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- Senior Director - Arizona Cardinals Football Club
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Salary Cap Management – Financial Planning and Analysis
- Everyone is a "capologist" and has something to say!
There are misconceptions in the media and with the fans about what the salary cap really is and what teams are really "spending."
You have players and agents running around throwing numbers out for obviously their own agenda. Those numbers are often completely unrelated to the actual salary cap figures. What they’re doing is lumping together the total value of a contract over a number of years – including amounts that may or may not be earned in the future.
People will hear those numbers in the media: “Oh, so and so got a $50-million contract.” What does that really mean? It sounds like a big number, but then each element of the contract translates to a salary cap charge for any given season and, additionally, those elements can change over time due to incentives that go unearned or more subtle rules that come into play.
It’s becoming less of an issue now with the new collective bargaining agreement (CBA), but it’s obviously been a big issue in the past and has been a public relations nightmare putting some teams on the defensive because of the perception of how much a team is spending. And everyone has opinions about whether that is enough, or too much, relative to the team's performance on the field.
Clubs care about all this because it is these public opinions and discussions that can ultimately affect ticket sales.
- Roster planning equals risk management. But, predicting roster changes due to unforeseen injuries is almost impossible.
This is the nature of this business .
In the blink of an eye you can go from having a marquee player, who people are buying tickets like crazy to see, to having that player injured. Now, theoretically, you parked the guy on injured reserve. You are still paying him, BUT he is not helping you win the game. Additionally, you don’t know what his status may be long term. This means you have to make decisions about replacing that player.
You have to maintain a pool of dollars for the purpose of replacing these injured players, because you may not be able to cut them in order to create cap space.
- The allocation of resources is skewed and embedded guarantees can severely limit a team's options in the future without extensive planning and. . . some luck.
This salary cap spending limit has to be to spread out to build a full roster of 53-players. Realistically, you can allocate it however you want, with a couple of exceptions. In reality, most of the salary cap is absorbed by very few contracts and the remainder of the final 53 tend to be drastically lower. Therefore, there often are very few options to make "space" to allow for a change.
If you are going to try to go out in the market and pursue a marquee player, you will likely need to carve out a really big portion of your salary cap for that player either by leaving space intentionally (which requires a lot of forethought and planning) or by cutting players to make cap space.
That’s a pretty high risk situation. If that marquee player gets injured, you’re in a pretty bad place and sometimes forced to make some really tough, last-minute decisions.
- Collective Bargaining Agreements are making it very difficult for teams to manage contracts.
The CBA encompasses total player costs. This includes player benefits and the "salary cap." Total player costs are calculated relative to league-wide revenues, first on a projected basis and then trued-up at the end of the season.
Because some of the benefits negotiated as part of the new CBA have substantial increases – due to Players Association demands – there has been less room for growth of the salary cap portion of the total costs.
The salary cap is the controllable portion of the costs, where the teams are able to negotiate with individual players going forward. But, the existing contracts may escalate much faster than the increase in the salary cap and this puts huge pressure on teams to make room within the cap for new deals. This may require either cutting players or renegotiating existing contracts to make room for new deals.
- The salary cap is not published beyond the current year, so this makes managing the bigger picture and total guarantees pretty tricky.
The salary cap used to increase 4-5 percent per year. But now it’s bouncing all over the place due to some unintentional CBA limits that have been put in place.
You’re doing your internal planning in terms of what strategy you want to take, which contracts you want to renegotiate, which players you want to go after and which moves you want to make on your team without knowing, up until a couple of weeks before the season starts, what your salary cap limit is going to be for the next year.
Trying to estimate what the salary cap is going to be in the future makes accurate planning VERY hard to do.
- Allocation of resources is usually not evenly distributed – much of it is concentrated in a few large player contracts. Consequently, the risk is not distributed evenly, making it challenging to manage that risk.
There's a huge disparity between the major contracts and the so-called "minimum salary" players. The majority of contracts tend to be the smaller ones.
The minimum salary is spelled out in the CBA rules. You know exactly what it’s going to be each year for a player that’s in the league one, two or three years. (For 2013, a rookie that makes a team will earn a minimum of about $400,000 over the season. That excludes signing bonuses and other incentives that may or may not be offered. For a proven core player on the team, their average compensation for the 2013 season could be $5 million or even $15 million just for the salary.)
You are then left with a limited amount of money to negotiate with the players that demand or deserve bigger contracts.
- Calculating the comparative value of each contract is tricky.
There are so many elements in each contract these days and they span different periods and some have a subjective component – elements that are considered likely or unlikely to be earned.
This makes quantifying the value of a contract to make some of these decisions pretty complex. You need to be clear that you are comparing apples to apples to make a clear and well-thought-out decision.
- Local revenue streams do not always keep pace with salary cap increases.
This creates real cash flow challenges at different times of the year, which sometimes puts negotiators at a disadvantage when negotiating contracts.
But, in some markets, teams are very dependent on ticket deposits coming in to fund the initial signing bonus cash flows. This can put a crimp in negotiations on the front end. And, sometimes, it feels as though the teams in bigger markets really have the advantage here.
- The league year almost never coincides with the fiscal year, which is a unique accounting problem.
The league year begins in the second week of March for a 12-month span. That includes free agency, training camp, the draft, the regular season and post season. Fiscal years almost always begin either at the beginning of the year or at least the beginning of the month.
This can make cut-off issues really sticky, and blending views of the league year and fiscal year into a single decision can be confusing.