The NFL Sign-and-Trade

The Texans' Andre Johnson, tired of his team's perpetual rebuilding, has requested a trade.  Houston can hardly afford to trade him though, because while getting rid of Johnson would save them having to pay his $15.6 million salary, it would also add almost $12 million in dead money to their salary cap (ignoring for now the post-June 1 split rule), leaving a net savings of only around $3.7 million (hat tip to the excellent website overthecap.com).  Replacing anything close to Johnson's production for only $3.7 million would be impossible, so Houston is forced to keep their unhappy player. 

The Johnson example shows how the rules governing NFL player contracts help make trades rare, especially for star players with large contracts.  When they do happen, trades tend to involve players near the end of their contracts who are at risk of being cut outright.  With some careful contract structuring, however, a trade could allow two teams to capitalize much more on their individual resources in a way that would benefit both teams, and the traded player.

NFL contracts contain a guaranteed and a non-guaranteed portion.  See overthecap.com for an exhaustive explanation of all the various bonuses, incentives, and options that can be used in an NFL contract and how each affects the team’s salary cap.  But as a gross simplification, we can categorize all player compensation as either guaranteed or non-guaranteed.   Non-guaranteed salary is only paid if and when the player is still with the team at the time the contract specifies that it comes due.  Most regular salary is this non-guaranteed type.  Even though the player has a contract with the team, if his performance does not justify his salary, the team can cut him and will not owe him any of his future salary (he then becomes a free agent, able to sign with any team).  For this reason NFL contracts are sometimes referred to as one-way contracts: the player is contractually obligated to play for the money he signed for, but the team retains the option to terminate the deal at any time.

Regular salary could be made guaranteed, but in most cases the guaranteed portion of the deal is paid as a signing bonus.  This allows the player to get his money right away, though NFL rules allow signing bonuses to be spread over the life of the contract for salary cap purposes.  NFL players and fans have learned to look at the signing bonus as the real number that matters in contract negotiations, since this is the only money the player is assured of seeing.  The regular salary can be thought of as performance-based incentive pay (the player only gets the money if his performance justifies keeping him on the team).  Crucially, however, if the team decides to cut the player, the signing bonus money that had been pro-rated across all the years of the contract accelerates onto the current year’s salary cap (it becomes so-called “dead money” that is owed to a player no longer on the team).  This creates a powerful incentive not to cut a player, since it can frequently cost more (in the current year) to cut him than to keep him (though the savings may be worthwhile in the long term).  Even though a player might not be justifying his paycheck, he might be worth keeping if his performance (even if only as a backup) is worth more than the combined cost of getting rid of him and replacing him.

When a player is traded, the effect to the team that trades him is exactly the same as if it had cut him – future salary is wiped off the books (becoming the responsibility of the receiving team), but pro-rated signing bonus money accelerates onto the current year’s cap, creating the same disincentive to trades that exist for cuts.  As a result, much of the time the only players who are traded are those who stood a good chance of being cut outright, with the receiving team frequently giving up a low draft pick for the privilege of skipping in line ahead of other teams who might have bid for the player’s services in free agency.  Furthermore, traded players will often negotiate a new deal with their new teams, as the prospect of playing on a completely non-guaranteed contract will often induce them to restructure their deals to include guaranteed salary, thereby reintroducing the job security of the dead money protection, even if at a lower overall level of pay.

It doesn’t have to be like this.  Deals could be structured to work better for players and to both teams in a trade, though this would only happen in a situation where a trade seemed likely.  A sign-and trade deal, in which a trade deal is contingent on a player signing a pre-negotiated contract, is a common thing in the NBA, whose rules allow a player’s current team certain contractual freedoms over any other team they might sign with as a free agent.  In the NFL, there’s no such incentive for a sign-and-trade, but it could still be a mechanism for a team to extract significantly more value from a player than they could otherwise get with a typical trade.

Here’s how it would work: a team decides a player isn’t worth his salary (for existing contracts) or desired salary (for new contracts) and starts considering options for parting ways.  Normally, the team’s options would be limited to either cutting the player or attempting to trade him for a pittance as described above (or simply allowing the contract to expire if that will happen soon).   But if a contract could be negotiated to reduce the signing bonus and replace it with guaranteed salary, then the old team would reduce the acceleration on the current cap, the new team would gain a new player at a discount, and the player would retain more leverage and security than they otherwise would in a trade, while potentially earning more than they could if they were cut outright and made a free agent.

In the case of Andre Johnson, suppose he and the team renegotiated his contract to keep the total and guaranteed salaries unchanged, but simply converted half of the pro-rated bonus to guaranteed salary.  Now Houston can trade him at a dead-money cost of "only" $6M instead of $12M.  Meanwhile, the team trading for him (say, Carolina), would get him at a $6M discount over his existing salary (which is presumably at least somewhat reflective of his market value since he negotiated it with the leverage of possibly leaving in free agency).  Furthermore, Carolina would be on the hook for six million fewer guaranteed dollars than if they had signed Johnson to his existing deal in free agency.  In fact, Johnson could conceivably even get a raise over his current deal and Carolina would still be getting him at a discount.  In this way, the two teams share the cost of the player and each make use of their comparative advantages (having the player under contract in Houston's case, and offering a fresh start and draft picks or other assets in Carolina's).  David Ricardo would be proud.

Why is this a bad plan?