The differences in rookie contracts
First, rest in peace, Michael Jackson and Farrah Fawcett. Those of us who were children of the ‘70s lost a part of our legacy yesterday.
We’re at a time of year when there is (pardon the pun) quite a draft. The drafts for three of the four major team sports – Major League Baseball, the National Hockey League and the National Basketball Association – all have occurred in the past two weeks. The NBA draft was Thursday night, the NHL draft is tonight and the MLB draft was June 9-10. And although the NFL Draft occurred in late April, it is still very much front and center as the matter of signing the draft picks is upon us.
Having just negotiated six of these draft picks for the Eagles, I know that the system in the NFL has its pluses and minuses. With that in mind, I thought I’d take a look at the negotiation and cap/scale issues facing the three major sports (sorry, hockey fans, I can’t speak with any remote intelligence on that subject). Let’s consider the big three:
Major League Baseball
There is no overall salary cap in baseball, nor is there any kind of rookie cap limiting how much teams can pay their draft choices. Thus, unlike the NBA and NFL, MLB has – in theory -- the truest free-market application to its selection process, giving players at the top leverage (whether real or perceived) to negotiate without any of the parameters imposed by the caps of the other sports.
The most interesting part of the negotiation of draft choice contracts in baseball is a concept that MLB has instituted called “recommendations” for signing bonus amounts for each slot in each round. Clubs are obviously not bound to come in under or at the “recommended” slot, but the mere meaning of the word indicates that the home office is watching (and somewhere, antitrust lawyers are cringing).
Now, according to the Sports Business Journal, those recommendations are getting smaller. MLB is “suggesting” a 10-percent reduction in recommended bonuses for the first rounds of the recent draft and a 15-percent reduction of those recommended bonuses for the fifth round and below. According to agents who were presented with this sobering news, the economy was given as the reason for the drop, and teams are hiding behind the league office in their negotiations. Again, it’s not compulsory that clubs follow these slots, and there may be some who don’t. As for the 10-percent drop, MLB did the same in 2007 but brought it back up 10 percent last year.
All of the above is well and good, but there’s one force out there who treats these recommendations as a pebble in his shoe to be easily discarded. That force is agent Scott Boras. Known for his scorched-earth negotiating style and comprehensive books presenting the best possible view of his clients, Boras uses every bit of leverage he can in negotiations.
And Boras has the biggest fish in the pond this year. Stephen Strasburg is being hailed as a once-in-a-generation talent, the no-brainer first pick of the downtrodden Washington Nationals. I admit it, that’s my team, ever since they were the downtrodden Washington Senators with Frank Howard, Del Unser and the gang. I cried when they moved out of Washington, even though they were the worst team in the league. As the great sportswriter Shirley Povich said about having the Senators in town as opposed to not having them, “Halitosis is better than no breath at all!”
Boras has the perfect storm with Strasburg – the player of a lifetime who can turn around a franchise in the nation’s capitol that’s been the losingest club in the league, a franchise that’s been playing to crowds featuring several thousand fans at best, that has a beautiful new ballpark whose honeymoon period died after one year and whose fan base is dying for a savior. This is not a setup for the Nationals to look to MLB for “recommendations.”
The highest bonus given to a draft choice to this point has been $10.5 million to Mark Prior. Strasburg will easily eclipse that, as Boras has strategically floated the $50-million number out there, raising the expectations of the public for that to happen.
So MLB’s draft choices – without a cap or pool – begin negotiations with the league providing its recommendations. We’ll check back in a couple weeks to see if those numbers have been heeded by the clubs.
For the most part, the players drafted last night already know what they’re going to make. The NBA has a rookie salary scale, which – more than any other major sport – provides almost exactly what each player will receive, depending on where he is drafted. These are appropriately called “rookie scale contracts.”
Each rookie scale contract of a first-round pick is for two years with a team option for the player’s third and fourth seasons followed by, if the options have been exercised and the player has not signed a long-term extension, a restricted free agent number. Eighty percent of the compensation for the rookie scale contract is already negotiated for the player, with the agent responsible for completing the other 20 percent. The contract is fully guaranteed for the first two seasons and the first option year, leading some clubs to try and trade out of the first round to avoid such guarantees.
For example, the top pick of the 2008 NBA draft, Derrick Rose, received the following contract, achieved through little to no bargaining:
2010/11: $5,546,160 (team option)
2011/12: $6,993,707 (team option II)
2012/13: $9,091,819 (restricted free agent)
The second pick in the draft was Michael Beasley, who received the following contract:
2010/11: $4,962,240 (team option)
2011/12: $6,262,347 (team option II)
2012/13: $8,172,362 (restricted free agent)
And so it goes in the first round, stair-stepping down the round. The money is certainly strong, but not to the level of top picks in the NFL as far as guarantees, and earned on a year-by-year basis.
The important distinctions in the signing of NBA draft selections are: (1) there is little to no negotiation on these picks, ensuring no holdouts (in fact, the players drafted last night will sign before the NFL first-rounders drafted two months ago); (2) teams must guarantee the first three years, but the amounts are palatable, with the highest pick in the draft only receiving $15M or so of guarantees, as opposed to almost three times that sum for the top pick in the NFL Draft; and (3) the money is paid on an annual basis, as opposed to an upfront signing bonus in which the player has the money in the bank before playing.
There are those who believe the NFL should go to a system similar as opposed to...
Although many have failed to report this, the NFL does have a rookie salary cap. It’s called the “entering player pool” in which a number is given to each team after the draft depending on the location of its draft selections. So in a way, the rookie cap is a sort of defined “recommendation” on what each team should pay its draft choices similar to Major League Baseball, with the added kicker of a cap.
The rookie cap – a subset of each team’s overall cap – is not a large number in the NFL. The average rookie cap is around four percent of the team’s overall cap, a miniscule amount of cap tied up in all the drafted and undrafted rookies on the roster. Thus, the problem with the system in the NFL is certainly not the allocation of rookie contracts to the cap.
The problem is cash, not cap, especially at the top. Due to the increasing leverage of play ers at the top of the draft, the cash outlays to top picks have become a source of consternation to league officials and veteran players every year. This year, we’ve seen guaranteed amounts of over $41M to Matthew Stafford, the highest guarantee in the history of the NFL, and $28M to Mark Sanchez. Having said this, the problem is limited to a handful of players every year, but it’s those players who get the attention of the media. No one writes about players on their rookie contracts making less than $500,000 in their third year in the league.
Due to the operation of the rookie pool, there are a myriad of rules and regulations that have to be navigated in every contract to avoid pool charges yet provide the player the amount set by the marketplace. As a result, these contracts end up being up to 60 pages long, most of which is simply language to keep money out of the rookie cap. For example, Sanchez will not receive a signing bonus in 2009, simply around $2.5M of salary, which will be his cap number to squeeze into the rookie pool. However, he will reportedly receive more than $30M over the next three seasons. That’s the weird dichotomy between cap and cash with these rookie contracts.
NFL teams do have to squeeze their picks into a cap, and the functional reality is that 50-55 percent of each team’s rookie cap -- and a much higher percentage of cash --ends up going to the top pick. There is much debate about the players at the top, but the vast majority of rookies represent fixed and reasonable costs for their teams.
Having summarized these rookie contract issues, here’s the bottom line on players entering any of these leagues: The goal is to get to the second contract. Except for a few aberrations – bonus babies such as the “S” boys, Stafford, Sanchez and Strasburg – the real money will be on the next contract, not this one. Although there’s a lot of attention paid to what these rookies make coming into the league having not played a minute of professional sports, these contracts pale in comparison to veteran contracts, especially the lucky few who reach the mother lode of free agency.
Enjoy the weekend.