In the last few days there has been much talk about the concept of “new money” in NFL contracts after a report about what the Giants are offering Odell Beckham Jr on a contract extension. Today PFT chimed in with a look and I think that just led to more confusion, at least on my Twitter feed, about how contracts are valued. So lets jump in and look at “new money” and other metrics that should be, but aren’t used, when crafting extensions.
So what exactly is new money and why is it important? The NFL effectively has two types of veteran contracts- extensions and free agent contracts. Free agent contracts are signed when a players previous contract has expired and he has no years remaining on the deal. While his leverage may be impacted based on a franchise tag designation the valuation of his contract is simple- add up the money in all contract years and divide it by the years of the contract. Pretty straightforward.
Extensions are different because the player is under a contract that he has to honor and that presents a difficulty in comparing the numbers. For whatever reason the concept of the extension seems to confuse people but the easiest way to think about it is that a team is making an effort to buy out a players free agency. In a good faith negotiation the two sides need to sit down and determine how much the player would earn if his contract expired and he was signed to a new deal the following year. Part of that analysis has to be the player honoring his current contract because if he didn’t his contract would toll and he would not be a free agent.
To determine the true contract valuation we subtract the current contract years and salary out of the extension to come up with the “new money” total value and annual value. Its not complicated and it makes sense to better compare apples to apples. We’ll use Beckham as an example to show why it makes sense.
For Beckham we have two scenarios to consider. One is that Beckham signs a five year extension before the start of the regular season. In scenario two he doesn’t sign a new contract until after the season. For the sake of argument well use the same numbers as PFT and say the Giants feel comfortable offering Beckham $17.1 million a season in new money over five new years. While variables can change the year (injuries, performance, other contracts around the league, etc…) that drive a price up or down all things being equal and assuming a good faith offer the Giants offer the next year will remain $17.1 million. I estimated a basic cash flow estimate of that type of contract and will compare it with the argument put forth in the PFT article.
|No New Money||$31,000,000||$43,000,000||$58,375,000||$71,500,000||$85,600,000||$102,600,000|
Obviously the no new money valuation looks best but its not reality because its not a realistic scenario. Why would the team potentially pay an extra $8.6 million when that scenario doesn’t exist? If he doesn’t take scenario 1 (the extension), scenario 2 kicks in (the free agent/franchise tag offer). Both land in the same spot its just a question of how they get there. The third scenario never happens because the Giants made a good faith offer about what Beckham would get in free agency.
While one can and should argue that Beckham is worth more than the $17.1M offer (and IMO he should not consider an offer less than $20M a year in new money) that’s not the point here. Its just that if the team plays out a scenario analysis in which they believe their offer is very fair they can never justify the different valuation, especially when they control the free agency variable for a player like Beckham.
There are other issues that would exist for Beckham and others if they don’t look at new money. The discussion centers around being above Antonio Brown, except they are using the new money valuation on Brown not the effective contract value. If you want to compare apples to apples here are the effective APYs of the WR market.
When you look at that its pretty easy to see why the Giants find a good faith offer to be under Watkins because players far better than Watkins are all under him. It also should drop the overall money valuation to $96.6M (besting top of market by $100,000) which is pretty close to the new money valuation in the first place ($17.6M a year in new money).
The problem really isn’t with the way that we value the contracts its in the acceptance of negotiating norms and not pushing forward on the free agent valuation. When I work on consulting arrangements I typically look at APY inflation based on the cap, new money guarantees, effective guarantees and cash flows. Lets start with the way we should be looking at setting floors for the annual value. Because Beckham is such a special player I will include two historical contracts. Here are the inflated APYs among WRs.
|Player||Year Signed||Inflated APY|
Every contract on this list, other than Thomas, is an extension so we easily have out apples to apples situation to Beckham and a real range of where prices should be. Beckham should not accept anything less than $18.5M and should be able to make a realistic argument that he is worth well over $20 million. This is a major problem with contracts in that too often it seems as if the player side is too accepting of a current market rather than trying to frame his player in a more historical context.
Secondly the guarantee concept is totally lost on so many extensions and this is where teams really take advantage of the situation. If we are valuing contracts by new money we absolutely have to value guarantees by “new guarantees”. A good faith effort is buying out free agency and it should also reflect the same money that would be earned in guarantees.
If we look at Jarvis Landry, DeMaryius Thomas, and Sammy Watkins we have an idea of what a player should earn as a guarantee as a free agent. Here are their guarantees and the % of contract guaranteed.
|Player||Injury Guarantee||% of Contract||Full Guarantee||% of Contract|
You can adjust these numbers but they outline the basics of how a contract should be constructed. The problem is that everyone pumps up a total number. For example Mike Evans signed an extension this year with a “record” $55 million guaranteed except he was already guaranteed this year to earn $13.258 million. That brings his new guarantee number down to $41.7 million, or just 50% of the new value of his contract. How is that equitable to the free agent type players? This is where teams derive such a benefit and its lost on everyone. Here is how the “new guarantee” measures up for the top extensions in the NFL.
|Player||New Injury Guarantee||% of Contract||New Full Guarantee||% of contract|
Now some of these players are on teams that simply don’t do guarantees (Brown, Green and Adams), but players are giving up about 10% on total guarantees and a whopping 25% on fully guaranteed salary. That translates into something like $20 million in full guarantees and $8 million in injury protection on a five year high end extension.
That leads to the final point which is the virtual guarantee. We often look at 3 year cash flows when identifying the “safe” money in a contract. This is a very old method that was very valuable back in the day when teams struggled to manage their salary cap and were forced to use big signing bonuses and option bonuses to comply with the cap. Releasing those players before year 4 proved a challenge because of the dead money in the deal so the three year cash flow became a good standard.
Things are vastly different in 2018. Teams are now able to have millions in cap room making dead money more or less irrelevant for all but a few teams. The huge cap surplus that exists allows teams to use no signing bonus money these days making dead money not even exist in a contract beyond the guaranteed money. For extensions its even worse.
Again when we are comparing apples to apples agents have to demand to structure the contracts in a way that benefits the players to protect that three year “new” cash flow. Whether it is by insisting on prorated bonuses, guarantees that extend deep into the extension or just very aggressive early contract payouts the player side has to realize what it potentially gives up by agreeing to an extension that doesn’t take this into consideration. This is an issue for all players though who should be studying contracts signed by the likes of Mario Williams, Ndamukong Suh, and Marcell Dareus rather than just doing contracts.
None of this is to say that teams should not get a discount by taking on the risk by extending early but most of that is baked into the fact that they are being paid on markets a year early. Had DeAndre Hopkins waited until this year to sign a contract and seen players like Landry getting over $15 million and Watkins $16 million you can bet his price would have risen. That was the discount.
The problem isn’t the new money concept or valuation its just everything else that goes into it. Teams will pay for players. They always have and always will, but players need to be thinking about setting new highs in the market rather than settling for a few norms that get touted as some new standard when in reality the player is being shortchanged every step of the way.