PFR Originals News & Rumors

When an NFL team finds itself short on cap flexibility and in need of some space, one of the most effective short-term fixes is to restructure a player’s long-term contract. While cutting or trading players can often be solutions as well, a contract restructure allows the team to keep its roster intact while also providing immediate cap relief.

The base salaries of NFL contracts typically aren’t guaranteed, but players can receive guaranteed money in the form of signing bonuses. While those bonuses are considered to be up-front payments, for cap purposes they can be spread out over up to five years of the contract. For instance, if a player were to sign a four-year deal with a $12MM signing bonus, that figure would prorate equally over the four years of the contract, amounting to a $3MM cap hit per year. If a team were to release that player one season into the deal, the club could avoid paying most of the player’s annual base salaries, but would still be on the hook for the remaining bonus money, along with the cap total for that money.

As such, the most common form of contract restructuring involves converting a portion of a player’s base salary for a given year into a new signing bonus. That bonus can then be spread out over several years, moving it away from the current season.

This is exactly the sort of agreement the Ravens and Tony Jefferson reached this offseason. In 2017, the Ravens signed Tony Jefferson to a four-year deal worth up to $37MM. This year, the Ravens moved some of that cash around to give themselves breathing room under the cap. Baltimore converted $5MM of Jefferson’s $6MM base salary into a signing bonus, creating $3.3MM in space for 2018. Meanwhile, Jefferson’s 2019 and 2020 cap numbers increased by $1.67MM.

Restructuring a contract by converting base salary to a signing bonus creates immediate relief, but also creates problems in future years. A year from now, the Ravens may have to make another move with Jefferson, which will likely mean restructuring his deal once again, to reduce a $12.657MM cap number for 2019.

There are ways a player can remain under contract with a team while also helping to create or maintain both short-term and long-term cap flexibility. A player agreeing to take a pay cut, for instance, could allow a team to reduce his current cap number without necessarily moving that money further down the line in the contract. However, that generally happens in situations in which the team’s leverage outweighs the player’s leverage.

In most cases then, a restructured contract that sees base salary converted into bonus money is the simplest short-term fix for a club. The bill will come due eventually, but restructuring a deal allows a team to put off a more significant decision for at least one more year.

Note: This is a PFR Glossary entry. Our glossary posts explain specific rules relating to free agency, trades, or other aspects of the NFL’s Collective Bargaining Agreement. Information from Joel Corry and Over the Cap was used in the creation of this post.

This year’s biggest free agents have already come off of the board, but there are still plenty of notable veterans available, including Antonio Gates, DeMarco Murray, Dez Bryant, Tre Boston, and Johnathan Hankins. When these players eventually sign, they’re likely to have contract incentives built into their deals. With that in mind, we wanted to give a refresher on contract incentives and their various forms.

Signing bonuses can sweeten the pot for free agents and are largely self-explanatory, but incentives are a bit trickier. At the most basic level, contract incentives are designed to reward a player for his performance — in some cases, these financial rewards are linked to individual or team production, while other incentives can be earned simply by the player earning a spot on his team’s active roster from week to week. These incentives are divided into two categories: Likely to be earned (LTBE) and not likely to be earned (NLTBE).

Under the NFL’s definition, a likely to be earned incentive is generally one that was achieved the year before. So if a running back racked up 1,300 yards on the ground in 2017 and has an incentive in his contract that would reward him for surpassing 1,200 yards in 2018, that incentive is viewed as likely to be earned and counts against his cap hit from the start of the year. On the other hand, a back who has never surpassed 700 rushing yards in a season could have an incentive on his deal for 2014 that would reward him for rushing for 800 yards — such a bonus would be considered not likely to be earned, and wouldn’t count against the player’s cap number.

Because the player’s or team’s performance in a given season dictates whether or not the incentive is actually earned, the player’s cap number is sometimes altered after the fact. For instance, there’d be no change if a player met the criteria for a $50K LTBE incentive, but if he failed to earn that incentive, his team would be credited with $50K in cap room for the following season. Similarly, if a $50K NLTBE incentive isn’t reached, nothing changes, but if a player does earn that incentive, his club’s cap space for the following season is reduced by $50K.

A simple incentive linked to yardage or touchdown totals in a season isn’t too hard to track, but there are more convoluted forms of bonuses. Let’s say a player coming off an injury that limited him to six games played signs a contract that would pay him $500K in per-game roster bonuses. That player would be considered likely to appear in six games, but unlikely to appear in more beyond that. So, of his $500K in roster bonuses, $187,500 would initially count against the cap, as the LTBE portion.

Here are a few more notes on contract incentives and how they work:

• Any incentive that is considered to be in the player’s sole control, such as weight bonuses, or his presence at workouts, is considered likely to be earned.
• Any incentive in the first year of a rookie contract is considered likely to be earned.
• Individual performance incentives can be linked to most basic statistical categories, such as yardage, yards per attempt, and touchdowns. However, more obscure stat categories typically aren’t allowed for individual incentives. For instance, a receiver couldn’t have an incentive tied to receptions of 20+ yards. Meanwhile, a defender could have an incentive linked to sacks or interceptions, but not to tackles for a loss.
• In some cases, individual performances can also dictate the value of traded draft picks. For example, the Jaguars making the playoffs in 2017 altered their trade for Marcell Dareus. The Bills received a conditional 2018 sixth-round pick for Dareus in the parties’ October trade, but that pick became a fifth-rounder when the Jags reached the postseason.

Note: This is a PFR Glossary entry, modified from an earlier entry by editor emeritus Luke Adams. Our glossary posts explain specific rules relating to free agency, trades, or other aspects of the NFL’s Collective Bargaining Agreement. Information from Russell Street Report, Over The Cap, and Salary Cap 101 was used in the creation of this post.