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Timing everything with NFL contracts

July 23, 2014

Hundreds of thousands of dollars on the line when planning renegotiation, new research finds

When renegotiating a contract in the NFL, timing is of the essence — the player can benefit financially the earlier in the offseason the contract is signed, while the team can benefit by waiting.

And timing can mean a difference of hundreds of thousands of dollars, according to new research from the University of Chicago Booth School of Business.

"This paper is about a seemingly very small part of the NFL contracting — when do you get paid in the offseason?" says Gregor Matvos, an associate professor of finance at Chicago Booth.

He says that whether football players get paid early in the offseason or later in the offseason shouldn't matter, because regular-season games don’t start until September.

"It turns out it matters hugely — the timing of these payments, how they're staggered," Matvos says. "In a lot of markets we don’t quite understand how important timing is."

No NFL contracts are guaranteed — though players are bound to the teams with which they have their contract, the teams can cut ties with the players at any time. Thus, with no safeguards, teams could delay renegotiation with a player until late in the offseason, giving teams an upper hand because there would be few if any openings elsewhere and the player would have little option but to take whatever the team offered.
For veteran players, though, a roster bonus often is part of the payment package and must be paid early in the offseason, forcing teams to decide whether to keep or cut a player at a time that is more opportune for the player. The rest of the salary is paid at the end of the offseason.

In his paper, "Renegotiation Design: Evidence from National Football League Bonuses," which was published in May in the Journal of Law and Economics, Matvos looked at 4,220 contracts signed in the NFL from 1994 to 2003, focusing on the 1,428 contracts in that span that were two years or longer, as well as corresponding player performance data.

Matvos focused on the NFL because of conversations he had with Andrew Wasynczuk, a former chief operating officer with the New England Patriots who now teaches at Harvard Business School, and a realization that "sports are a really nice lab to think about contracting because things are very constrained."

"I started thinking about renegotiation — how it happens, why timing of renegotiation is very important," he said. "You really want to think about how you’re going to structure your contract. …

"In the NFL we can measure dollars. If you slightly mis-structure your contract on the timing, that could potentially cost you hundreds of thousands of dollars."

Matvos says NFL contracts are interesting because teams and players have to "buy" trade-offs — through signing bonuses, roster bonuses and salary.

"What does a nonguaranteed contract mean for a player? It means that if I, the team, want to keep you, I have to pay you this money (roster bonus), but if I don’t want to keep you I can just terminate the contract," he says. "So in some ways as a team, I have an option on your play. But of course there is a price for this contract ex ante. ... Just because a player doesn't have a roster bonus doesn't mean they're worse off. Hopefully they got compensated appropriately for it, with a bigger signing bonus or a bigger salary. It's stunning that such a little difference could matter so much."

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For more information, Gregor Matvos can be reached at Gregor.Matvos@chicagobooth.edu.