Renegotiating The Rookie Pay System

There was a very interesting article put up on Yahoo by Doug Farrar of Football Outsiders. It discusses the “real” story of the rookie wage scale negotiations – which is the effort to reduce rookie contracts.

Rookie contracts are front of mind lately. Sam Bradford’s new six-year, $78 million contract with a whopping $50 million guarantee is the illustration for this. Both sides of the labor negotiations likely agree that this contract is an illustration of the problem. But the sides don’t agree on exactly what the problem is. Before I get into Farrar’s article, let’s examine exactly what the point of dispute is.

What The Sides Agree On

Bradford’s contract is a nice illustration of the dispute. Both sides will agree that a system that gives $50 million of guaranteed money for a guy who hasn’t thrown an NFL pass – heck, a guy who only played in two games at any level in the past 18 months – is insane. There’s not even a good way to justify it.

So why do teams pay that amount out? The reason is an unintentional side effect of the rules currently in place that were supposed to limit rookie contracts.

Some of you will recall the 30% rule that is in place for veteran players this season. If you don’t remember this rule, it is the one that is keeping DeSean Jackson from getting, or even asking for, a contract extension. The rule is essentially that his salary in an extension can’t increase from year to year by more than 30% of his 2009 base salary. So if a player made $1 million in 2009, he can only make $1.3 million in 2010, $1.6 million in 2011, and so on.

There are two ways around the 30% rule. First, you can set performance-based incentives. However, low salaries and high performance-based incentives in future years won’t get a player to sign an extension; such a deal is in the team’s benefit, while a player is better off just waiting to be a free agent in that situation.

The second way around the 30% rule, and the one that is more important for this topic, is to give guaranteed bonuses. This guaranteed money doesn’t count against the 30% restriction. But the Eagles, for example, have taken the position that they don’t want to give DeSean Jackson a contract that is 70% guaranteed money. And who can blame them? But if they wanted to get a deal done with Jackson, that is what they would have to do.

Rookies have a similar restriction, but it is set at 25% and based on their rookie season. Combined with a cap specifically on what rookie cap hits can be in their first year, this was designed to limit the size of rookie salaries.

But again, you can get around that restriction with guaranteed bonuses. And while DeSean Jackson has to play for the Eagles because he has a contract in place, a rookie doesn’t have to play at all until his first contract is signed. And because a first round rookie is very valuable, and worth more to a team than the rookie cap number grown at 25% per year, teams began to cave and give a higher and higher amount of guaranteed money in each rookie deal.

The perverse result is that teams have wound up in a situation where a guy who made the Pro Bowl at two different spots in 2009 would be laughed out of the room for asking for an extension with a ton of guaranteed money, but a QB with zero NFL experience who played only two college games in 2009 due to injury gets $50 million guaranteed without any criticism being leveled at the Rams.

The problem with having so much guaranteed money is that if Sam Bradford is a bad NFL QB, the Rams still have to pay him $50 million. For the league, that is awful. For the NFLPA, that is money that could be spent on veteran players who actually perform.* JaMarcus Russell is the poster boy for this. And the risk imposed by the huge guaranteed money paid to players at the top of the draft has turned getting a top 10 pick from a consolation prize for being a bad team into an anchor that can ruin an already-struggling franchise.

After the jump, I will explain where the sides disagree, and discuss the various ideas on the table.

Where The Sides Disagree

Going back to the Bradford contract as an illustration, while both sides agree that $50 million is crazy, they disagree about the $78 million total. Absent the guarantee, guys taken at the top of the draft have the highest likelihood of being a top player.

Think about the DeSean Jackson situation again. The thing holding up a deal isn’t that the Eagles think he is worth less than the $X million per year that he is asking for. What is holding it up is that they don’t want to guarantee 70% of that money. The same holds for Bradford, from the NFLPA’s point of view.

Give me some leeway with facts for illustrative purposes. If you lifted the 25% rule, for example, Bradford might very well have gotten the same $78 million deal with a percentage guarantee that is more in line with what a guy like Matt Schaub got from Houston in 2007 (15%). A $78 million deal with “only” $11.5 million guaranteed allows a team like the Raiders to make a mistake without killing the franchise.

For the NFLPA, this would be problem solved. Their player, if he is good, gets paid appropriately. If he isn’t good, he isn’t stealing money from deserving veterans.

For the NFL, however, limiting that $78 million is a goal as well. A huge part of the reason that draft picks are so valuable in the league is that the NFL is able to underpay rookies relative to the actual value they get out of them. A rookie and a veteran free agent of the exact same ability will have a massive disparity in their pay – the veteran will get far more (as shown by the Massey-Thaler study I have previously discussed). And assuming you are going to spend up to the cap anyway, the more players you get who are underpaid relative to their ability, the higher the overall skill level of your team, all else equal.

So the NFL really wants to not just limit guaranteed compensation to rookies, they also want to limit how much a rookie will ever get paid under their rookie contract.

That gets us to the NFLPA’s proposal that Farrar discusses. The NFLPA’s proposal has two prongs:

1. Limit rookie deals to three years
2. Add a performance-based compensation portion.

Term Limits

Limiting deals to three years will clearly limit the amount of guaranteed money a team will be able to, or will be willing to, provide to a player. And in the event of a miss, you have wiped the slate clean relatively quickly. From that perspective, both sides would like the deal.

After three years, the player becomes a free agent. That allows a player to get his fair market value more quickly. In Bradford’s case, years 4-6 of his current deal would be replaced by a free market assessment of his true value. If he is successful, it is possible (if not probable) that he would actually make more than the $78 million he just agreed to. If he fails, he makes far less than the $50 million guarantee.

This is where the NFL starts shaking its head. This new proposal cuts the legs out from the roster cost control that they are really seeking. First round picks currently get 5 or 6 year deals, second round picks and most third round picks get 4 year deals. Those are the rounds most likely to produce your best players, and you are losing 1-3 years of bargain salaries for those players.

Farrar claims that “the beneficial part of the three-year contract idea that the owners have completely failed to grasp is that teams would be able to bail out of bad contracts with expensive draft busts - essentially protecting the owners from themselves.” The owners grasp that perfectly. It is just that they are looking for more than that.

Performance-Based Pay

This is nice in three ways. First, it rewards deserving players. Second, it presumably does so without coming out of a specific team’s pocket, instead coming from a league-wide pool. Third, money goes to retirees, and one clear outcome of whatever deal is struck will be money going to retired players to try to end what is a very embarrassing episode for both sides.

But what the performance-based pay proposal doesn’t do is reduce the amount of money that owners pay for rookies (and veterans). It keeps the total spend the same. What the NFLPA has done is change who receives the cash, not how much cash is spent as a whole.

What the NFL wants is to spend less on all rookie contracts. The NFLPA is just changing the structure of how that works to make sure that the right rookies get the money, not the wrong rookies.

Rookie Wage Scale

The rookie wage scale idea would accomplish the NFL's objectives. It would clearly reduce not only the guaranteed portion of a rookie's pay, but also the total amount that player would receive over the course of his career, as he'd never get the upside back. The NFLPA is not going to sign off on that without some substantial givebacks. Throwing the "first $100 million" to retired players isn't enough, because the savings to owners will substantially exceed that $100 million.

Perhaps the outcome is going to be some hybrid, where the savings owners get on rookie deals is offset by a combination of earlier free agency and performance-based pay. In which case, all we need to do is get some smart person to figure out a way to codify that in a way that both sides trust. That is no small task, and would doubtless wind up being gamed by one side or the other.

One Final Note

I disagree with Farrar here:

Both sides are pretty clear in their intentions. The NFL wants to reduce player costs and increase revenue. The NFLPA wants to uphold its obligations to the players. The only way that both sides will be able to accomplish their goals at the same time is for each negotiation to be based on an open and frank exchange of ideas. Misrepresenting proposals, and using the court of public opinion to put trumped-up concepts on trial, only distorts the truth and makes actual negotiations nearly impossible.

This is a high stakes negotiation. Posturing, manipulation of public relations and the press and misrepresentations of the facts are part of the game. It’s like lamenting fighting in the NHL. It is a significant part of the game even though it has no direct purpose.

Further, the NFLPA’s proposal was disingenuous. It accomplishes their own goals without addressing the owners’ goals. They knew that before they put it on the table, and knew the NFL would never warm up to it. And the NFLPA trumpeted the 3-year proposal all over the place. This whole article is coverage of a proposal and a response that were purely done for the purpose of competing for the hearts and minds of the court of public opinion.

Getting to a new CBA isn’t going to be fun, it isn’t going to be civil, and it isn’t going to be quiet. The truth is that the court of public opinion only wants football in the fall of 2011. It will hold both sides in contempt if that doesn’t happen. And quite frankly, the public is best served by disregarding everything that both sides say from now until a deal is struck. Nobody is being completely honest. When the deadline comes, real negotiations will take place. The sides are just feeling each other out now, seeing if they can find weaknesses for later. Once a deal is reached, if there is no interruption of the sport, no matter how much pettiness may spew from either side between now and then, the public will be happy. And NFL GMs and agents will be working their tails off, trying to find loopholes to get around whatever agreement was ultimately reached. Because that is how this game is played.

-----

* Ok, quick aside here. The NFLPA would LOVE to see 100% guaranteed contracts. They are the only major sports union that hasn't gotten them. But assuming that outcome isn't happening, they want money spent on guarantees to shift more towards veterans than rookies.