Creative contracts: signing bonuses and void years

The NFL’s salary cap is a hard cap. However, accounting and contract maneuvers can help teams create salary cap room in a current season, though not without impacting the salary cap in a future season.

In this post we will discuss the basics of signing bonuses. We will also discuss a contract mechanism which teams have used to have portions of a signing bonus allocated against the salary cap in a specific future season.

Signing bonus basics

Signing bonuses are guaranteed and usually paid out at or near the beginning of the contract. This can cause a cash payout by the team significantly higher than the amount that that same bonus is counted against the salary cap for that first contract year. For salary cap purposes only, a signing bonus is allocated over the years of the contract up to a maximum of five years.

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A large signing bonus may allow a player to receive a disproportionate portion of his pay upfront depending on how the rest of the contract is structured. Signing bonuses are also guaranteed, so there is a double benefit for the player.

Nick Foles’ signing bonus

For an example of how signing bonuses work from a cash and salary cap perspective, let’s take a look at the contract that Nick Foles recently signed with the Jacksonville Jaguars.

Foles signed a four year $88,000,000 contract with the Jaguars. His contract included a signing bonus of $25,000,000, guaranteed Foles $50,125,000 overall, and averages $22,000,000 per year over the four years of the deal.

For this post, we are going to focus primarily on the signing bonus and first year payout. See here for the full details of Foles’ $88,000,000 contract.

In 2019, Foles will earn his entire signing bonus of $25,000,000, his base salary of $5,000,000, a roster bonus of $500,000, and a workout bonus of $250,000. In total, Foles may take home $30,750,000 during his first year with the Jaguars.

Foles’ signing bonus salary cap charge

Foles’ cap charge will only be $12,000,000 in 2019. The difference between the salary cap charge and the actual cash paid by the Jaguars in the first year of the contract will be $18,750,000.

Why is this? It’s simply accounting.

Because Foles’ contract is for four years, for salary cap calculation purposes, his signing bonus will be divided equally over those four years, resulting in a salary cap charge of $6,250,000 for each year of the contract. To this number you add his 2019 salary, roster bonus, and workout bonus to get to the $12,000,000 cap charge for 2019.

The benefit of a signing bonus to the player is the amount of upfront and guaranteed money paid to the player. The advantage to the team is the ability to create salary cap space for the current season by amortizing the signing bonus over all of the years of the contract.

If all goes well and the player plays out the full term of the contract, this is a win-win for the player and the team. However, if the player doesn’t live up to expectations and is cut or traded, the impact to the salary cap can be extreme.

Upon a player having his contract terminated or the player being traded, all remaining amortized signing bonus amounts are escalated and applied to the that team’s salary cap in that season. This is purely an accounting mechanism, as remember that the signing bonus was paid out previously.

For purposes of this post we are assuming that any contract termination would be prior to June 1st and that the player is not designed as a June 1 cut. The salary cap escalation of signing bonuses is calculated differently in this scenario. This will be explained in a future post.

If for whatever reason the Jaguars trade or release Foles after the first season, the remaining signing bonus amounts applicable to the remaining years of the contract will immediately be applied to the cap. In this case, the result would be $6,250,000 times the three years remaining on the contract.

This $18,750,000 will be applied to the salary cap in 2020 for a player no longer on the team. Note that this charge does not include any additional guaranteed salary, which would also be applied to the salary cap. In the case of guaranteed salary, not only would this count against the salary cap, but as that cash has not yet been earned, the team would be responsible for the payment of these guaranteed amounts as well.

Escalation of signing bonus prorations could have a major impact on a team’s ability to manage its salary cap and roster if this salary cap hit is not anticipated. Clearly teams do not plan to move on from a player they have signed to a deal with such a large signing bonus so quickly. But, it does happen. See the Antonio Brown example from this offseason.

Signing bonuses allow teams to be strategic with salary cap space

Sometimes, from the team’s perspective, they will sign a player and include a signing bonus which will get allocated over the years of the contract, fully intending to renegotiate or terminate the player contract and take a dead money salary cap hit for the remaining bonus amount (after having already paid the bonus in cash in the first year).

One of the reasons that teams will do this is to create additional salary cap space during the year that the player is signed to better manage the salary cap. For example, if team management feels that they have a team that can compete for a championship, or if salary cap room needs to be created to sign a star player to a mega-deal, a team may use this salary cap management contract mechanism.

The Ronald Darby contract

An extreme example of how this could work is how the Philadelphia Eagles have structured the new contact of Ronald Darby.

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It has been reported that Darby’s contract is for one year with a maximum value of $8,500,000 assuming Darby reaches all of the incentives in the contract. The deal includes a $3,500,000 signing bonus, a $1,000,000 base salary, up to $2,000,000 in roster bonuses ($125,000 for each game) and up to $2,000,000 in other not likely to be earned incentives.

Only likely to be earned incentives count against the salary cap for that season. Incentives are likely to be earned if the player reached the milestone in the prior season. Because of Darby’s injuries, he was not on the active roster for every game of the 2018 season. Only $1,125,000 of the roster bonus counts as a likely to be earned and is therefore counted against the salary cap. The remaining $2,000,000 of not likely to be earned incentives do not count against the salary cap for this season (if earned, these values will be added to the cap for the next season).

Darby’s salary cap number for 2019 is only $2,825,000, consisting of the $1,000,000 base salary, $700,000 of the signing bonus (the full $3,500,000 evenly divided across the five years of the agreement) and the $1,250,000 likely to be earned roster bonus (of the maximum $2,000,000 roster bonus).

But I thought it was a one year deal, so how is the signing bonus allocated over five years?

When you dig deeper, the contract is actually a five year agreement for a total of $66,500,000 (not including the $2,000,000 in not likely to be earned incentives). In addition to the $6,500,000 cash paid in year one (which only counts against the cap for $2,825,000 in year one), Darby’s contract includes salaries of $15,000,000 for each of the last four years of the contract.

The value of the full contract was first reported, to my knowledge, by Reuben Frank. See his article here which discusses this contract as well as a couple of other more complicated contracts.

So how can Darby earn his $15,000,000 salary for each of those seasons? He can’t, at least not under the same contract.

There is a provision in Darby’s contract that voids the final four seasons of the contract if Darby is on the Eagles’ roster 23 days before the start of the 2020 league year.

Once that provision is triggered, all remaining amortized signing bonus amounts escalate onto the 2020 salary cap. The result will be that Darby no longer will be playing under that contract for the Eagles in 2020 (he could still play under a different contract for the Eagles) and the remaining $2,800,000 of Darby’s signing bonus will be applied against the salary cap in 2020 (remember, this full amount was already paid; this escalation is for salary cap purposes only).

So why would a team do this?

  1. It saves salary cap space to use towards other roster needs in the first year of the agreement. Darby’s salary cap hit would have been $5,625,000 (not including the not likely to be earned bonus amounts) instead of $2,825,000 if his agreement was structured as a one year agreement.
  2. If the Eagles have unused salary cap space at the end of the 2019 league year, the Eagles can simply carry over this unused space to the 2020 league year. So no harm in saving as much salary cap space as possible for use in the current league year.
  3. Any salary cap escalation amount will reduce the amount of available cap space. However, the trend is for salary cap space to increase year over year. By moving this salary cap allocation forward by even one year, the percentage of the salary cap used will likely be less in the following league year then it would have been if it was fully charged in the first year.

Hopefully this gives you an idea of how a signing bonus works from a salary cap perspective, and how teams can manipulate, to some extent, the year in which the signing bonus amounts will be applied to the salary cap.

For additional detail relating to the CBA please see my CBA Summary.

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