How does the NFL salary cap work?

Often when you hear of a NFL player signing a multiyear contract, it's within the context that "so-and-so inked a four-year deal worth $12 million." While that's true, it is more complicated than dividing the total contract by the number of years and then applying that figure to the salary cap. Teams often "back-end" contracts by applying most of the base salary in the last two or three years of the agreement. In theory, this lessens the impact on the salary cap in the early years.

However, before the big money kicks in at the end of a back-ended contract, the team can get around the salary cap by cutting the player. That means the team doesn't have to pay the player the money for the remaining years of his contract. The team also could negotiate another contract with the player that's friendlier to the limitations of the salary cap [source: Lackner].

Not surprisingly, that's what usually happens as draft day approaches. Teams will often "make room" under the salary cap by releasing players or renegotiating contracts. For example, one sportswriter speculated that the Pittsburgh Steelers could save more than $10 million in 2014 by renegotiating Troy Polamalu's contract and by cutting Ike Taylor [source: La Canfora].

You might now ask yourself why would a player sign a back-ended contract if he isn't guaranteed the money? Two word: signing bonuses, or guaranteed money that's doled out whether the player stays or not.

Teams have found a way to finesse signing bonuses within the salary cap, too. Let's say a football player right out of college signs a deal worth $22.1 million over 4 years, plus a $14.5 million signing bonus. To minimize the impact on the salary cap, the team spreads the bonus over the life of the contract, in this case, $3.625 million each year. Now, let's say, a superstar quarterback with two years left on his contract signs a five-year extension with a $35 million signing bonus. Under the current rules, the bonus affects the cap every year of the player's contract (in this case seven), not just the extension years. This means $5 million of the signing bonus hits the team's salary cap each year of the seven years [source: Brooke].

There are drawbacks for the owner, however. Because the signing bonus is guaranteed, if the player quits, is released, traded or waived, all of the bonus money that was being prorated throughout the length of the contract has to be paid when the player leaves. So, if a team releases its star player after the third year of his contract, or the player quits after the first year, the entire remainder of the bonus will have to count toward that season's cap. The NFL has limited the number of years in which a signing bonus can be prorated.

A team can face huge penalties if it goes over the cap, or if it tries to dance around the limit. In 2012, the NFL reduced by $46 million the salary caps of the Washington Redskins and the Dallas Cowboys. The Redskins lost $36 million in salary cap space, and the Cowboys took a $10 million hit after "front-loading" contracts in 2010 when there was no salary cap in place [source: Trotter].

The NFL warned teams not to structure their contracts that way. The league said that by dumping salaries into the uncapped year, both Washington and Dallas would have had more money in upcoming seasons to pay for high-impact players and veteran stars. According to the NFL, the two teams "created an unacceptable risk to future competitive balance" [source: Trotter].

So what does the salary cap mean for you? Research shows the cap doesn't affect the price of tickets and merchandise, but it does affect the way a team keeps and acquires players. More important, the cap allows bad and good teams to compete on a level playing field. In theory, and sometimes in practice, a not-so-good team can lure a major talent away from a better team because everyone has the same amount of money to work with. As a result, many experts agree that the salary cap allows sports teams to achieve a competitive balance [source: Neiger].