“Resetting the Risk Clock”: Rationalizing Contract Disputes Using Expected Contract Value

“Resetting the Risk Clock”: 

Rationalizing Contract Disputes Using Expected Contract Value

Adrian Peterson would like a new contract. Specifically, he would like the Vikings to release him so that he can sign a new contract with a different team, but I suspect that this is mostly because the Vikings have made it clear to him that they will not give him a new contract. Peterson has said that his issues with his contract are caused by a desire to “secure his future.” That certainly sounds reasonable. But why has Peterson initiated this dispute this year? Why not next year, or last year? And why aren’t the Vikings willing to budge in this situation? We can use Expected Contract Value to explore these questions and dissect the anatomy of a contract dispute.

Examining the Expected Contract Value breakdown of Peterson’s contract reveals an explanation for both the general reason for initiating a contract dispute and the timing of the dispute. Peterson’s contract is easily the largest running back contract in terms of Expected Contract Value, stated contract value, and average annual value. He is scheduled to earn more cash in 2015 than any running back other than LeSean McCoy, and he is scheduled to earn more cash in 2016 and 2017 than any other running back. I think it is unlikely Peterson views the $45 million he is scheduled to earn from 2015 through 2017 as an insufficient amount.

However, Expected Contract Value shows that the likelihood of Peterson earning the $45 million remaining on his contract is fairly low. With Expected Outcomes of 58.0%, 33.8%, and 17.4% in 2015, 2016, and 2017, respectively, Peterson’s contract carries an Expected Contract Value over that time frame of $15,568,000. Even if we assume that the Vikings will keep him on the roster for 2015 – which would not necessarily be the case if he suffers a serious injury in training camp – Peterson’s Expected Contract Value would be $21,028,000, or less than half of the stated contract value. Peterson’s contract dispute can therefore be blamed on the fact that the structure of his contract leaves him vulnerable to the point where he can expect to earn only a fraction of the money purportedly owed to him over the next several years.

Expected Contract Value also explains the timing of the dispute. The urgency would not have existed to initiate a dispute a year ago, as at that time Peterson could look forward to relatively good Expected Outcomes of 68.0% and 58.0% in the coming years. However, at this point in time he can peer into the future and see his Expected Outcome drop in a significant fashion, from 58.0% this year to 33.8% next year. It is logical from his perspective to initiate the contract dispute now, while he still may have some sort of leverage, as opposed to a year from now, when Expected Contract Value forecasts a strong likelihood that the Vikings will release him.

Adrian Peterson
YearSalaryExpected OutcomeExpected ValueAdjustment
2011$250,00099.3%$248,250$20,250,000
2012$8,250,00094.7%$7,812,750
2013$11,500,00083.2%$9,568,000
2014$12,000,00068.0%$8,160,000
2015$13,000,00058.0%$7,540,000
2016$15,000,00033.8%$5,070,000
2017$17,000,00017.4%$2,958,000
Subtotal$41,357,000$20,250,000
Total$61,607,000
 

Based on the above chart, and again assuming that we can now consider the 2015 Expected Outcome to be 100%, Peterson should be happy with any contract restructure that leaves him with an Expected Contract value greater than $21,028,000.[1] For example, if the Vikings offer him a fully guaranteed deal for $8 million per year covering 2015 through 2017, he would then have an Expected Contract Value of $24,000,000 over that time period. Given that he does not have any leverage to force the Vikings to give him a new deal, such a result would seem like a satisfactory ending to a contract dispute, as it would improve his expected earnings by several million while also eliminating any injury-related risk.

[1] This assumes that security is in fact his primary concern. He could also play out 2015 knowing that the Vikings will likely release him in 2016. If he thinks that he will end up with an Expected Contract Value in a new contract of at least $8,028,000, then he would be in a better position. But doing so involves taking the risk that he will suffer a serious injury this upcoming season.

Agreeing to such a renegotiation may be a good idea for the Vikings as well. If the team expects Peterson to remain productive over the next three seasons, then agreeing to such a renegotiation could save the team $21[2] million in cap space over that period as compared to allowing Peterson to play out the current terms of the contract.

[2] Or some lower number if the agreed-upon renegotiation were to be closer to the $45 million scheduled contract value.

However, there are valid reasons why the Vikings may not want to agree to such a renegotiation. At the beginning of Peterson’s contract – and at the beginning of almost all sizeable NFL contracts – the Vikings assumed a large degree of risk: risk that Peterson may suffer a serious injury, risk that Peterson may unexpectedly lose his ability to perform at a high level; risk that Peterson may unexpectedly become less valuable or completely superfluous within the context of the roster, etc. The specific risk for the Vikings was that in the event any of the aforementioned scenarios took place, they would have to either pay Peterson an amount they no longer felt he was worth, or release him and consequently suffer a very large dead money charge.

Conversely, Peterson’s guarantees and “dead money protection” reduced his personal risk at the beginning of the contract for the same reasons. However, the degree of risk reduction declined with each passing year. At the same time, the Vikings survived their fixed amount of risk in the applicable yearly increments. This gradual shifting of risk from the Vikings to Peterson is reflected in, and is a significant contributor to, the declining Expected Outcomes in each successive season of the contract.

If the Vikings were to agree to a renegotiation involving any amount of guaranteed money, then they would find themselves in a position of “resetting the risk clock.” Rather than enjoying one of the benefits secured with the risk taken in the original contract – risk free team options at the back end of the contract – the team would again subject itself to the non-zero chance of injury, performance decline, etc.

While the Vikings appear to have chosen to avoid such an outcome, two other teams chose to make the opposite decision with respect to their running back positions this offseason. The Eagles entered the offseason with LeSean McCoy under contract for three remaining seasons. The following chart displays McCoy’s yearly cap numbers and dead money risk, with the relevant seasons highlighted in bold.

LeSean McCoy (Eagles Contract)
YearCap NumberRunning Risk
2012$2,657,500$20,765,000
2013$4,950,000$18,450,000
2014$9,700,000$13,750,000
2015$11,950,000$4,400,000
2016$8,850,000$1,700,000
2017$7,850,000$0
 

The Eagles took on a considerable amount of risk at the beginning of this contract, but had managed to get through the large majority of it by 2015. As a reward, they were poised to have McCoy signed for three years with a low degree of risk and declining cap numbers. Instead, they chose to trade McCoy to the Bills for Kiko Alonso and sign DeMarco Murray to replace him. The following chart displays Murray’s yearly cap numbers and dead money risk.

DeMarco Murray (as compared to LeSean McCoy)
YearCap NumberRunning RiskYearly Net RiskNet Cap Room
2015$5,000,000$18,000,000+$13,600,000+$3,550,000
2016$8,000,000$13,000,000+$11,300,000+$4,400,000
2017$9,000,000$5,000,000+$5,000,000+$3,250,000
2018$9,000,000$2,000,000
2019$9,000,000$1,000,000
 

As the fourth column shows, the Eagles reset the risk clock on their running back position by essentially swapping Murray’s new contract for McCoy’s old contract. In return for taking on a significant amount of new risk, the Eagles saved a total of $3.25 million in cap space over the three-year period that McCoy was signed for. This seems like a small amount of flexibility to gain in exchange for such a large amount of risk. However, this decision is defensible because the Eagles also acquired Alonso and would argue that Murray will be more effective than McCoy. I am not interested in examining or debating whether or not that will be the case, but it is at least a plausible argument.

Whereas the Eagles can at least argue that they received a benefit worth resetting the risk clock for, I do not think that the Bills can similarly defend their decision to do the same. At the moment that the Bills completed their trade for McCoy, they had him signed under contract for three seasons with almost no risk.

LeSean McCoy (Initial Bills Contract)
YearCap NumberRunning Risk
2015$10,250,000$1,00,000
2016$7,150,000$0
2017$7,850,000$0
 

One can argue that a primary advantage of trading for a player is that the player’s former team will often times be forced to eat much of the remaining risk associated with the players contract. Such signing bonus acceleration not only strips the contract of risk; it also lowers the cap numbers for the acquiring team. But rather than enjoy this benefit, the Bills decided to give McCoy a new contract that he had no leverage to demand.

LeSean McCoy New Contract (as compared to LeSean McCoy Old Contract)
YearCap NumberRunning RiskYearly Net RiskNet Cap Room
2015$5,500,000$15,750,000+$14,750,000+$4,750,000
2016$7,675,000$10,500,000+$10,500,000+$4,225,000
2017$8,875,000$7,875,000+$7,875,000+$3,200,000
2018$8,950,000$5,250,000+$5,250,000
2019$9,050,000$2,625,000+$2,625,000
 

When the Bills reset their risk clock, they took on more risk than the Eagles and saved less net cap room over the relevant time period than the Eagles. They did not receive any additional players – as the Eagles did with Alonso – and cannot argue that they swapped in a more effective player (because they gave a new contract to the same player). The team presumably has a happier running back than it would have had in the absence of resetting the risk clock, and I suppose that this transaction demonstrates that the Bills value McCoy’s happiness very highly.

This is a roundabout way of laying out the factors that the Vikings should consider when deciding whether or not to appease Peterson’s contract demands. Weighing against doing so is (i) the prospect of resetting the risk clock to significant degree after just recently making it through the risky part of the original contract and (ii) the absence of any kind of upgrade (whether actual or perceived) of assets or personnel as was the case for the Eagles.

Weighing in favor of doing so is the opportunity to save a significant amount of cap room over the next three seasons by delivering Peterson a contract with an ECV higher than what he can currently expect, but with a stated value much lower than he is scheduled to earn. However, this is really only a benefit if the Vikings expect to want Peterson under contract for the next three seasons. Expected Contract Value thinks that the Vikings will not want Peterson under contract for the next three seasons. ECV does not know that Peterson has always been an outlier in almost every respect. But outliers are outliers for a reason, and not even Peterson will be an outlier forever.

The most likely outcome is the one that Expected Contract Value forecasts. Peterson has acted entirely rational in initiating a contract dispute in an attempt to transfer risk to the Vikings. The timing of the dispute makes sense. However, the Vikings will decide that the potential cap savings are not worth resetting the risk clock on Peterson’s contract, particularly given that they do not receive any help for 2015 that they were not already entitled to receive. Peterson will maintain all of the risk for the 2015 season and beyond, and the Vikings will take advantage of their contractual right to postpone taking any action on the contract until 2016. The Eagles will either be correct or incorrect that the acquisitions of Murray, Alonso, and marginal cap space were worth resetting the risk clock on the running back position for. The Bills will carry significantly more risk than was necessary, but they will have a happy running back in exchange.

Assuming risk is often times a necessary consequence of obtaining a benefit, but NFL teams should ensure that they receive adequate benefits in exchange for assuming risks, and they should avoid assuming risk when doing so is avoidable. In perhaps no situation is this more important to consider than in the context of a contract dispute.

Introduction Part 1: Justification, Theory, & “Contract Analytics”

Introduction Part 2: Inputs & Outputs

Introduction Part 3: Contract Comparison

Introduction Part 4: Salary Cap Budgeting

Introduction Part 5: Frequently Asked Questions

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

Bryce Johnston earned his Juris Doctor, magna cum laude, from Georgetown University Law Center in May 2014, and currently works as a corporate 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.

Nicholas Barton is a sophomore at Georgetown University. He intends on double majoring in Operations and Information Management and Finance as well as pursuing a minor in Economics. Currently one of the leaders of the Georgetown Sports Analysis, Business, and Research Group, Nick consults for Dynamic Sports Solutions, an innovative sports start-up that uses mathematical and computational methods to evaluate players. He also writes for the Hoya, Georgetown’s school newspaper, and his own blog, Life of a Football Fan. Nick can be contacted via e-mail at njb50@georgetown.edu.