Signing Bonuses- Circumventing the Salary Cap
While the National Football League has a “salary” cap in that all teams have to be under the defined amount 365 days a year, with March 1 serving as the deadline for when contracts roll over from one season to the next, teams have developed ways of circumventing this cap- signing bonuses.
When most people read that a player signs a new contract, they see that player X signed a 5 year, 20 year million dollar contract and assume that the player is earning 4 million dollars per year. This, however, is not how the salary cap works.
In order to make a contract cap-friendly, teams “backload” contracts putting the majority of payment in the out years.
Year 1: $400,000 (league minimum)
Year 2: $1.5 M
Year 3: $1.5 M
Year 4: $7 M
Year 5: $9.6 M
Signing bonus: 10 M
With a contract like this, a player who signs a deal like that would count $2,400,000 against his team’s salary cap for the first year of the contract, rather than the $4 million logic would dictate he cost. The team thus saves $1.6 Million dollars under the cap by the way they’ve structured the contract.
As time wears on, and the player’s additional value to the team does not meet his salary cap hit, teams then choose to either renegotiate or cut players. A player’s signing bonus is generally prorated over the life of the contract. Thus, Player X above maintains a relatively low cap number for the life of his contract. If he is cut by the team, because NFL Contracts are not guaranteed, the team pays a cap penalty of the remaining portion of his signing bonus.
This is part of the reason for contracts constantly being negotiated and yearly rash of player cuts around the March 1 deadlines.
Because signing bonuses often call for players to receive money that would not be part of the DGR, this creates the need for owners to find other short-term revenue streams, as the discussion on stadiums and lessons later will show.