Salary Cap Management
Managing salary caps is one of the most difficult things to do in the world of sports. The salary cap is designed in a way to make sure teams continue to spend money while not overpaying and sending their franchises into bankruptcy by placing a limit on how much teams can spend. Many people in the public like to believe that managing the millions of dollars franchises pull in, being able to pay players should be no problem, but that is a common misconception.
When trying to figure out whether or not spending money a player is worth it or not, that is one of the hardest things to do. This tends to be difficult because you are trying to project whether an investment will be worth it years down and the line and if its worth it to put on your payroll and cost you in the salary cap area. The general concept used to manage salary cap is accrual accounting.
Accrual accounting is an accounting method that records revenues and expenses when they are incurred whether or not cash is exchanged or not. Signing bonuses create the most problems when dealing with the salary cap. For example, if a player signs a 3 year deal with a $9 million signing bonus, the bonus will be split into 3 years and charged to the salary cap that way.
The NFL happens to be completely different however. Every player selected in the first round receives a fully guaranteed contract. What this means is no matter what happens whether it be injury or very early retirement, the player will get the full value of the contract. This is different from every other league as most player contracts in the athletic world tend to protect the team from the presented issues above, however the NFL player contracts do not allow the teams to do this and the players will always receive the money they signed on the contract.
All in all, NFL contracts are both simple and complex. The importance of understanding the concept of a salary cap in any league cannot be understated or teams would run into lots of trouble financially if they do not adhere to the policies instituted by the league.
Ben and Jerry’s strategy for salary management
It is a common belief that being a chief executive entitles you to receiving great individual pay. In many cases this is true and critics have argued the setting of CEO pay creates rifts among the workers who work under the CEO. Inflation is big issue in the US when it comes to worker salaries. According to a survey from Pearl Meyer & Partners, the average chief executive earned $10 million in total compensation which was a 13 percent increase over 2003. The average American worker earned about $27,485 in 2004 which was just 2.2 percent higher than the year before.
Many experts have argued that CEOs bring much more to the table other than their skills. They are a part of a ‘privileged class’ that other everyday workers are not because they are the “star and face of the company”. Chuck Pappalardo, the managing director of the firm Trilogy Venture, states “Not everyone is capable of running a truly global company. Companies pay them for giving over their entire lives to the company. They make a lot of money, but you have to compare what it takes to do it.”
Experts say that part of the problem pertaining to executive compensation packages is how they are determined. Every company has a compensation committee, which is composed of peer executives from other corporations. The reason why this is seen as a counterintuitive issue is these other executives have an incentive to see a compensation increase because it would result in their own salaries being increased.
Bill Strahan, a senior consultant of Philadelphia-based Mercer Human Resources Consulting, believes “Executives are not the the enemy. Finding people who are both willing and capable to do what it takes is difficulty.” It is also believed that the talent pool for jobs has grown in recent years in an attempt to include more managers with the skills to run companies. A likely reason for this would be if there were more supply and less demand for people with the executive skillset, there would be a decrease in compensation.
Ben and Jerry’s had a rule during the early 80s that no employee could make more than 5 times what the lowest paid worker was paid. This plan resulted in CEO pay being capped at $81,000. It is believed that the nature and risks CEOs have to manage, this results in the disproportional impact on the business and community and is a justifiable reason for this lob-sided pay.
Taking less money and its effect in sports
For years, former New England Patriots Quarterback Tom Brady, took less money when it came to contract negotiations to help the team stay competitive around the league. Money has always been a big problem in the NFL when it came to roster construction because it cost lots of money to pay every player on the roster. The method used by Brady resulted in one of the most historic dynasties in all of American sports.
The best and highest paid players in the NFL rarely see the end of a contract. When it came to Brady and the Patriots, they frequently adjusted his deals to lower his base salary and used the extra money created by the use of this method to address other roster needs while Brady just received more money up front. When projecting out the money that Tom Brady could have made throughout his career, he could have been one of the richest men in sports at a very early point in his career due to the many accolades he received in his early years.
If Brady received a new contract every 4 years starting in 2005, using the biggest QB contracts from that season, it would have cost the Patriots in the range of $400 million which would have seriously prohibited any serious roster rebuilding via the draft and free agency. Using the contract of Matthew Stafford in 2017, Brady at that point in his career being 40, he gave up close to $80 million in an effort to aid his team in their cap management and roster construction.
Effect of good cap management in sports
The Seattle Seahawks of 2013 were one of the most dominant teams in NFL history. Many people associate this success with the great players and their performance on the field. While it has a great deal to do with that, it is really a triumph of cap management. The star Quarterback and Cornerback of that team were both playing under rookie contracts that did not pay much money to them individually, which resulted in the team having lots of cap flexibility allowing them to sign and keep more key players to the team such as the two best free agents in the league that season and their big play receiver to a big contract.
The NFL’s salary cap has been finely tuned over the last few decade to maximize competitive balance among teams instead of allowing certain teams to run roughshod over the rest of the league. The chart shown depicts teams as red dots determining whether they were getting enough bank for their buck and not surprisingly, the top two teams in the league in terms of player production under their salary caps were the two best teams in the league and played in the Super Bowl that season. The best way to beat the cap is player evaluation and drafting, however another possible method is through intelligent accounting.
The 2013 Detroit Lions were one of the most weighed down teams as a result of several massive contracts they had to pay out. In order to find a solution to this problem, they used very smart accounting strategies. The best methods to use with the accounting strategy are prorated bonuses, restructuring, incentives, and cap carryover. Roster bonuses are given up front so they are not charged directly to the cap, restructuring is used to spread money out if needed for cap relief, incentives are almost like little challenges players can meet in order to earn extra money, and carryover is simply using the leftover money from the season before to combine with the cap for the following season. The use of these methods allow for cap flexibility and are used by teams to help keep them competitive with the better player evaluation teams in the league.
Quarterback Contracts and effects on long term salary cap
Quarterbacks are one of the most important positions in all of sports, if not the most important. As a result of their importance, their salaries have undergone serious inflation over the past 2 decades. Regardless of their importance to their teams, there has been a common point made that these utterly massive contracts being doled out to Quarterbacks have a serious effect on their team and their ability to keep a good roster around them.
Kansas City Chiefs Quarterback Patrick Mahomes is the most recent absurd contract signed by Quarterback in the NFL. The Chiefs over the years were able to develop their roster using bridge QBs such as Alex Smith who was a placeholder until the Chiefs found their guy in Mahomes. The result of this roster building was a record shattering team in terms of offensive production with the abundance of talent they had accrued over the years of rebuilding. While Mahomes was on his rookie deal and the talent around him being tied down, the Chiefs were able to hoist the Lombardi Trophy in a matter of 2 years after Mahomes was drafted. Mahomes was on his rookie deal then only earning $4.6 million in that season, but with his new $500 million contract dollar contract it may signficantly hinder the Chiefs ability to win another Super Bowl.
Over the last nine years of the new NFL CBA, many QBs have helped their teams reach the big game. The common denominator of those players: many of them have been on their rookie contracts. With those Quarterbacks making less money than they would be making post extension, it allowed for their teams to have more flexibility to spend money on other positions on the roster, bettering their teams and their chances at the championship.
One thing that remains consistent in relation to QBs and their teams salary caps is that there is a common percentage that many seem to take up of that salary cap. Since the new CBA in 2011, many QBs maxed out at around 15% in regards to how much of the salary cap they took up for their teams. There have only been 12 instances in which a QBs salary cap hit exceeded 15%, however it has been happening more and more recently as the market for the position resets itself year after year. The reason for this common percentage of the cap being taken by QBs is that as contracts have skyrocketed, so has the salary cap. The salary cap has increased by $68.2 million since 2011 and has led to contracts inflating quickly.
Due to the COVID-19 pandemic, the salary cap may continue to drop, resulting in the percentage of cap being taken by QBs increasing seemingly tenfold. In regards to Mahomes’s contract specifically, the Chiefs have pushed the big years of cap hits out until the 2023 season. Until then, we will wait and see if the most recent massive QB contract will effect the Chiefs in the long run as the salary cap fluctuates in value.
The idea of QBs on high salaries is that if the player can make up the financial disadvantage with their play, then no contract can be too much. Even the half a billion dollar contract being paid to Patrick Mahomes.