How Does The NFL Salary Cap Work?

The National Football League has this fun thing called a Salary Cap. It keeps all of the 32 teams in check, giving guidelines for how much they can pay players. It was introduced in 1994 and was set at 34.6 million dollars. Today, the Salary cap has grown almost 6 times that amount. Let’s break down some of the biggest parts of the salary cap.

The Basics

The NFL has a hard salary cap, meaning teams cannot go over it. Other leagues with a soft salary cap, such as the NBA, receive fines, called a luxury tax if they go over the cap limit. We have a breakdown explaining the NBA salary cap too, you can check that out here. The NFL’s hard cap is different in the fact that a team pretty much doesn’t even have the ability to be over the cap. All contracts signed between teams and players have to go through the NFL office and, and if the contract doesn’t fit within the team’s salary cap, the league says “nah, try again”.

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The NFL salary cap is tied to the NFL revenue stream. As the NFL makes more money, the cap will increase and give the team the ability to pay players more. The salary cap has risen over time as revenues increased, but it took a small hit due to the pandemic and was lowered about $16 million for the 2021 season to $182.5 million. The cap only applies to players, it does not include coaches’ or trainer’s salaries. The team must be within the salary cap limits by the first day of the league year, which is usually late February or early March.

The salary cap doesn’t just tell teams how much they can spend, it also tells them how much they have to spend. We will touch on this later on, but the amount teams pay a player and the salary cap hit they take are often very different numbers. In order for the amount players are paid to be somewhat in line with the salary cap, every NFL team has to exceed 90% of their salary cap in actual cash spendings. This is averaged over a three-year period so you can drop below for one year as long as the average stays above 90% for the three-year period. This is strictly cash paid out, which is almost always different than the team’s actual salary cap for that year. If a team was under this minimum cash spending threshold they would be forced to pay out the remaining money to the players on their roster. If you are confused with that, it’s all good, keep reading.

The entire NFL also has a floor according to the Collective Bargaining Agreement which requires that all of the NFL teams combined must spend 95% of the salary cap in cash over a three year average, meaning that the average spend across the NFL has to exceed 95% of the cap from 2021-2023. Just like the individual team floor if they end up below this, the NFL pays the remaining amount directly to the players.

Contracts

Contract structure is critical to a team’s salary cap. When a team and a player agree to a new contract, it is seldom a neat calculation to determine what the player’s cap hit is in any given year. For example, a 4-year $24 million contract is most likely not paying that player $6 million each year, nor is there a cap hit of $6 million each year. The contract will usually be structured to pay the player more on the backend of the deal as teams expect the salary cap to rise over time and it allows them more wiggle room in the first year or two.

This logic brings the question “What about the last couple years of the contract? Doesn’t it put a heavy strain on the team?” Well, here is the thing about the National Football League, the teams have the right to release a player at any time, meaning before the NFL player enters the later years of their contract the team can release them and owe them nothing. You might be saying, “Hold on, a team can just release a player even though they have a contract with them and not have to pay them any of it?”… yep. They also have the ability to negotiate a new contract that helps the team stay under the cap. The way a player can avoid this is by having more guaranteed money in the contract, which has been the standard in the NBA but is not the norm yet for the NFL, although we are seeing more and more stars getting a lot of guaranteed money upfront.

Signing Bonuses

With teams being able to cut a player whenever they want, why would a player be OK with signing a back-heavy contract if there is a big chance they won’t see the money at the end? The solution: signing bonuses. Signing bonuses still count against the cap, but the team can attribute the cost of the bonus over the years of the contract instead of all of it counting in the first year. For example, if a player signs a three-year contract with a $15 million dollar signing bonus, that player will receive the $15 million dollars that year, but the salary cap hit will be $5 million over the next three years of the contract. If it is a contract extension, it will be spread out over the remaining years on the current contract plus the years of the new contract. Signing bonuses are guaranteed no matter if the player is released, retired, traded, or injured, making them very enticing for players. This ties back into what we went over before, with teams being required to have a cash spend of at least 90% of their salary cap.

If a player is released, traded, or retires, the remaining signing bonus all hits the salary cap the next season. However, there is an important caveat to this we see often. Many teams will wait until after June 1st to waive players because the team has the ability to stretch the hit over two seasons instead of having to pay it all out the next year. If a different team picks up that player, whether through trade or from waivers, that new team does not have to pay any amount of the signing bonus.

There is a rule in place that does not allow players to take their signing bonus and then retire. The NFL calls this the “Cashed Check and Lickety Split” rule. Just kidding. It doesn’t have a name, but that should be it. Owners over the years became worried they would give these players millions of dollars and then the player would just bounce, so they include language in contracts that pretty much says the player has to return all or some of their signing bonus if the player fails to practice or play for the team.

Cash Incentives

Contracts often have incentives for players to earn bonuses. These incentives are categorized in two different ways, Likely To Be Earned (LTBE) and Not Likely To Be Earned (NLTBE). Which… it seems pretty un-motivational to call an incentive Unlikely To Be Earned but take that up with the NFL. LTBE incentives include performance-based goals that use the previous season as a benchmark. For example, a running back might have rushed for 1200 yards last season and in his new contract, he has a cash incentive to rush over 1200 yards. This would be considered Likely To Be Earned since the running back has already achieved this. LTBE incentives also include cash incentives for offseason workouts and minicamps. Pretty much anything that is… likely to happen. If there is a performance-based incentive that the player did not complete the previous year, it is categorized as NLTBE. Which, once again, does not sound very motivational for a player.

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The key difference between these two incentives is how they affect the salary cap. The incentives that are deemed Not Likely To Be Earned do not count against the team’s salary cap, while the incentives that are Likely To Be Earned do count against it.

Dead Cap

You might hear the term “dead cap space” often when NFL contracts are being discussed. To put this term simply, dead cap means how much the team is paying players who don’t play for them anymore, taking up salary cap space for no benefit to the team. This term can get pretty dang complicated so let’s go over two main ways to have dead cap space. The first deals with traded players and the second is for cut players.

Traded Players

First, let’s go over an example of dead cap space with a trade. Remember those signing bonuses we talked about earlier? Big time important here. Let’s say, hypothetically, you have a player who signed a 4-year contract for $156 million dollars in 2020. When he signed the contract, he received a $27 million dollar signing bonus because his agent was a homie. If in 2021 before his new contract even begins, the player became unhappy and requested a trade, that team would take a big hit in dead cap if they moved him. The team would carry dead cap hit of $21,600,000. We get this by taking the original signing bonus of $27 million, divide that up by the term of the contract plus 1 since he signed it the year before, making it 5 years, bringing the cap hit of $5.4 million dollars a year. Since they already took the cap hit for one of these years we subtract $5.4 million from 2$7 million, giving us a total of $21.6 million that would hit the cap the next season, or in other words, $21.6 million of dead cap.

Cut Player

But… what if no one wanted a player because they didn’t want to take on his contract. What if the team had to make a big decision in either keeping the player on and paying him a high amount, or cutting him so they could save some money overall, but take a large hit in dead cap?

Well, let’s look at an example of how cutting a player affects dead cap. Let’s use the largest dead cap hit from a cut player ever, Todd Gurley, who was cut by the Rams in 2020. Todd Gurley signed an extension off his rookie deal in 2018 for 4-years, $57.5 million. The Rams put themselves in a predicament when they headed into the 2020 season with a roster well over the salary cap limit. They had a decision to make, they had to either keep Gurley on the contract he inked a few years back, or cut him and save some cap space for that year but take on a lot of dead cap. They chose the latter and he was cut. The issue for the Rams was that Mr. Gurley had $21.95 million freaking dollars guaranteed at signing and they had only paid him $1.8 million as his contract was heavily backloaded. Guaranteed money is different from signing bonuses, if a player is traded, that guaranteed money is transferred to the new team. When a player is cut, the team has to pay that player the full guaranteed amount. So the LA Rams took on a dead cap hit of $20.15 million. They cut him after June 1st so they were able to spread this out over two seasons, but this was the biggest dead cap hit from a cut ever.

Adjusted Cap

Although all NFL teams have the same salary cap base, you will notice that all teams have a different salary cap every year. This is because the NFL allows teams to have an “adjusted cap”.

Those fun Not Likely and Likely cash incentives come into play here. Both LTBE and NLTBE incentives can have an effect on a team’s salary cap. If you had a player who had an incentive that was LTBE but did not end up achieving it, that incentive amount is now credited to next year’s cap. For example, if a quarterback had a $200,000 incentive to rush for 1000 yards but he only rushed for 800, the team’s salary cap the following season would get a $200,000 credit. Vice versa for a player who earns an incentive that was NLTBE, it will be charged against the team’s salary cap next year for the incentive amount.

The team also has the ability to rollover cap space from one year to the next. For example, if the Dallas Cowboys were $10 million under the Salary cap at the end of the season, they could roll over that amount to the next season and have an extra $10 million to their cap limit.

Conclusion

The NFL salary cap has many moving pieces and it can get very complicated very quickly. Understanding how the salary cap works though is crucial to better understanding what your team is doing off the field. Learning about your team’s salary cap can show you how just how well your team’s front office is doing, giving you some analytical insight on how talented they are on structuring deals and keeping key players around.