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Mailbag: Breakdown of how the salary cap works


Stratton in New Jersey: If you have time, can you give me a breakdown of how salary cap accounting works? What counts against the cap and what doesn't? How do restructures help today, but hurt tomorrow?

John Schmeelk: There are intricate details of the cap that are hard but here are the basic details that will allow you to track free agency and the salary cap each year.

There are two basic types of money in a player's contract: bonus money and base salary. Signing bonus money is always fully guaranteed and will get prorated over the length of a contract for up to five years. This is often the dead money people refer to in a contract when a player is let go before all the prorated bonus money is accounted for on the cap. All that money will then get accelerated into the team's cap in season the player is let go. If the player is designated a June 1st cut, the cap hit of dead money is split between the current year and following year. More on that later.

There are other types of bonus money. There are roster bonuses a player will get if he is on the team after a given date – these kick in later in the contract. A player can have workout bonuses for attending the offseason program. They can also have performance bonuses, but they won't be included in the following example because it would get confusing.

Base salary is what a player makes each season, not including the bonus money referenced above. Generally speaking, base salary is not guaranteed though some contracts will guarantee base salary for a player in the early years of a contract.

Here is an example of how a hypothetical restructuring of a contract would work: A player signs a five-year, $100 million contract, including a $25 million dollar signing bonus, with the base salaries structured as follows...

­Year        Base Salary           Prorated Sign Bonus        Salary Cap Number           Dead Money

Year 1    5 million              5 million                                10 million                              25 million

Year 2    15 million            5 million                                 20 million                             20 million

Year 3    15 million            5 million                                 20 million                             15 million

Year 4    20 million            5 million                                 25 million                             10 million

Year 5    20 million            5 million                                 25 million                             5 million

If you add up the numbers in the first column, you get to $75 million in base salary. If you add the $25 million dollar signing bonus you get to $100 million, which is the full value of the contract. The column to the right labeled "Dead Money" is the amount of prorated salary cap money left unaccounted for that a team would have left on the cap if they trade or cut the player that season.

The contract is structured in a way that backloaded the money in order to make it more affordable under the cap during the early years of the deal. Now, let's say this team decides in Year 2 of this contract that it needs to reduce the player's $20 million cap number.

A team, with the player's permission, can take base salary and convert it to signing bonus money. The player still gets the money he was owed, but the cap hit is spread over the length of the contract to help the team reduce his current cap number. So let's say in Year 2 of the deal, the team is looking to save $7.5 million on the cap. It can take $10 million of base salary and convert it to signing bonus. This is how the salary chart would change.

­Year        Base Salary           Signing Bonus    Restructure $     Salary Cap #         Dead Money

Year 1    5 million                5 million                                          10 million            25 million

Year 2    5 million                5 million               2.5 million          12.5 million       30 million

Year 3    15 million             5 million               2.5 million          22.5 million       22.5 million

Year 4    20 million             5 million               2.5 million          27.5 million       15 million

Year 5    20 million             5 million               2.5 million          27.5 million       7.5 million

As you can see from the updated chart, the team successfully reduced the player's Year 2 cap number from $20 million to $12.5 million. The drawback is that the $7.5 million reduction is spread over the final three years of the contract in cap obligations that cannot be erased. The money becomes guaranteed and turns into "Dead Money" if the player is let go in a future season.

After the restructure, if the team wants to cut this player between his second and third seasons, they will have $22.5 million of "Dead Money" on the cap, versus just $15 million in the original contract structure. A team can get relief for the current year, but the cap charge must eventually be paid down the road. After a restructure, the "Dead Money" on a contract increases, reducing the cap savings compared to the original structure of the released player's deal.

If the player is designated as a "June 1 cut" between his second and third seasons, the player would cost $7.25 million on the cap in Year 3 (resulting in $15 million of immediate cap savings ), but he would also cost $15 million (the remaining guaranteed money on the contract) in cap obligations the following season. If he was not designated a "June 1st cut," the player's full cap number is charged to the current season and he disappears off the team's books the following year.


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