The Salary Cap is defined as the maximum amount that a team may spend on compensation in a given season, for all of its players combined. It exists in part to pacify team owners, who write the paychecks, and to keep player salaries somewhat under control. Small-market (and less profitable) teams can also stay competitive with the big boys, because the cap prevents them from spending their competition into submission (a la George Steinbrenner).
The salary cap prevents teams with a superior financial situation from the formerly widespread practice of stocking as much talent on the roster as possible by placing younger players on reserve lists with false injuries while they develop into NFL-capable players.
The NFL's cap is a hard cap that the teams must stay under at all times; penalties for violating or circumventing the cap include fines of up to $5 million, cancellation of contracts and/or loss of draft picks. There is also a hard floor, which is the minimum payroll the teams must pay their players.
The Salary Cap resulted from the NFL's 1993 Collective Bargaining Agreement between the NFL Players Association and the owners in an effort to impartially share the wealth. Players are allowed to be Free Agent's, meaning they can market their skills after a distinct period of service, and meanwhile the cap keeps their salaries in check. These salaries are regulated each season by a maximum amount each franchise is allowed to spend on its total roster. Coaches, Trainers, Front Office, Medical staff, etc., are not included in the Cap.
The cap was introduced for the 1994 season and was initially $34.6 million. Both the cap and the floor are adjusted annually based on the league's revenues, and they have increased each year. It is calculated by the current CBA to be 59.5% of the total projected league revenue for the upcoming year. In 2009, the cap will be $128 million per team, while the floor will be 87.6% of the cap, or $112.1 million; the salary floor percentage will increase 1.2% per year until it reaches 90% of the cap in 2011. As a result of the NFL owners opting out of the CBA two years early, the 2010 season will not have a salary cap if no new CBA is negotiated.
Salary Cap Per Team for NFL Player Salaries by Year:
2008 $116 million
2007 $109 million
2006 $102 million
2005 $85.5 million
2004 $80.5 million
2003 $75 million
2002 $71 million
2001 $67.5 million
2000 $62.2 million
1999 $58.4 million
There is also a simple way for NFL teams to legally circumvent the salary cap and offer players even more money: Signing Bonuses. These are lump payments that players receive immediately under the NFL's agreement with the NFLPA, but team accountants can prorate them throughout the life of a contract. In this way, a team can work around the salary cap legally, and offer players bigger paydays.
So if a player receives a $10 million signing bonus for a 5 year contract, $2 million per year would count against the salary cap for the life of the contract, even though the full $10 million was paid up front during the 1st year of the contract.
For example, say Player X signs a 5 year contract for $16 million, with a signing bonus of $10 million. Player X pockets that $10 million immediately, but for salary cap purposes, that figure will be evenly dispersed throughout the life of the contract.
NFL teams also commonly "backload" contracts to keep their current NFL salary cap situation desirable. This means that the contract is not divided equally among the time period it covers. Instead, the player earns progressively more and more each year. These contracts are often later renegotiated, or else the player is simply released. If a team cuts this player after the 1st year, the final 4 years do not count against the cap. Any signing bonus, however, ceases to be pro-rated, and the entire balance of the bonus counts against the cap in the upcoming season. This also pays the player as he gains league experience and moves up the depth chart.
Using Player X's 5 year deal as an example, his compensation could look something like this:
Base Salary Bonus Paid to Player X Salary Cap Figure
Year 1 $500,00 $10 million $10.5 million $2.5 million
Year 2 $1 million 0 $1 million $3 million
Year 3 $2 million 0 $2 million $4 million
Year 4 $3 million 0 $3 million $5 million
Year 5 $14 million 0 $14 million $16 million
Player X's $10 million signing bonus, which he received immediately, was spread evenly over the team's salary cap for 5 years. Around year 4, the team would likely either resign Player X to a new deal, and a new signing bonus, or simply cut him in order to stay under their salary cap. The base salaries of rookie FA's do not count towards the rookie salary cap, though certain bonuses do.
If a Qualifying Contract with guarantees is terminated, the player shall continue to receive the guaranteed portion of the contract and that money shall continue to count against the Team's Salary Cap.
Because of this treatment, NFL contracts almost always include the right to cut a player before the beginning of a season. A highly sought-after player signing a long term contract will usually receive a large signing bonus, thus providing him with financial security even if he is cut before the end of his contract.
If a player retires, is traded, or is cut before June 1, all remaining bonus is applied to the salary cap for the current season. If the payroll change occurs after June 1, the current season's bonus proration is unchanged, and the next year's cap must absorb the entire remaining bonus.
Incentive bonuses require a team to pay a player additional money if he achieves a certain goal. For the purposes of the salary cap, bonuses are classified as either "likely to be earned"(LTBE), which requires the amount of the bonus to count against the team's salary cap, or "not likely to be earned"(NLTBE), which is not counted. A team's salary cap is adjusted downward for NLTBE bonuses that were earned in the previous year but not counted against that year's cap. It is adjusted upward for LTBE bonuses that were not earned in the previous year but were counted against that year's cap.
One effect of the salary cap has been the release of many higher-salaried veteran players and their replacement by lower-salaried players on a given team's payroll over time. On the other hand, many teams have made a practice of exploiting these adjustments and used FA's to restock their team with more suitable personnel.
Generally, the practice of retaining veteran players who had contributed to the team in the past, but whose abilities have declined, even those who are fan favorites has become less common in the era of the salary cap. A veteran's minimum salary is required to be higher than a player with lesser experience. This means teams tend to favour cheaper, less experienced prospects with growth potential, with an aim to having a group of players who quickly develop into their prime while still being on cheaper contracts than their peers. To offset this dollars and cents driven tendency, the NFLPA accepted an arrangement so that a veteran player who receives no bonuses in his contract may be paid the veteran minimum of up to $810,000, while only accounting for $425,000 in salary-cap space.
The cap has risen each year since it was first implemented in 1994; naturally, so have NFL player salaries. Comparing the current cap with recent years, it quickly becomes apparent that at least some of the sport's meaty returns are being passed along to the NFL players in one tight spiral. For example, in 2000 the top salary in the NFL was $8.5 million. It belonged to Patriots QB Drew Bledsoe. Steelers QB Ben Roethlisberger will take home the NFL's largest single-season paycheck this year, earning more than $27.7 million. And yes, this is more than Eli Manning and Nnamdi Asomugha's new contracts. Peyton Manning earns an average of $14.17 million annually with the Indianapolis Colts.
The NFL Owners' decision earlier this year to end the most recent CBA with the players’ union in 2011 suggests changes are on the horizon. League officials and owners have stated that the current CBA is too lopsided in favor of players. They also want to change the system to divide the money more to veterans than to unproven rookies. This thought is based on a disparity in salaries that has them spending far more on unproven rookies than on reliable veterans.
Some veterans are in complete agreement with that. The rookie pay needs to be revamped. It is irrational to guarantee money to a player who hasn't played a down in the NFL. The way the system has gotten, if someone has potential to become an elite player they will get more in their 1st contract than the average player will make in his whole playing career.
With the requirement of each team to spend at least 84% of the cap each year, big money gets tossed into fat new NFL contracts for players. Many of them with only marginal ability. It's no wonder that more and more college players opt for the pros early. Sounds like a good time to cash a paycheck if you happen to be an NFL football player.