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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Making Sense of the NFL's Million Dollar Salaries

The Super Bowl is behind us, but the off-season drama in the National Football League is just getting warmed up.

Peyton Manning set free from the Indianapolis Colts and Drew Brees in heated negotiations with the Saints, it's clear that the season never really ends for general managers and players looking to renegotiate salaries or sign-on as free agents. 

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At face value, the whole process seems very simple: players and teams agree on salaries and players are paid the same annual salary for the duration of their contract. If only things were so simple. The reality is much more complicated. 

Let's take a look at the complex and often controversial process of paying NFL salaries:

New CBA NFL Salary Caps

Like any successful business owner, the most financially savvy NFL teams strive to get the most "bang" for their buck. For 2012, teams have to stay within a $122 million salary cap -- up from $120 million in 2011. 

The cap is determined by a complicated formula that changed with last year's collective bargaining agreement. 

The formula uses team revenue data for the past year, minus league benefits and multiplied by percentages based on the collective bargaining agreement. Failure to stay under the cap can bring about penalties, such as fines or forfeiture of draft picks.

Included in the new salary cap is a revenue sharing agreement. Players receive 55% of national media revenue, 45% of NFL ventures revenue and 40% of local club revenue. Minimum salaries increased 10%, made changes to the length and scale of rookie contracts and made a number of other changes to promote player safety and health including reduced off-season programs and team activities.

New Rules, Few Guarantees

Now that you know how much money teams have to work with, let's look at individual salaries. Many NFL players have contracts worth millions of dollars. Peyton Manning, for example, had a $23 million contract for 2011. Even with a neck injury that kept him benched for most of the 2011 season, he was the highest paid NFL player in the league. 

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But these contracts aren't guaranteed. If the Colts had decided to cut Manning during the 2011 season, he wouldn't have been entitled to the full $23 million. 

Teams can cut a player at any time, and if they do so before the season, they aren't liable for the player’s salary. Imagine a player who signs a 5-year, $65 million contract. The NFL contracts can back-load that salary in the last two or three years of the contract. The players are often cut or contracts are renegotiated before those salaries are paid in full. 

The NFL has set new rules to combat this practice, including preventing teams from increasing a player's salary by 30% or more from year to year. This protects the players, and also keeps the teams from finding ways to cheat the salary cap. 

NFL players can be cut at any time for any reason and would only be entitled to "guaranteed money" in their contracts. Guaranteed money is a portion of the total salary that is paid regardless of whether the player is injured or cut. With the frequency of injuries in the NFL, it's easy to see why signing bonuses and guaranteed money are so important to players.

The Bonus Structure 

Many players' salaries count on big signing bonuses, which are paid at the time of signing in full (a big win for the player) but are amortized to count toward the salary cap over the length of the contract (a win for the team). This practice is called the Deion Sanders rule, named after the former Dallas Cowboys cornerback. Back when bonuses didn't count toward the salary cap, Cowboys owner Jerry Jones tried to pay Sanders almost exclusively through a signing bonus, which wouldn't count towards the team's salary cap at all. 

There are also incentive bonuses for players, which are divided into two categories: "likely to be earned" or "not likely to be earned." An example of a bonus that is likely to be earned would be if Tom Brady had a Pro Bowl bonus. Barring strange circumstances, he will make the Pro Bowl team, so this money is taken out of the year's salary cap even before the bonus is paid. 

Bonuses not likely to be earned might be something like a 5,000-yard passing season for the Washington Redskins' Rex Grossman or a Super Bowl win for Cowboys' quarterback Tony Romo. Either way, these bonuses would count toward the salary cap the next year.

There are even bonuses for attending off-season workouts or reporting on time. These are considered likely to be earned, so they are already factored into the salary cap.

The Franchise Tag

We’ve all heard about our favorite team dishing out a "franchise tag" on a player. The Saints' recent franchise tag on quarterback Drew Brees has certainly brought the concept into focus. But what exactly does it mean?

A franchise tag is a way to sign a player to a one-year deal without having to negotiate salary. Teams usually utilize the franchise tag on a valuable player that they either cannot afford to sign a long-term deal, or a player who is risky to sign for multiple years -- such an older or injury-prone player. 

The salary of a franchised player is decided by averaging the salary of players who have been franchised at a particular position for the past five years. In the previous collective bargaining agreement, the salary was based on an average of the five highest salaries at a given position, so salaries for franchise players have dropped dramatically in the new collective bargaining agreement.

The Investing Answer: Professional football is a tough business where there is very little loyalty. Just ask Peyton Manning. But anyone can take some lessons from the NFL to their own career. 

Many companies are becoming increasingly competitive as employers are looking to cut costs and increase productivity. Keeping skills sharp and staying up-to-date on new technology and technique is essential to not getting left behind on the job. 

In order to have the best chance for a raise at your current job or a salary increase with a new job, you should sharpen your skills, expand your area of expertise and practice negotiation techniques to stay ahead of the curve.