Explaining Salary Cap Dead Money
There have been quite a few questions in the comments about dead money in relation to the salary cap, so I wanted to dedicate a quick post to it.
When a player receives a signing bonus, whether it be on a new contract or a restructure, that money is paid out immediately to the player. For salary cap accounting purposes it is prorated out over the remaining years of the contract, but it can not be prorated out over more than 5 years.
Let\’s say a player signed a new 3 year contract that included a signing bonus of $3 million. That player will have a prorated signing bonus cap charge for each of those 3 years of $1 million and that is added on to whatever the base salary, roster bonus or other (LTBE) Likely To Be Earned incentive that player is scheduled to earn in that season. So let\’s say that same player has a base salary in year one of his contract of $465,000, his cap charge in that first year would $1.465 million.
Let\’s hypothetically say that before his second season you choose to release him and suppose he is scheduled to earn a year two base salary of $555,000. Normally base salaries are not guaranteed unless that player is vested and on the roster at the start of the regular season. So the team is not on the hook for the $555,000. Thete is still $2 million left in proration of the signing bonus that needs to be accounted for. If that player is terminated before June 1st, that $2 million escalates immediately as a dead money cap hit for that upcoming season. So originally that player was set to count $1.555 million against the cap, but now because his contract was terminated he will count $2 million against the cap as dead money.
Now if that same player is cut after June 1st and before the start of the season, only the originally proration amount hits the cap for that year as dead money and any other left over proration will hit the following year as dead money. So using our example, if the player is terminated after June 1st, the team will have a dead money cap hit in that year of $1 million and another $1 million dead money cap hit the year after.
You should know that signing bonuses also stack up on top of each other as well. In other words, let\’s say a player receives a signing bonus of $10 million for a 5 year contract. That breaks down to a $2 million a year cap hit proration of signing bonus for 5 years. Now let\’s say you need to restructure his contract to save cap room in year two and let\’s say he is scheduled to earn a base salary of $6.5 and you want to turn $5 million of it into a signing bonus so you can prorate it out. $5 million divided by 4 years left on the contract comes out to a another $1.25 million proration cap charge for the remaining 4 years that stacks onto the top of the $2 million remaining per year. So now years 2-5 of the contract have a signing bonus proration total each year of $3.25 million. That player originally was scheduled to count $8.5 million against the cap. ($6.5 million base + $2 million signing bonus proration amount) After the restructure he now counts $4.75 million against the cap. ($1.5 million base + $2 million signing bonus proration amount + $1.25 million signing bonus proration amount.
That same player after his second season has $9.75 million left of proration remaining on his contract. (3 years x $3.25 million) If you choose to cut that player before June 1st, the dead money cap hit is the full $9.75 million. If you cut that player after June 1st, his dead money hit for that upcoming year is $3.25 million and the second year dead money hit would be $6.5 million.
I hope that answers a few of the questions on dead money in relation to the salary cap. The above examples are crude, but the best way to explain it.