL team taking on the risk. Sure all those big injury guarantees sound great but who is really taking on the risk when we look at the big picture?

Vernon received $13 million in additional injury protection and $44 million in backend salary with his contract to hit his gigantic $17M APY. But what did he give up?  Based on what the Giants fully guaranteed him he gave up at least a $55M payout on the backend. So for $13M in injury guarantees, a pretty rare event to be collected on, he could be giving up $11 million in real money. So who is really paying the premium on the guarantee?  Not the Giants. Its really Vernon giving up $11M for that injury protection.

This is the problem with the way agents negotiate contracts and this is in no way done to pick on the Vernon deal. I just thought it was a great example because it is one of the best player contracts in the NFL and a current gold standard. The agent community I don’t think gets much support to do otherwise though nor are players given the financial tools to understand the tradeoffs.

An agent should consider 5 situations on a long term deal. Scenario 1 is the player plays great for 5 years and fulfills his contract. Scenario 2 is that the player plays pretty well and is cut after 4 years of the contract and can sign a mid level deal after that. Scenario 3 is that the player is a moderate success and cut after three years with some interest in his talents. Scenario 4 is that the player is a bust and is basically done after two years. Scenario 5 is that the player gets seriously injured. You can add you own probabilities to each scenario but I can tell you the least likely is scenario 5. Just for kicks I made up my own probabilities but we can run a number of contract comps to come up with a more accurate estimation of each scenario.

What are the five year earnings for a player like Vernon in each of these scenarios under a long term and short term contract strategy?  The assumptions I will be making here are that Vernon will earn 90% of his current two year value on a short term deal and 90% of the future inflation deals. In scenarios where he is released well use a sliding scale based on some recent 1 year kind of deals for the Mario Williams types (i.e. somewhere between $7 and $10M for a year) or lower end ($5M and down) if cut early and then slide down from there.

The first short term deal we look at is the two year contract.

Scenario 1Scenario 2Scenario 3Scenario 4Scenario 5
Long term deal$85,000,000$79,500,000$64,000,000$49,750,000$53,000,000
Short term deal$113,550,000$88,750,000$82,250,000$45,650,000$36,900,000
Short term benefit$28,550,000$9,250,000$18,250,000($4,100,000)($16,100,000)
Probability0.150.250.350.20.05
Expected Return$4,282,500$2,312,500$6,387,500($820,000)(-$805,000)

The expectation should be that Vernon, by doing a series of two year contracts, would earn $11.25M more over a five year period by using a guaranteed short term structure rather than a traditional structure.

What if he did a three year guaranteed deal?

Scenario 1Scenario 2Scenario 3Scenario 4Scenario 5
Long term deal$85,000,000$79,500,000$64,000,000$49,750,000$53,000,000
Short term deal$96,700,000$96,700,000$58,700,000$45,650,000$47,700,000
Short term benefit$11,700,000$17,200,000($5,300,000)($4,100,000)($5,300,000)
Probability0.150.250.350.20.05
Expected Return$1,755,000$4,300,000-$1,855,000-$820,000-$265,000

Here he comes moderately more ahead with about $3.1M more in expected earnings. This is why it really isn’t the team taking on a massive risk with the injury guarantee. Its little more than optics because in the long run they make out better by taking on the risk of a pretty unlikely event.

In any event the bottom line is that the tools are there now for agents to attempt to work such contracts out on their own with a team. Working with agents to give them more leverage to do this would allow the union to focus on bigger issues like revenue splits, the removal of the franchise tag, and most importantly the overhaul of the free agent system.

Discussions like this often come up around this time because NBA free agency results in some massive contracts and we are reminded of how much those athletes make. One of the big differences here though is that NBA players come into the league at 18 and 19 years of age and are hitting their first extensions at the time NFL players are just signing their rookie contracts. They also have a longer career expectancy, so they are getting multiple shots at the big dollars. NFL players are lucky to get one shot. The NBA also has limits for players which allows lesser players to earn more.

The union has fallen into a trap of accepting some argument that NFL rookie contracts must be 4 or 5 years because of whatever development period there is and initial cost there is. Maybe there was a time that was true but is it still true?  How many times nowadays do we see a young player more or less have his fate decided by the end of his second season in the NFL?  Other than at QB I’d say pretty often and even for QBs we see teams get ready for an alternative by year 3 if they haven’t seen that spark.

So why do you give the team control for at least 5 years?  It makes no sense. By the time the player is done with his rookie contract and tag year more often than not they are about to enter a decline phase. Rather than cashing in at age 24 or 25 and then getting another shot at 27 or 28 they are forced to wait until age 27 for their first crack at free agency. Rookie contracts really should be modified to either include expensive 3rd and 4th year options for all rounds or they should be allowed to become free agents. Modifying the cap or instituting guaranteed deals is not an easy negotiation but there was already movement on rookie contracts and that’s an area that I think they could tweak which would benefit a lot of players.

I do feel for agents in these situations because they get a bad rap and when you write something like this its basically telling them to not accept the norms and do differently. I think that falls on the union to help agents more with training and to find more ways to protect them from losing players when a deal doesn’t get done so quick and they find a new agent who woos them away with promises of gold that never materialize.

I know we talk about collusion among teams to hold wages down or drive players from the NFL but the players are the ones who need to collude to change things. The new CBA still wont happen for a few years but they have power to make things change if some want to sacrifice. Even when it comes to the franchise tag as long as everyone agrees to no extensions teams wont have the tag to use. For instance in Minnesota it would have been a lock that at least Danielle Hunter or Anthony Barr would have been a free agent this year but now its likely neither will.  Force the teams hands by actions with your contracts and use free agency to earn the biggest amount of surefire salary possible and prepare to do it again in two or three years.

Questions about this article? Reach Jason Fitzgerald on Twitter at @jason_otc