How does the NFL salary cap work?

We bet Roger Goodell, the NFL commissioner, is glad he didn't have to negotiate a salary cap for the $44.2 million he received in compensation in 2012.
We bet Roger Goodell, the NFL commissioner, is glad he didn't have to negotiate a salary cap for the $44.2 million he received in compensation in 2012.
© Eric Thayer/Reuters/Corbis

In major league sports, money talks, and it surely screams the loudest in the NFL. With 2012 annual revenue of $9.5 billion, the NFL is the most lucrative sport in the world, blowing away Major League Baseball, the Premier League, the NBA and even NASCAR [source: Isidore].

While the league makes oodles of cash, so do its players. Still, the NFL and the union representing the league's players have rules to keep the money in check. In 1994, both sides agreed to institute a so-called salary cap. The idea was to keep player salaries from increasing at the rate they were at the time.

The salary cap refers to a set amount of money that each of the NFL's 32 teams is allowed to spend on player salaries for any given league year. When the league introduced the cap in 1994, it was set at $34 million. By 2014, the cap had soared to $133 million, a $10 million increase over 2013. The salary cap only applies to players, not coaches, trainers or other personnel. Each season all teams combined must spend on average 95 percent of the cap or more on salaries. If the league doesn't reach this limit, it must pay the players the remaining amount [sources: Brooke, Lackner].

In the early days, the NFL's salary cap was based off its gross revenue, which included money earned from national television contracts, ticket sales and merchandise sales. In 2006, the cap included such things as naming rights for stadiums, sales of premium seats and local advertising. As of 2014, the cap includes all streams of revenue. The calculation is based on a complicated formula, which often changes with each collective bargaining agreement between the players and the league. Teams must comply with the cap before the first day of the league year [sources: Brooke, Lackner , La Canfora].

Circumventing the Cap

Peyton Manning is introduced as the Denver Broncos quarterback after signing a $96 million, five-year contract with the team in March 2012. Think the Broncos and Manning just split up that money evenly across the five years? Not quite.
Peyton Manning is introduced as the Denver Broncos quarterback after signing a $96 million, five-year contract with the team in March 2012. Think the Broncos and Manning just split up that money evenly across the five years? Not quite.
© Dustin Bradford/Icon SMI/Corbis

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.

Penalties and League Balance in the NFL

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].

Author's Note: How does the NFL salary cap work?

Do salary caps help make a sports league competitive? The short answer is probably yes, although there are other, different factors including luxury taxes and reverse-order drafts. Still, an argument can be made that the salary cap doesn't hurt. Within the last 30 NFL seasons, 14 different NFL teams have won the Super Bowl, while 25 different teams have appeared in the big game. Major League Baseball, which also has a salary cap, has similar numbers: 18 different teams have won the World Series in 30 seasons, and 25 different teams have made it to the series. The NBA, which has a salary cap, seems to be the least competitive. In that period, just eight different teams have won the NBA Finals, while only 19 different teams have made it to the finals.

Related Articles

Sources

  • Brooke, Tyler. "How Does the Salary Cap Work in the NFL?" Bleacher Report. June 10, 2013. (April 1, 2014) http://bleacherreport.com/articles/1665623-how-does-the-salary-cap-work-in-the-nfl
  • Isidore, Chris. "Why football is still a money machine." CNN Money. Feb. 1, 2013. (April 1, 2014) http://money.cnn.com/2013/02/01/news/companies/nfl-money-super-bowl/
  • La Canfora, Jason. "2014 NFL salary cap: Where each team stands as free agency looms." CBSsports.com. March 3, 2014 (April 1, 2014) http://www.cbssports.com/nfl/writer/jason-la-canfora/24466063/nfl-salary-cap-where-each-team-stands-as-free-agency-looms
  • Lackner, Al. "Salary Cap FAQ." Ask the Commish.com. (April 2, 2014) http://www.askthecommish.com/SalaryCap/faq.aspx
  • Neiger, Chris. "How Salary Caps Changed Sports." Investopedia. Sept. 28, 2010. (April 3, 2014) http://www.investopedia.com/financial-edge/0910/how-salary-caps-changed-sports.aspx
  • Trotter, Jim. "Cowboys, Redskins file complaint over salary cap penalties." Sports Illustrated. March 25, 2012. (April, 3, 2014) http://sportsillustrated.cnn.com/2012/football/nfl/03/25/cowboys.redskins.complaint/index.html