From Million-Dollar Deals to Salary Caps: The Evolution of the NFL’s Pay Structure
Do you ever wonder how much money your favorite NFL player makes? The NFL has undergone tremendous changes over the years, and one of the biggest shifts has been in the pay structure of its players.
From the days when million-dollar deals were unheard of in the NFL to the modern era where players can now earn over $50 million a year, the NFL has come a long way. In 1994 the NFL implemented the salary cap along with free agency as the means of managing monies and promoting competitive balance.
However, with the introduction of salary caps, teams have had to rethink their strategies when it comes to signing and retaining players. In this blog post, we’ll take a closer look at the evolution of the NFL’s pay structure, and how it has impacted the league as a whole. So, sit back, grab your favorite team’s jersey, and let’s dive in!
Introduction to NFL Salary Caps
The NFL salary cap is the total amount of cash that teams can drop on their player’s salaries each year. However, teams can manipulate the cap (quite easily), so they’re able to spend more cash on their team’s rosters than what the salary cap allows (which is why I often jokingly say that the “cap is fake”).
The salary cap changes from year to year based on various factors connected to league revenue and expenses. But why the heck does the NFL even have a salary cap?
Well, supposedly, it’s to keep things fair and competitive for all the teams. The idea is that if there was no salary cap, then the richer teams could just throw-out massive amounts of money at the best players and just dominate the league. The original idea of the salary cap was all about leveling the playing field.
Teams need to be smart in how the manage their monies if they want to remain competitive. The idea is that this supposedly gives smaller market teams a shot at success if they can manage their resources wisely. The salary cap was designed to promote competitive balance and reward teams that are savvy with their finances.
Introduction of Shared Revenue
In the early days of the NFL, teams made most of their money from local ticket sales. They also sold rights to local radio stations to broadcast games, but the revenue from radio broadcasts was minimal. However, eventually radio broadcasts became more lucrative. Teams secured contracts with stations to broadcast games locally and regionally. And when broadcast television began to grow, teams then started to secure contracts with local and regional stations to broadcast games on television, and that was the financial game changer.
By the mid-1970s, NFL teams were generating significant monies from those local and regional television contracts. However, each team secured their own deals with broadcast partners. The NFL owners did not have any broad revenue sharing models in place. That’s not to say they never shared revenue, because they did, but it was minimal. For example, the home team sold tickets and then gave the visiting teams a portion. The NFL also shared the revenue generated from the Monday Night Football broadcasts (which had started in the mid-1960s).
By the early 1980s, due to population disparities between cities and also due to variants in television reach from city to city, some teams were able to generate drastically more revenue than other teams. The smaller market teams complained that they couldn’t compete, so in the 1980s the NFL began to develop a robust shared revenue model.
Rather than individual teams generating revenue, the teams would pool most of their monies, and then split the revenue (mostly) evenly. This was tweaked multiple times in the 1980s and finally reached a somewhat permanently framework by the early 1990s which is still in place today.
The salary cap was first implemented in 1994. The salary cap is determined by a portion of the revenue generated by all the teams (collectively). So the salary cap has fluctuated each year somewhat based on monies generated. The salary cap plays an important role in the success and growth of the NFL.
How is the NFL Salary Cap Calculated?
The salary cap calculation was determined by the collective bargaining agreement (CBA) between the NFL and the NFL Players Association, based on the league’s revenue. Some revenue is considered “local” and some monies are “shared.”
Calculation of “Local” Revenue: Local revenue consists of 60% of the revenue from regular season games, including ticket sales, concessions, parking, and local corporate sponsorships. The home team keeps that 60% sum (and it many cases it gets split between the NFL team and the local stadium ownership). Also, all income from pre-season games are considered local.
Calculation of “Shared” Revenue: The other 40% of the funds from ticket sales and local sources get thrown into the big shared “pot.” All 32 teams contribute to that big “shared” pot. In addition to that, 100% of the NFL television contracts (e.g. Fox, ESPN, NBC, CBS, etc.) go into the big shared revenue pot… and the television contracts bring in significantly more money than the ticket sales and other local sources. Also, all income from playoff games, the Super Bowl, and the Pro-Bowl all go into the shared pool.
Calculation of the Cap: The salary cap is determined by the shared revenue. 51.2% of the total shared pot goes to the owners (split evenly 32 ways) and 48.8% of the total pot gets allocated to the players (collectively). For the 2022 season, that 48.8% sum was apx. $7.2 billion dollars, which is apx. $224.8 million per team (the actual full formula in the CBA is convoluted, but for the purposes of this article I’m using simple terms and numbers).
Over the last decade, the NFL salary cap has increased each season by apx. 5-8% except in the 2021 season because revenues went down from the year before due to COVID.
A Look at Pre-Cap Pay Structures
Back in the day, before the Salary Cap was put into place in 1994, NFL teams had free reign to spend however much they wanted on their players. And because there was limited revenue sharing, some teams could spend a lot more, having crazy high salaries for their players, while other teams struggled to keep up. This clearly put some teams at a disadvantage.
But then, when the salary cap came into play in 1994 everything changed. Teams were suddenly forced to be more strategic with their spending. In the 1990s, many teams struggled to do this well. But over the last 20 years, most teams have learned to navigate the salary cap.
The salary cap and revenue sharing have definitely leveled the playing field. Of course, some teams have managed to expose loopholes and ways to get around the cap (which has caused me to regularly say that the “cap is fake”). But even with that in mind, the salary cap has still been a major game-changer in the history of the NFL.
Additionally, there have been challenges along the way, such as disputes over how to calculate and enforce the cap, and concerns about whether it has led to a decline in competitiveness. Despite these challenges, the salary cap remains an important feature of the NFL today, providing a framework for how teams allocate monies.
The Impact of Salary Capping on the NFL
The general perception is that the NFL salary cap forces teams to be extra careful about how much they’re paying their players if they want to be able to stay under the cap (which is mostly true). To do this, it seems that teams have focused on building rosters that include both high-priced veterans and low-cost rookies. This way, they can get the best of both worlds and still achieve their goals.
Most teams want to win games, make the playoffs, and maybe even make it to the Super Bowl. But with the salary cap in place, teams are more motivated (and incentivized) to find creative ways to build their rosters and creative ways to account for the monies they spend. It’s a challenge, and some teams suck at it.
Similarly, the salary cap has also had a significant impact on free agency in the NFL. The salary cap sets the parameters for how much teams will likely spend in any given year. The salary cap rules also govern how long-term contracts are structured.
On the other hand, some free agents may be willing to sign shorter deals or take smaller salaries in hopes of eventually landing a bigger payday. In any case, the salary cap adds another layer of complexity to the NFL offseason, so it’s essential for NFL teams to understand how to manage the salary cap is in place.
So, there you have it folks, the evolution of the NFL’s pay structure in a nutshell. From the days when players were lucky to make a few thousand dollars a year, to the current era where salaries can reach astronomical heights, the NFL has certainly come a long way.