Expected Contract Value Impact of Cap-Driven Restructures

Each offseason a number of players agree to simple restructures of their contracts designed to free up cap room for their respective teams in the present year. These cap-driven restructures involve converting base salary (or roster bonus) to signing bonus, with the converted amount then prorated over the remaining years on the contract (up to a maximum of five years). These restructures only involve changing the nature of contract payments, as opposed to the amount of those payments, and are therefore distinguished from pay cuts, raises or extensions. There is clearly no downside to the player agreeing to do this, as he immediately receives money scheduled for payment more than six months in the future (and which is often not guaranteed). But what may be overlooked is that these cap-driven restructures typically increase expected earnings in future seasons without in any way changing the payment terms in those future season.

When teams evaluate potential cap-driven contract terminations, they cannot focus solely on each player’s cap number. The teams must consider the dead money that would remain after releasing the player, which drives the amount of cap savings that would result from a contract termination. If Player X and Player Y each carry cap number of $10 million, but releasing Player X would create $8 million worth of dead money while releasing Player Y would create only $2 million worth of dead money, then Player Y is more likely to be released, all other things being equal. When a player executes a cap-driven restructure, the prorated bonus amounts that extend into future contract seasons amount to more potential dead money in those future seasons, thereby causing those players to look more like Player X in the above example than Player Y. Because the players who execute contract restructures are therefore less likely to be released in future seasons, their expected earnings increase to account for the higher probability of earning the scheduled contract amounts associated with those future seasons.

The amount of cap savings associated with a contract termination is factored into one of the variables of Expected Contract Value, so we can use ECV to calculate the change in expected earnings resulting from a cap-driven restructure. For each contract season, the probability of remaining under contract is multiplied by the scheduled earnings to calculate the expected earnings. In the charts below I have only depicted the probabilities of remaining under contract and the aggregate impact on expected earnings. Note that the probability of remaining under contract in the final season of a contract never changes as a result of a cap-driven restructure. This is because the increase in dead money is identical to the increase in cap number (as there are no more future seasons for which prorated amounts would accelerate from), so the savings is equal to the base salary (plus roster bonuses, workout bonuses and LTBE incentives) no matter how much dead money would result from a contract termination.

This analysis does not speak to the implications for the teams executing these restructures, but from a player’s perspective this should be taken into consideration when structuring new contracts. If a player has the opportunity to structure the contract in such a way as to potentially force a team to perform one of these restructures, then the player will likely end up with higher earnings than could have been expected at the time of signing. This was the case with the contracts for Suh and Clay in particular, and Josh Norman has positioned himself very well for a 2017 cap-driven restructure with his new contract signed with Washington.

Expected Contract Value was created by Bryce Johnston and Nick Barton.

Bryce Johnston earned his Juris Doctor from Georgetown University Law Center in May 2014, and currently works as a corporate M&A associate in the New York City office of an AmLaw 50 law firm.  Before becoming a contributor to overthecap.com, Bryce operated eaglescap.com for 10 NFL offseasons, appearing multiple times on 610 WIP Sports Radio in Philadelphia as an NFL salary cap expert. Bryce can be contacted via e-mail at bryce.l.johnston@gmail.com or via Twitter @NFLCapAnalytics.

Nick Barton is  a junior at the McDonough School Business at  Georgetown University.  He is majoring in Finance and Operations and Information Management. Nick currently interns with an NFL team . His prior work experience includes interning with CollegeSplits and Dynamic Sports Solutions, and working as a research assistant for the Center of Applied Research of the Apostolate.