Weekly Commentary & Review #4

Contract incrementalism kills parity, the cap is real but contracts are fake, what are Saquon Barkley and Aaron Rodgers doing?

This post looks at a handful of relevant articles, analyses and podcasts from the week that provide useful insight to be absorbed, or have missing context to be added. I’ll add my takes on the material, while heavily quoting the relevant passages.

This is going to be a contract-focused commentary, with training camp becoming the new extension bonanza.

CONTRACT INCREMENTALISM KILLS PARITY

Justin Herbert is getting paid. But is it enough?

The big-money extensions have come flooding in at a number of positions in the last week, most notably at quarterback (Justin Herbert), offensive tackle (Andrew Thomas and Tytus Howard), cornerback (Trevon Diggs), linebacker (Uchenna Nwosu) and tight end (Cole Kmet).

It makes sense that extensions are happening at this stage in the offseason for both sides. From ownership perspective, the cash-flow situation for the next year is as solid as it’s going to be, with free agents and rookies signed, and projections for ticket sales and ancillary seasonal revenues solidified.

Extensions, especially at premium positions, are the biggest cash outlays teams are going to have to make, potentially for several years. The combination of signing bonus and full guarantees for the biggest deals necessitates having to arrange upwards of more than $150 million of liquidity for payment and escrow, not something every owner has sitting on-hand at all times. The multi-billionaire ownership class can probably find that type of cash in the couch cushions, while some legacy owners need to take loans or sell off minority stakes in their franchises.

From the player’s perspective, why sign early in the offseason when each subsequent extension at your position is so often an exercise in incrementalism, or you can be early and miss an entire market move, like we saw with wide receivers last offseason. D.J. Moore’s three-year, $62 million extension signed last March looked downright middle-class once the season started, going from the third highest APY for wide receivers at signing, to ninth by the time the 2022 season kicked off. When the way of doing business for NFL contracts is pointing at the last signed and demanding 5% more, waiting as long as possible has its benefits.

I’ll focus on Herbert since quarterback is the true big-money position, and this offseason has illustrated contract incrementalism as clearly as possible. Jason Fitzgerald at Over The Cap has a breakdown of the Herbert extension and it’s assumed cash flows, based on his league sources.

Justin Herbert signed a five year, $262.5 million contract today making him the highest paid player in NFL history. The contract is very heavy on up front cash, setting big records in first and second year cash flows, while following the recent pattern with vesting guarantees that are not guaranteed at signing. Here is a breakdown of some of the key points of the contract.

This is one of the first contracts that seems to explicit deal in “new money” guarantees, which is something I’ve been harping on for years. Herbert’s contract has $133.738375 million guaranteed at signing, which ranks third in the NFL behind Deshaun Watson and Lamar Jackson. When pulling out Herbert’s 2023 and 2024 existing compensation the number works out to a clean $100 million in new guarantees. That ranks fifth behind Watson, Jackson, Jalen Hurts, and Aaron Rodgers.

The new money guaranteed at signing is decent for Herbert when you consider the timeline on his deal, as this extension is a combination of new money with the year remaining on his rookie contract, plus an exercised fifth-year option.

The real strength of the contract for Herbert lies in the big cash flows on the front end of the contract. Herbert will earn $100 million in new money by the end of his 1st new contract year. The prior high for that was $80 million, so this is a massive increase for Herbert and the market. Through year two Herbert will be at $124 million, $11.5 million higher than the next closest player. The numbers come back down to earth in the final three years which show moderate growth over the market.

In 2023, Herbert will earn a signing bonus of $16.12 million along with the minimum salary of $1.01 million. This represents a raise of $12.9 million from his existing salary. His cap charge will be $8.45 million or exactly what it was before the extension.

In 2024, Herbert will earn a massive $50.6 million option along with a guaranteed $6 million salary. This is a $27.1 million raise from his rookie option salary. His cap will be $19.34 million.

I’m not sure if the front-loading of cash in the contract was needed to get Herbert to agree to a minimal increase in APY over the likes of Jackson and Hurts, or if it was mostly a tool for the Chargers to keep his cap chargers aligned, or even lower in 2025 ($19.34M versus $23.5M), than they would have been under his rookie contract.

2025 brings another huge option bonus worth $45 million as well as a guaranteed $15 million salary. The new money cash hits $100 million this year. The cap that year will be $37.34 million.

In 2026 Herbert has a $24 million salary that is guaranteed for injury and will be fully guaranteed by the time 2026 rolls around. The cap grows to $46.34 million and his running cash is $124 million.

In 2027 Herbert will earn a $36 million salary (this is already injury guaranteed) for a cap charge of $58.34 million to bring the three year total to a record $160 million, $4 million more than the next closest QB contract.

In 2028 Herbert has a $47 million salary and a $5 million roster bonus. His cap charge that year will be $71.12 million to bring the four year new money to $212 million, also $4 million more than the next closest player.

In 2029, there is a $10 million roster bonus and $40.5 million salary for a cap charge of $59.5 million. The $262.5 million total is tops in the NFL by $2.5 million.

Assuming the NFL cap grows by 10% per season, Herbert’s cap hits in percentage of cap will be as follows:

• 2023: 3.8%

• 2024: 7.8%

• 2025: 13.7%

• 2026: 15.5%

• 2027: 17.7%

• 2028: 19.6%

• 2019: 14.9%

The highest percentage of cap for a quarterback this season is for Patrick Mahomes at 17.7%, a number Herbert wouldn’t reach until 2027. Mahomes won the Super Bowl last year with the second-highest cap hit in the NFL, worth 17.1% of the cap. It’s a great illustration on how valuable truly elite quarterback play can be, creating so much surplus value, even at high cap charges.

Assuming the Chargers also have an elite signal-caller (I think they do), they could make him the highest paid player in NFL history, and not severely compromise their cap for the for the next five seasons. The Chargers will likely look to extend in the 2028 offseason, avoiding at the squeeze of the nearly 20% cap hit and a natural time to lock up the franchise quarterback with two years remaining on the current deal.

And this is where the incrementalism of the market makes such a huge impact. If contracts matched player value, there is no way Mahomes or Herbert would have a spike in cap charge only make them incrementally more expensive than lower tier players. I think Jalen Hurts is a good quarterback, and has proved a ton of value as a mid-second round pick. But there’s no way the Eagles would be in as good of a position to succeed as the Chargers if Hurts and Herbert had the same contract charges.

The Eagles chose to “solve” that issue by structuring Hurts’ deal with tons of option bonuses, kicking the can to a final void-year charge of $97.6 million. Sure, the Eagles will be saving 5-6% of the cap with Hurts’ contract structure versus Herbert’s when the charges rise in a couple years, but that likely just gets closer to equalizing their relative cost-benefit values, rather than providing a clear advantage. Hurts will be barely 30 years old when his contract will need to be extended and reworked, and the disadvantage to teams with elite quarterbacks like Herbert will only multiply on the next deal. Maybe Howie Roseman isn’t entirely concerned about the future anchor on team performance of an additional $90 million to spread out over the next deal: he’s probably as likely as not to be gone by then anyway. But this is a very different means of operating from what the Eagles did with the Carson Wentz extension, giving themselves flexibility to pivot if needed.

Elite quarterback draft picks are the gifts that keep on giving, as long as extensions go along in an incremental fashion, like we saw with record APYs for Hurts ($51M), Lamar Jackson ($52M) and Herbert ($52.5M). I’m not sure if a young quarterback will ever push to get the maximum of the value they provide over others, but Herbert and Joe Burrow it would be at least $7-10 million more per season than where the market now stands, while the second and mid-tier quarterbacks getting near-record deals benefit from their value generation.

THE CAP IS REAL, BUT CONTRACTS ARE FAKE

Joe Mixon: one of the many to experience the realities of NFL contracts

Few things frustrate me more than “the cap is fake” discourse. Luckily, the Saints have, finally, been forced to throttle down on their perpetual can-kicking, so strongest provider of “evidence” of the cap’s fakeness is out of the game. But misunderstandings of the cap is still very much a thing. I’ll say it one time here and then go into detail below: The cap is real, but the contracts are fake.