The Russell Wilson Guaranteed Salary Problem

This past weekend there was again much talk about Russell Wilson’s contract with the Seattle Seahawks, mostly centered around the guaranteed portion of the contract. This was something I speculated about months ago when the Seahawks mentioned “outside of the box” thinking on Wilson’s contract and it looks to be a divisive issue between the sides.  Wilson’s agent is primarily a baseball agent, a sport where contracts are fully guaranteed so it is a logical point for them to take. So let’s see if we can sort this out.

The Total Guarantee

There are currently six quarterbacks in the NFL that average $20 million per year in salary. There are a number of different ways that we can look at their guarantees, but to start with let’s examine their total guarantee package. The total guarantee package is all forms of guaranteed salary contained in a contract. I then like to break this down further into new and old money guarantees. This is an adjustment for any salary in the year of signing that may not have been guaranteed on paper but from a logical standpoint is certainly guaranteed (a player signing a $100 million extension in June is in no danger of release by September). Finally I want to look at the percentage of guarantee of the contract valued in both new and total money terms.

PlayerTotal Guar.New Money Guar.New Money ValueTotal Contract Value% New Contract Guar% Total Contract Guar

Based on the market one would assume that the Seahawks should be comfortable with guaranteeing about 50% of the contract and, based on the high end comparables, should be willing to move upward to about 65% of the total contract value being guaranteed.

It is probably reasonable to further adjust those totals to make everyone’s contract years the same length. In this case our shortest contract is Roethlisberger’s at 4 years and that may make the most sense as a Wilson comp, since the Seahawks most recent extensions have been four years in length rather than the five years that is more common around the NFL.

PlayerFour Year Value% New Guar% Total Guar

This should tell us that the team should be willing to guarantee 60% of the total contract value on a four year extension and we do have one data point to suggest a 75% guarantee. While that may be an outlier it should be a point brought up.

Here is what Wilson’s guarantee package could look like at the floor and the max depending on APY and years signed:

APY4 Year Min4 Year Max5 Year Min5 Year Max

There is little difference in the total guarantee which reiterates one of the points I make on the site that players give up potential free agent years for little reward and why Wilson should opt for a four year contract extension no matter what in this negtiation.

The Full Guarantee

The second part of the contract negotiation is deciding the fully guaranteed portion of the contract. For the purposes of this argument we consider both fully guaranteed salary and money due by March as an option as fully guaranteed. He following table shows the percentage of the total guarantee that is fully guaranteed.

PlayerFull GuaranteeNew Full Guarantee% New% Full

This is likely a larger disconnect. Here we are looking at around 70% of most guarantees actually being committed by the following March. The largest percentages went to Rodgers and Flacco, who had the two lowest overall percentage of contract guaranteed. The fact that their full guarantees are so high may have been the compromise in structure.

Based on these numbers, Seattle is probably willing to go anywhere from $41 to $48 million fully guaranteed depending on APY and the assumption that it’s a four year contract extension. This is likely well under what Wilson is seeking.

The Escrow Condition

One of the things being discussed about the contract is a little known pre-funding rule that exists in the NFL. People are probably a bit more familiar with this rule now from the Tom Brady renegotiation a few months ago, but if you are not I’ll explain.

The rule likely has roots in a much older time when the NFL wasn’t a multi-billion dollar business and arguably any future guaranteed salary needed to be protected, as crazy as it sounds, in the event a franchise went bankrupt or did not have the liquidity to pay their bills which may have led to crazy annuities like we sometimes see in other sports.  To protect the salary any future money guaranteed for skill termination (basically a completely subjective reason to cut a player) needs to be set aside in an account to ensure payment of the contract. So for a player seeking $60 million in future guarantees the owner will need to set that money aside to cover future payments.

The rule really has no place in today’s NFL but it has become a legit reason for teams to not offer skill guarantees upon signing. In the past players used to receive larger signing bonuses (as a percentage of cap) than they do now, but the league’s cap managers have transitioned somewhat away from that model and instead use salary guarantees and a smaller bonus to maintain more roster flexibility in a contract. Overall the players are hurt by the lesser signing bonus in return for massive injury guarantees.

But regardless of the opinions of the rule, the rule is there and it is not going away any time soon. No person is going to be willing to put that kind of money aside for a contract so we now have an established system of injury only guarantees (injury guarantees are only funded following an injury) that become skill protected at the start of each league year when the payment is actually due. This rule makes it harder to do a contract such as the on Wilson is seeking.

Thinking Outside the Box

So how can two sides reconcile the argument?  I think we again need to think outside the box and look at this contract from a completely different perspective to take all factors into consideration.

The first thing the two sides need to agree on is a guarantee from a traditional NFL standpoint. From there we see the difference between the two sides, assuming Wilson is looking for an 80% full contractual guarantee. Splitting some of the numbers calculated above and using a 72% full guarantee rate I came up with the following being a reasonable pay out, that should be acceptable to Seattle based on the market.

TotalAPYFull GuaranteeRequestDifferential

While the full guarantee request is certainly massive, the important part to consider is the differential, which is really the additional pre-funded amount that needs to come from the Seahawks front office. The other portion of that number should simply be the cost of doing business in the NFL with a highly regarded quarterback.

For Wilson to receive the massive full guarantee the tradeoff first comes from that differential. That differential will basically be set aside for the entire term of the contract. Though some would be paid out over time to make this simple let’s just assume it’s stuck until the end of the contract. The Seahawks will either need to fund that by borrowing money or will simply forgo the opportunity to invest the money for the future. If we assume a 7% return (which is the higher of the two costs) the team loses in the ballpark of $7.8 to $9 million over the course of the contract due to the full guarantee differential.

If we subtract that we come up with Wilson’s new contract numbers:

TotalAdjusted TotalAdjusted APY

Wilson would now have about 88% of the contract fully guaranteed and in return the Seahawks get significantly more contract flexibility and remain whole for the cost of essentially fully guaranteeing the deal. You can use any numbers you want to adjust the contract (and include additional insurance premiums in the equation too for the added injury protection if you want), but this should be a reasonable way to arrive at a compromise that balances everything out.

Is it worth it?

That should be a legit question for Wilson. The QB position is unlike almost any other in the NFL. There are few players I can think of that were paid at a high level that did not make the fourth year of their contract, guarantees or no guarantees. From the last era of the monster contracts, Eli Manning, Philip Rivers, and Ben Roethlisberger all made it much further than that. Carson Palmer lasted quite a long time between Cincy and Oakland. Tom Brady and Drew Brees did it. Mike Vick went to jail and Peyton Manning was injured and quickly released before landing in Denver for nearly the same money. Really it’s the second tier players that don’t last, not guys considered elite.

Almost 100% of the time NFL player contracts are given out in today’s dollars with no adjustments for the future. So a $23 million contract in 2015 may not seem so crazy in 2018.  Is it worth giving up the extra money for that full guarantee, knowing that you will be pretty well compensated in the event of injury?  I think that is also a valid question if the sides accepted using an analysis like this when you do a tradeoff analysis.

I do think it would be difficult to justify having the highest APY while also having 80% of the contract guaranteed. At that point the team would see a more reasonable cash situation by simply tagging Wilson the next two years and then seeing where things go in 2018. That doesnt really benefit Wilson either since the protection at that point is year to year.

That said there should be very logical methods of compromise for Wilson. Seattle may have to adjust their contract philosophy a bit (typically 20-30% paid out as a signing bonus and no options) to make it work, but again that is normal for the NFL and a team with a superstar player at a premier position. Both sides benefit by getting a contract done this summer rather than playing the franchise tag game next February.

  • theowl

    Interest on the “set aside”! Wow, nicely done.

    I think the Seahawks should almost be fine waiting a year to make a deal. Unlike the Ravens/Flacco situation, the Hawks have plenty of cap space to pay Wilson the franchise tag. But, extending Bobby Wagner this year needs to be a priority. The Hawks can only tag one player next year and given the choice it won’t be Wagner. Once one of the two signs it gives leverage to the Hawks in negotiating with the other. Any news about Wagner’s negotiations?

    I don’t completely agree with you that guarantees in contracts are beneficial to the players. The more guarantees, the greater the chance for dead money in the future, which would result in less cap space available for future players’ salaries. Assuming the owners are only going to spend a certain amount, due to the cap, the players are really competing among themselves for the cash. I would argue that lower guarantees are beneficial to the team and the fans, and hurt players who become injured or lose value later in the contract… and stars. Thankfully players now usually only lose a year from a serious injury, so maybe this could be dealt with with injury guarantees.

    These are just observations mind you… I am really quite pro labor.

    • Nathan_12thMan

      My biggest worry about waiting a year? Our team looks the best it has ever looked (addition of Jimmy and Defensive depth and WR talent, etc) and our schedule looks to be an actual improvement over 2014’s in terms of when we play teams and where and our bye week placement. So, my point? I think the odds are strong (Vegas has our odds at the best) to make it to the Superbowl again. So what does it do to Russell’s leverage and him mentally to go to three Superbowls back to back to back? And if he wins this third one….the 50th Anniversary of the Superbowl…what are the odds that doesn’t embolden him and his agent to the “fact” that he deserves mega mega money?

      Its a weird feeling to want your team to go 16-0, get to the SB and win, yet at the same time know that if Russ isn’t signed before that happens, odds are us having that success all but puts a nail in the coffin of the Hawks getting a long term contract with him.

      • theowl

        Well, with the franchise tag, at least you have him for the next three years… at least. And there is no guarantee beyond each year. That is the thing about having a low franchise tag. No QB’s have hit free agency to push it up.

        • Jason Congleton

          Non-exclusive franchise tag next year is looking to be $20M+.If he wins the superbowl this year you can almost guarantee a team will be willing to offer the 2 1st round picks for him and big money to obtain his rights. With that said non-exclusive option doesn’t look very good. So then you must tag him with the exclusive tag – looking to be $25M next season. Now take either of those numbers and multiply by 1.44 to determine year 2 and year 3 numbers under the franchise tag. Not pretty.

          • McGeorge

            I agree with your analysis.
            Look at teams like the Browns and Jets and Bills.

            Do you chose Option A –
            spend draft picks (1st and 2nd rounders) for years, hoping for a decent QB, while most are busts and you as the owner have a finite lifetime.

            Option B – Sign Wilson away from the Seahawks for say 25MM and give up 2 #1s. You would likely have to give up those draft picks in a QB search anyway. And you get a good QB, even if he’s a little over paid.
            Instead of putting up with Mark Sanchez, Geno Smith, EJ Manuel, Brady Quinn, Johnny Football, etc.

  • Derek

    Interest for money set aside in escrow doesn’t count against the cap. Paul Allen has already demonstrated a willingness to spend exorbitant amounts of money on the team outside of the cap. It doesn’t seem like that’s an issue for him.

    • eYeDEF

      Still, I think he’d prefer not to if at all possible. Freeing up 100 million dollars in cash out of his own pocket independent of the cash flow of the team’s business operations and putting it in escrow is still a lot of dough. He’s not going to have it laying around and would most certainly have to liquidate holdings in something else he’s vested in to do it. Even as a multi-billionaire you’d always want amounts that large working to make money for you. That doesn’t happen sitting in escrow.

      • dbqp

        Should be easy to loan the money. You obviously have to pay the interest on the loan, but liquidating holdings seems out of the picture. Still, it’s a stupid rule.

        • eYeDEF

          Get a loan for 100 million dollars so you can put it in escrow to pay Russ? I suppose depending on what sort of rate he could get. It would beat liquidating holdings in something else and having to pay capital gains on that investment income. Just ridiculous that all these out of pocket expenses like interest and tax would have to be considered to pay Russ that way. It makes sense for owners to avoid doing that and I don’t see Wilson breaking tradition on that.

          But you’re right, it’s absolutely asinine they have such an antiquated rule in the books that just makes it harder for GMs and owners to be flexible.

      • Derek

        I’m pretty sure the Seahawks annual profit far far exceeds $100 million. Why wouldn’t they take it from there?

        • eYeDEF

          lol. You think the Seahawks have an idle 100 million sitting in an account that can be written off the books into escrow for Wilson without having it cripple their liquidity and the ability of the business to function? WAHAHA. Sorry man, you’re killing me with that. You’re talking about the amount of cash that would fund all the salaries in the entire organization through the course of a year at one time. And they’re going to have that sitting around doing what? Collecting a short term interest rate from a bank at 0.48%?

          No way. That’s not how the wealthy or well run businesses would ever treat liquid cash of that volume because it’s not the most efficient use of the extra flow. Typically, depending on their bylaws, excess cash deemed to be profits will be distributed to owners and shareholders quarterly and annually.

          • Derek

            I think the Seahawks exceed $100m in profit every season. The Seahawks have obviously known about the potential need for a large sum going into escrow this off-season for some time, so it would be very easy to set aside the appropriate amount over the last year. The most intelligent way to do so would be to structure investments so that the appropriate amount of money would mature during this off-season, allowing it to be easily sent to escrow or reinvested depending on need. You seem to think Allen has to pull this money out of investments, and that’s simply not true. It would be very easy for the Seahawks to fund it with only their yearly budget. I don’t think you understand how businesses operate nearly as well as you think you do.

          • eYeDEF

            Actually, I’m intimately familiar with how businesses operate, which is why I think you’re high.
            The closest we have of public disclosure as to how much NFL teams make is Green Bay, since they’re the only publicly held team, which is not a bad comparison seeing how they’re consistently a championship caliber team. They made close to 300 mil last year, but that was GROSS. After all the various expenses, the primary one being paying everyone’s salary in the organization from the top down, do you think they came anywhere close to 100 million in net profit? LoL. No way. Yes, they also make a percentage from revenue sharing from the NFL based on merchandising sales too which is not publicly disclosed, but that wouldn’t add that much more to the bottom line.

            So yeah, Allen could have told his CFO to earmark 100 mil to put in escrow for Wilson out of profits from last year, but like I said, in doing so it would sapped their liquidity and ability to function. Allen is not a stupid man, so I’m sure he didn’t tell his CFO last year to do that. It would also be ridiculous for him to do so when the contract had yet to even be negotiated yet.

  • mike jones

    “Almost 100% of the time NFL player contracts are given out in today’s dollars with no adjustments for the future.”

    I would have substituted the word *often* for the phrase *Almost 100% of the time*. more importantly than all nflk contracts, this special cohort of contracts (veteran highly capable qbs) very often do see large escalation if they are not taking home town discounts like brady/rogers/peyton.