Monday, June 15, 2009

The Structuring of Day Two Draft Pick Contracts

With Mark Sanchez signing a reported maximum value contract of $60 million with $28 million guaranteed, I’m sure readers of this blog are eager to read the analysis of that contract; while I have yet to see the official contract details, know that as soon as I do, I will be posting an entry regarding the deal.

While the Sanchez and Matt Stafford first round pick contracts garner the most attention, keep in mind that other draft picks of the 2009 Draft Class have signed contracts. Of course all of these picks are from rounds three through seven and their dollar amounts aren’t as intriguing as the first round contracts, but what you may find interesting is how their contracts are structured.

In terms of the mechanics of the deal, the first round contracts are the most complex. Second round contracts are not as complex as first rounders; however, second round contracts are structured differently than those of rounds three through seven. Contracts for third through seventh rounders all have pretty much the same structure with the only difference being the duration of the contract.

Seven clubs (ARZ, BLT, DET, KC, NO, PIT, SL) sign their third through seventh rounders to three year contracts; while the remaining 25 clubs sign their respective picks to four year contracts. When you compare and contrast the three year deal versus the four year deal, obviously, the 3 year deal gets the player to free agency sooner – albeit restricted free agency – while the four year deal gets the player a higher signing bonus than if the same player had signed a three year deal; basically, in exchange for an additional year the team has to give up more coin.

In Year Four of the four year rookie contract there is a salary escalator that, in the majority of instances, allows the player’s salary of $565,000 in 2012 to adjust to the restricted free agency Original Round Tender (in 2012 this amount is $1,308,000) if they achieve certain performances in the first three years of the contract. Additionally, some clubs allow for escalation to other dollar amounts or other RFA levels such as the First Round Tender (in 2012 this amount is $2,846,000). The performance mechanism to induce the escalation is a combination of the player’s playtime percentage and the club’s improvement in one of three negotiated statistical categories.

For example, in order for a player’s 2012 salary of $565,000 to escalate to the Original Round Tender of $1,308,000, the player must, in 2 of the first 3 years of the contract, play in 35% of the offensive snaps (lets say this player is a wide receiver) AND in those SAME two seasons, the team must improve its league rank in any one of the following three statistical categories: Points Scored by Offense, Total Offense (net yards), or Average Net Yards per Passing Play. Additionally, for the player’s salary to escalate to the First Round Tender of $2,846,000, the player must participate in at least 35% of the offensive snaps, AND in the same season the team must improve in one of the three statistical categories, AND the player must be elected on the original ballot to the Pro Bowl (being selected as an Alternate does not count). The player can only achieve one of the two levels, $1,308,000 OR $2,846,000.

So as you can see it’s not exactly a gimme. Some teams will even structure the language such that the player will not receive credit if the statistical improvement still ranks the team in the bottom five of the league, meaning the team went from 32nd in the league to 29th in the league in the given category. Some teams only require the statistical improvement in one of the two playtime years; so some team’s escalator language is easier than others, but again, none of it is a gimme.

Essentially, a player can be a significant contributor to a team from a playtime percentage standpoint, but if the team doesn’t improve in one of those categories then it all goes for not, in terms of escalating their year four salary. So like most things related to contract negotiations, it’s a matter of risk by both parties to the negotiation. From the player’s perspective, they can take, for example $40,000 for a late seventh rounder to sign a four year contract, in lieu of $30,000 to sign a three year contract; however, if they turn out to be a Pro Bowler, then in year four they’re playing under the First Round Tender of $2,846,000 or even worse the Original Round Tender of $1,308,000; when if they would have done a three year deal they would’ve been playing under the First & Third Round tender of $3,616,000 potentially. From the team’s perspective, they’re gambling on giving the player a little more money on the front end to save a bunch of money on the back-end, but if the player sucks, then they spent additional money unnecessarily. However, one could make the argument that if you have four draft picks who receive four year contracts and one of them turns out to be a contributor such that he earns his escalator and the other three picks are out of the league by year two, then the savings on the player who made it pays for the additional signing bonus expenses of the three players who didn’t.

In short, the team is, on the front end, buying even more control of the player’s fourth year. Also, keep in mind that it’s not actually a decision for a player and his agent to make in terms of three years versus four years; teams take the position that this is how we do business, this is non-negotiable. So in the case of a four year rookie contract team, you can either sign a four year contract or not sign one at all; after all, is a sixth round pick really going to hold out of training camp because he doesn’t like the duration of his contract? So the real negotiation lies on the terms of the escalator language; ie, Bottom 5 language, Original Round tender vs. First Round tender, and the three statistical categories.

Given that it sounds like this four year contract structure is tilted favorably towards the clubs, why don’t all clubs sign their picks to four year contracts? Well, I’d say that cash is a small part of the issue; lets face it, some owners are trying to save as much money as possible, particularly on players who have yet to prove themselves. However, I think the bigger issue is that the three year clubs believe that if a player turns out to be a stud, then the player probably is not even going to play under that year four salary anyway because either prior to year four or during year four the team and player are going to agree to an even more lucrative contract extension. Moreover, if there is still uncertainty as to if the player is deserving of a lucrative extension, then the club will tender the player accordingly and if they lose him via restricted free agency then at least they get a draft pick in return.

This transition to the majority of clubs utilizing four year contracts has occurred over the past few seasons; in 2007, my first season in Washington, we made the switch. With cap guy Kevin Demoff now in St. Louis (as a side, the NFL refers to the Rams as “SL”; “STL” the NFL considers as the St. Louis Football Cardinals), historically a three year contract team, coming from Tampa, a four year contract team, it’ll be interesting to see if they make the switch this year to four year contracts.

All of this said, when you see that your local team just signed their seventh round pick to a four year contract with a $50,000 signing bonus, understand that there’s a lot more to that contract than just how much the guarantee is.

Webinar: It’s that time of the month again, I’m conducting a Salary Cap 101 Webinar, where you’ll have the opportunity to learn about the components of player contracts and how those contracts are accounted for under the rules of the salary cap; for more information and to register, visit .

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