Value/Cap Ratio (VCR) Part II: Digging into VCR by Contract Type

In Part I, we introduced the concept of the Value/Cap Ratio (VCR) metric — a measure of the value a team receives as a function of the cost of salary cap space occupied by a given player. VCR was calculated for all players who occupied $420,000 of salary cap space — the league minimum for a player with no experience — during the 2014 season. A special thank you to Jason Fitzgerald of overthecap.com for providing the data necessary for this project in a user-friendly format.

To see if there is any efficiency to be gained by a particular contract format, every player included in the study was coded into one of ten categories, based on his contract. Contract information is relevant here as the salary a player is paid is very much affected by his experience level. The earnings of players under rookie contracts are limited by the collective bargaining agreement (CBA). Additionally, players with less than four accrued seasons may be controlled by their teams via exclusive rights or restricted free agency tenders.

If a player had several different contracts generating cap hits, he was coded according to the contract that generated the largest cap hit.

The ten categories of contract are defined below:

Rookie: the first contract signed by a player irrespective of whether he was drafted or signed as an undrafted free agent.

Veteran free agent: a contract signed by a veteran player with four accrued seasons who is free to sign with any team as he was not tendered with franchise or transition tag, or a contract signed by a player with three years’ experience who did not receive a restricted free agent tender and became  an unrestricted free agent.

Veteran: a contract signed by a veteran player who re-signs with his existing team prior to the start of free agency or within the first two days of free agency, or a contract that encompasses the league years of a player contract that occur subsequent to the player’s rookie extension. For example, a player might be under his rookie contract through the 2015 season and then sign a contract extension that affects the 2015–18 seasons. In this example, 2015 is a “rookie extension” year and 2016–18 are “veteran” seasons. Players signed to contracts under franchise, transition tags are included in this category as well, as the rights of their prior teams are consistent with the concept of a veteran contract (i.e., the prior team is using its rights over a player to sign a “team-friendly” deal).

Internal free agent: a contract signed by a veteran player who re-signs with his prior team during free agency, but not within the first two days.

Free agent non-veteran: a contract signed by non-veteran players whose existing contracts ran out and were not tendered by their prior teams or who were released. These players are now available to sign with any team. These players are typically (but not by rule) signed for the league minimum.

Exclusive rights: a contract signed by a player with less than three years’ experience whose existing contract expired and was tendered by his prior team. His prior team maintains exclusive rights to negotiate with him and generally offers the player the league minimum for his experience level.

Restricted free agent: a contract signed while a player is a restricted free agent, including the restricted free agent tender.

Rookie extension: a contract extension in which one of the seasons of the extension replace a season covered by a player’s rookie contract. Seasons that were not originally covered under rookie contracts and are covered by the extension are classified as veteran contracts.

Veteran extension: a contract in which a season is covered by the contract extension  replaces a season covered by a player’s prior veteran contract.

Veteran restructure: a veteran contract that is restructured via an agreement between a player and team.

Using the categories above, here is a summary of the 1,827 player contracts studied:

SalaryCapCrunch.com

SalaryCapCrunch.com

 

The contract type that saw the greatest return on investment (i.e., VCR) was the rookie contract, which should come as no surprise to readers. The draft enables teams to acquire premier players at a slotted cost below market value. In fact, 82 of the top 100 players in the 2014 VCR ranking were categorized as holding rookie contracts. Similarly, non-veteran free agents and exclusive-rights players, who mostly receive minimum contracts, also had very strong VCRs.

What did come as a surprise was that veteran free agents had a markedly better VCR rating (2.51) compared to veterans (1.68). Similarly to veteran contracts, veteran extensions (1.87) and veteran restructures (1.35) lagged behind as less efficient contract models.

As explained above, the veteran category includes the following years of a contract: a contract signed by a veteran player who re-signs with his existing team prior to the start of free agency or within the first two days of free agency, or a contract that encompasses the league years of a player contract that occur subsequent to the player’s rookie extension.

Because veteran deals are being crafted while a player is under team control, the deals often offer the player less money than he may have received in free agency. The benefit for the player of the veteran contract is that he receives guaranteed money up front and does not have to bear the risk of a potential injury before becoming a free agent. In contrast, veteran free agent deals are made on the open market, where 32 teams can bid for the services of one player. NFL free agency evokes images of the $100 million Albert Haynesworth disaster and the $60 million Mike Wallace disappointment, as well as the dead cap money left in the wakes of those deals. Considering these examples, we would have expected veteran deals to have a better VCR than veteran free agent deals.

However, as demonstrated by the chart below, it is apparent that, actually, veterans have a higher average salary ($4.6 million) than veteran free agents ($2.8 million) — more on that later — and therefore it does make sense that veterans would have lower VCRs. Recall that VCR is the product of dividing a player’s approximate value (AV) by his cap factor (the player’s cap hit as a percentage of the team’s total salary cap). Thus, veterans who have a higher average salary, and therefore a larger cap factor, naturally have lower VCRs because it is impossible for a player’s AV to multiply to the same degree that a player salary multiplies.

The range for AV in the NFL in 2014 was 0–22. J.J. Watt led the league with an AV of 22, followed by Aaron Rodgers with an AV of 21. To explore this concept further, let’s hypothesize that there is a productive player contracted to a cheap deal who is paid $3 million and has an AV of 13. A different player making $9 million, while he would be expected to have a better AV, would not necessarily have an AV of 39 because it is not logical to think that his production would be triple that of the first player just because his salary is tripled. For example, in 2014, Russell Wilson, who was on his rookie contract, made only $817,000 and threw 20 touchdowns. Aaron Rodgers, who was considered a veteran at the time, was paid $17.6 million, 21x the amount that Wilson was paid. However, it simply wouldn’t be feasible for Rodgers to throw the number of touchdowns (420) that would technically make him 21x as valuable as Wilson in one season.

Therefore, the appropriate way to use VCR is to compare a player’s VCR to those of his peers who are in a similar salary range. To decipher if there is a difference in efficiency between veteran and veteran free agent contracts, the average VCR for both contract types was compared according to salary range. Players were organized into five categories of cap hits: (1) $15.00+ million, (2) $10.00–$14.99 million, (3) $5.00–$9.99 million, (4) $1.00–$4.99 million, and (5) less than $1.00 million.

The breakdown is as follows:

SalaryCapCrunch.com

SalaryCapCrunch.com

About half of the contracts for both veteran and veteran free agents range from $1–5 million. However, 36 percent of veteran contracts were valued at $5 million and above,  compared to only 14 percent of veteran free agent contracts. On the flip side, only 11 percent of veteran contracts were valued at less than $1 million, compared to 34 percent of veteran free agents contracts. To summarize, there are more veterans being retained by their original teams at high salary amounts than there are free agents being signed at high salary amounts. The pie charts below display the breakdown visually:

Salarycapcrunch.com

SalaryCapcrunch.com

 

SalaryCapCrunch.com

SalaryCapCrunch.com

Free agents are perceived as being costlier, because top-of-the line free agents do indeed receive larger contracts on the free agent market. However, that includes just a small number of players. In 2014, 89% percent of free agents had salaries of less than $5 million. In contrast, veterans are more highly paid on average because teams traditionally try to sign their best players before they are eligible to become free agents.

Looking at the salary ranges, the average VCRs for veterans and veteran free agents were comparable. The lone exception was the group of players who had cap hits of less than $1 million. Veteran free agents falling under this category had an average VCR of 3.90, while veterans had an average VCR of 2.10, 54 percent less. It’s worth noting that there were only 31 veteran players who made less than $1 million in 2014, so the sample size was relatively small. Conversely, there were 129 veteran free agents who were in that salary range during the same year.

The discrepancy in average VCR between both veterans and veteran free agents making less than $1 million is a result of both parts of the Value/Cap ratio. The average AV for veterans making less than $1 million was 1.23, less than that of the veteran free agents in this category, whose average AV was 1.88 (value). The average cap hit for veterans here was $766,000, compared to $647,000 for veteran free agents (cap).

There are several underlying issues generating these differences. The CBA mandates a minimum salary for players based on years of experience. In 2014, the minimum salary ranged from $420,000 for players with no experience to $955,000 for players with at least ten years of experience. While this rule ensures that more experienced players are more highly compensated, it also creates the risk that teams might eschew signing more experienced players due to their higher costs. To prevent this, the CBA has a clause called the minimum salary benefit (MSB). Under the MSB, a player with at least four years’ experience who is signed to a one-year minimum contract (with the allowance for a limited signing bonus, which in 2014, was up to $65,000) only generates the cap hit of the minimum salary for a player with two years’  experience, plus any signing bonus the player received. For example, in 2014, Rashean Mathis signed a MSB contract, which provided him with a base salary of $955,000 and a signing bonus of $65,000 for a total compensation of $1.02 million. Yet, for salary cap purposes, his base salary was considered $570,000 (the minimum salary for a player with two years’ experience). Combined with his $65,000 signing bonus (the maximum allowed under the MSB provision), his total cap hit was only $635,000.

SalaryCapCrunch.com

SalaryCapCrunch.com

Rashean Mathis smiling from his million dollar contract

In 2014, there were 97 players who had MSB contracts. Of those, 79 were veteran free agents, nine were veterans, and nine were internal free agents (see above — internal free agents are veterans who re-sign with their teams after the first few days of free agency). So, while 20 percent of all veteran free agents agreed to sign contracts featuring the cap hit typically accorded to a player with two years’ experience, almost no veteran players re-signed with their original teams in this manner. This explains the difference in the cap portion of the equation, between veteran’s and veteran free agents whose cap hits were less than $1 million. The difference in value can be attributed to the following: Of the 31 veterans who were signed to contracts of less than $1 million, 12 of them were long snappers. There’s not much upside in production for long snappers, and most of them have an AV of 1 every season.

Of the ten categories of contracts, three — veteran, veteran extension, and veteran restructure — involve players remaining with their prior teams before testing free agency. Adding up these categories, in 2014 there were a total of 39 players who signed with their prior teams for less than $1 million. Conversely, 129 players signed outside of their teams on these cheaper contracts. As mentioned above, the majority of these contracts under $1 million benefitted from the MSB clause, which meant that only part of these salaries was charged against teams’ salary caps. In contrast, there were only nine players who re-signed with their prior teams under MSB contracts.

It is now clear why, on average, veteran free agents had better VCRs in 2014 than veterans who remained with their prior teams without testing free agency (veterans, veteran extensions, veteran restructures). Teams are signing many more players to minimum contracts via free agency and are seeing respectable returns in AV; they are not resigning their existing players to these cheap contracts. The simple explanation for this trend is that the pool of external free agents is much larger (originating from 31 teams) than that of a team’s own free agents, and therefore a team has more options to add cheap, contributing players outside of its existing roster. Another reason might be that players may think that a new team can afford them more playing opportunities, so they may be more likely to choose to play on a minimum contract for a new team rather than their old one.

Similar to veteran free agency, internal free agents — players who re-sign with their prior teams, but only after a period of time being free agents and testing the market — had a robust average VCR of 2.66 in 2014, slightly better that that of veteran free agents (2.51). This small group of players, 56 in total (at all salary levels), re-signed with their prior teams for an average cap hit of $2.3 million, yet were still productive, generating an average AV of 3.68, leading to a strong average VCR.

What emerges from this entire analysis is that the notion of free agency being the province of lousy, overpriced contracts is simply false. Teams are signing valuable contributors, both players who were previously on their teams and new players entirely, at relatively cheap rates.

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