Reassessing the Value of Contracts

A recent run of signings in the NFL this March is going to bring into question the way in which we are valuing contracts. Usually, one of the first things we look at when valuing the contract of a player is the average per year (APY) of the contract. While it certainly is not a perfect way to gauge the true intention or strength of the contract it at least gives a pretty reasonable way to look at the market for a particular position. There are usually a handful of red flag type deals but Tyreek Hill signing a “$30 million a year” contract yesterday is really making me question how we should be looking at really assessing the annual value of a contract in the future.

Hill’s contract, for those unfamiliar with it, carries a monster salary in the final year of the contract- $45 million to be exact- and it’s only purpose is to inflate the annual contract value from a pretty impressive $25 million a year to a stunning $30 million a year. From a practical standpoint it is simply functioning as a void year for the Dolphins and if a year like that were included in a lesser player’s contract we would simply value it as a void season.

This concept is by no means new in the NFL but it has been more or less dormant for many years. Back in the earlier days of the salary cap contracts often ran for 7+ years. At the time there was far more of a focus on total contract values than the actually important things for a player- how much will they earn in one year, how much in two years, what are the odds of being cut- and that inflated values for many players. As the NFL cut down on the number of years allowed for salary cap proration and as teams started to realize the benefits of playing younger players those balloon salaries disappeared from contracts. Now it is back and it makes it very difficult to compare apples to apples especially within the wide receiver market.

The first contract where this concept seemed to come back for the receivers was actually the contract of Keenan Allen. The Chargers used a bloated, but at least somewhat realistic, salary in the final year of the contract to move his deal from $19 million a year to over $20 million a year. While clearly a year that is unlikely to be earned you can’t look at it and say that is a bogus year. The Davante Adams and Hill contracts completely changed that dynamic.

Here is how Hill’s and Davante Adams’ yearly “new money” cash flows line up with the rest of the market.

PlayerAPY1st Year Cash2nd Year Cash3rd Year Cash4th Year Cash5th Year Cash
Tyreek Hill$30,000,000$32,300,000$52,065,000$75,000,000$120,000,000
Davante Adams$28,000,000$23,350,000$50,020,000$67,510,000$103,750,000$140,000,000
Deandre Hopkins$27,250,000$39,585,000$54,500,000
Julio Jones$22,000,000$42,974,000$54,487,000$66,000,000
DJ Moore$20,628,000$29,784,000$45,834,000$61,884,000
Keenan Allen$20,025,000$21,500,000$38,000,000$57,000,000$80,100,000
Mike Williams$20,000,000$28,000,000$40,000,000$60,000,000
Amari Cooper$20,000,000$20,000,000$40,000,000$60,000,000

Clearly these are strong contracts. but the APY clearly misrepresents the way they compare. As an easier way to compare let’s look at the yearly APY for each contract. I also included the averages for the bloated contracts at the top and the smaller ones at the bottom.

Tyreek Hill$30,000,000$32,300,000$26,032,500$25,000,000$30,000,000
Davante Adams$28,000,000$23,350,000$25,010,000$22,503,333$25,937,500$28,000,000
Deandre Hopkins$27,250,000$39,585,000$27,250,000
Julio Jones$22,000,000$42,974,000$27,243,500$22,000,000
DJ Moore$20,628,000$29,784,000$22,917,000$20,628,000
Keenan Allen$20,025,000$21,500,000$19,000,000$19,000,000$20,025,000
Mike Williams$20,000,000$28,000,000$20,000,000$20,000,000
Amari Cooper$20,000,000$20,000,000$20,000,000$20,000,000
Hill, Adams, Hopkins$28,416,667$31,745,000$26,097,500$23,751,667
Jones, Moore, etc…$20,530,600$28,451,600$21,832,100$20,325,600
% Difference38.4%11.6%19.5%16.9%

The stated APY indicates that the upper tier is worth nearly 40% more than the lower part of the elite level contracts in the NFL, but the real numbers indicate a much narrower spread, basically somewhere between 15 and 20%. 

This is also why when we hear the overused phrase “this is a gamechanger” (and I am as guilty as anyone of using it) it probably doesn’t mean much. Hill and Adams are two of the best receivers in the NFL and should be the highest paid. Earning 20% or so over the other top players is basically to be expected. Really the only movement at all that could represent a shift at all would be Hill’s third year reaching $25 million per year.

The real reason we got to this spot with this position also comes from another difficult area- how do we value a trade in player contract?  The first time I really remember thinking about this was when the Seahawks traded for Percy Harvin years ago and immediately extended him to a regrettable contract. If we value the contract by new money the way we would a normal extension, Harvin was worth $12.84 million a year. If we look at it as an entirely new contract he would have been worth $11.2 million a year. Trades were so rare then it didn’t really make a difference but as they become more prevalent that also poses a problem.

When a team trades for a player they have no “skin in the game” so to speak with the contract. In Harvin’s case it seemed clear that Seattle was negotiating a six year $67 million contract not a five year extension worth $64.217 million. In Miami’s case with Hill, though, the numbers were clearly designed to fit the model of a traditional extension.

From the player’s perspective the new money is what they do care about but the absurdity of the Hopkins contract is really what has led to the need to do these funny money years at the end. The Cardinals fleeced the Texans in a trade for Hopkins back in 2020 in large part because the Texans did not want to add salary to Hopkins existing contract. The contract had three years remaining at the time.

Arizona was more than happy to negotiate the contract with Hopkins. They would never have access to a player at that talent level in free agency and this was essentially a brand new contract for them.  They gave him his big raise and valued as “new money” it was about a 25% raise over the rest of the market. Because that was the number that was touted when signed it became a number that Adams had to beat. No team in the NFL could come up with a real structure to beat it because in their mind that contract doesn’t exist. If we value Hopkins and Hill from a team perspective the numbers change dramatically.

PlayerAPY1st Year Cash2nd Year Cash3rd Year Cash4th Year Cash5th Year Cash
Tyreek Hill$23,858,750$26,635,000$52,735,000$72,500,000$95,435,000$140,435,000
Deandre Hopkins$18,883,000$29,000,000$42,750,000$60,050,000$79,500,000$94,415,000

Hopkins is worth about $18.9 million per year which is exactly in line with the market at the time. His $60 million three year number just tops $20 million a season and then his value slowly comes down on the back end. That is a traditional contract structure.

Hill’s contract carries a four year annual value of about $24 million. These are really strong numbers throughout and a logical increase from the Jones contract which had been the top contract at $22 million per year.

The question is how many teams will follow suit in the future with this structure. For teams like the Dolphins and Raiders it doesn’t matter. Adams and Hill are third contract players and likely would not see the end of a traditional four year contract so who cares what that salary is since the outcome is going to be a release.

However, for teams extending players or signing a young free agent there are negative consequences. The massive salary prevents the team from being able to use a franchise tag if the player were to still be productive towards the end of his contract. It also forces a cut rather than letting the player go to free agency and potentially get you a compensatory pick. While those players who make it to the end of a contract are rare it does happen.

It presents a challenge for teams, agents, and players alike depending on the situation. I don’t know the best way to handle it, but this is definitely something we need to give more thought to if it spreads more around the NFL in the coming year or two.