Restructuring Contracts – Bad for Player, Bad for Team?
Written sometime in early offseason 2006.
Overall the Steelers manage their salary cap better than average, but they are not the best. Some time in the future, I will try to write more on their cap management, but for now I will focus on one aspect which the Steelers do to manage their cap – restructuring players’ contracts.
A contract restructuring creates cap space for the current year at the expense of future years’ cap space. For example, John Doe signs a three-year contract worth $9 million, which includes a signing bonus of $3 million dollars. John Doe’s cap values would be:
YEAR ONE: $635,000 base salary; $1 million prorated signing bonus = CAP VALUE of $1,635,000
YEAR TWO: $2.5 million base salary; $1 million prorated signing bonus = CAP VALUE of $3.5 million
YEAR THREE: $2.865 million base salary; $1 million prorated signing bonus = CAP VALUE of $3.865 million
(Most contract’s first year base salary is league minimum for that player…like YEAR ONE)
Now, let’s say the team in YEAR TWO needs to free up cap space. The team can restructure John Doe’s contract (with his approval). The team would reduce John Doe’s base salary for YEAR TWO to his league minimum. Then, the difference between the league minimum salary and his original salary is converted into a signing bonus, which would be prorated over the rest of the contract length. Here are the restructured cap values:
YEAR ONE: $635,000 base salary + $1 million prorated signing bonus = CAP VALUE of $1,635,000 (YR 1 already done)
YEAR TWO: $640,000 base salary + $1 million prorated signing bonus (original contract) + $930,000 prorated signed bonus (restructured contract) = CAP VALUE of $2.57 million
YEAR THREE: $2.865 million base salary; $1 million prorated signing bonus + $930,000 prorated signing bonus (restructured contract) = CAP VALUE of $4.795 million
The team reduced John Doe’s base salary from $2.5 million to $640,000, a reduction of $1.86 million. The $1.86 million was added as a signing bonus prorated over two years (length remaining on John Doe’s contract). The prorated amount for the restructured signing bonus is $930,000. John Doe is still getting the same amount of money. The team would save $930,000 in YEAR TWO, but they would have an additional $930,000 in cap space for YEAR THREE.
In order to get under the cap or to sign desired players, the Steelers have restructured quite a few players’ contracts in the past. Jeff Hartings, Travis Kirschke, Joey Porter, Aaron Smith, Marvel Smith, and Duce Staley (among others) have all restructured their contracts. As a result of these restructurings, the Steelers will have $8.244 million less salary cap space to work with in 2006.
Jeff Hartings is at risk of being cut. His current cap value is $8.13 million, which is too much. Unless he renegotiates his contract, he will more than likely be cut. If he had never restructured his contract, his cap value would have been $4.958 million. At $4.958 million, Hartings would not have been cut. By restructuring his contract, Hartings could be out as much as $4.75 million – his base salary plus bonus.
The Steelers will need to make a decision on Hartings. It is a decision which could have been avoided. If they could have managed their cap better in prior years, they would not need to make this decision.
They would also have an additional $8.244 million in cap space to work with this year.
In conclusion, restructuring contracts is bad. It is bad for the team, and could be bad for the player. Teams should only restructure contracts if there are no other options.
The Steelers are pretty good at managing their cap, but they are not perfect. Restructuring contracts is one of a few mistakes the Steelers make. They need to end the cycle of restructuring.