Rookie contracts: Part 2

In the second part of my series about negotiating rookie contracts, I take a look at the mechanism that allows players to upgrade their fourth year.

In the past, most teams used three-year contracts in all lower rounds. After three years in the league, the player is entitled to rights as a restricted free agent, allowing him to seek offers from other teams, for which the incumbent team has a right to match or lose the player for compensation, depending on the level of the tender offer.

In the past five years, more and more teams have switched from three- to four-year contracts for all draft picks below the second round. Any term longer than four years was outlawed by the 2006 extension of the Collective Bargaining Agreement, restricting all contracts below the first round to four years. As a result, almost all teams except a couple of holdouts now negotiate four-year contracts (interestingly, the two Super Bowl participants, Arizona and Pittsburgh, still do three-year deals in the lower rounds; maybe there’s something to that).

I have always debated the value of paying an extra year’s prorated signing bonus to get the fourth year since the odds are that most of these players will wash out before then. The amount of extra bonus is negligible in the lower rounds but can be a couple hundred thousand different in the fourth and third rounds. However, if one or two of these players becomes a star, paying the proportionate amount of signing bonus to get that extra year is worth it for all.

The Escalator

In virtually every round but the second, the “backside” of the contract becomes a separate and important negotiation. The escalator delineates how a player will be compensated in the fourth year in the event he reaches certain performance levels. Those two issues -- how he will be compensated when reaching certain levels of performance and what levels of performance are the qualifiers – are the subjects of great debate.

The First Level

Most teams will escalate the player to the draft round Right of First Refusal (ROFR) tender – for this year’s draft picks, their fourth year ROFR tender will be $1.308 million in 2012 – for one year of a requisite playtime, usually at about 35 percent.

Although the majority of teams only mandate one year of qualified playtime to earn the first-level escalator, some teams require two years of requisite playtime at a certain level to get the escalator (we did in Green Bay), the theory being that a backup player can fall into playtime one year due to an injury to the player or players ahead of them on the depth chart.

And although the majority of teams use the ROFR tender as the amount for the first-level escalator, some teams (the Eagles among them) prefer to use a number different than the ROFR number, hedging against a change in the CBA that may potentially raise that number as part of the negotiation.

The Second Level

A handful of teams will escalate to a second level – a higher amount based on superior performance such as a Pro Bowl or cumulative playtime of a high number, say 80 percent. There are about 10 teams that escalate beyond the first level to a higher amount for such performance. There are even a couple of teams (the Dolphins and Giants among them) that have multiple (up to six) escalator levels based on playtime and performance goals.

The theory of the second-level escalator is that, although it is certainly a tall task for an incoming player (especially in the later rounds) to achieve a Pro Bowl selection or cumulative playtime of 80 percent, the carrot of a higher escalator is one that’s a nice incentive for the player to have, no matter how hard to achieve.

As to how high, these second-level escalators usually raise the fourth year to the second-round restricted free agent tender, scheduled to be $2 million in 2012.

The point of the above is that each team is different and there is no standardization in these rookie contracts, making the negotiation much more about the “backside” of the contract than the signing bonus, especially in the later rounds.

Negotiations are all about two things: leverage and risk. The escalator is way to allocate risk in a player contract negotiation, incentivizing the player’s upside while protecting the team’s downside with a fourth year of the contract buying out the vagaries of restricted free agency.

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