SPORTS CONTRACTS: A QUANTITATIVE NIGHTMARE

SMASHING RECORDS

If you follow football, you may have recently heard that Los Angeles Chargers quarterback (and owner of the second best head of hair in the NFL) Justin Herbert signed a blockbuster deal to become the highest paid quarterback in NFL history (in terms of average annual value, AAV). If that sounds familiar, it might be because two other quarterbacks did the same thing this summer: Philadelphia’s Jalen Hurts in April and Baltimore’s Lamar Jackson slightly later in April. What gives? Why are records like this being smashed so often, and why do the numbers seem to keep getting higher and higher? In this article, we’re going to dive into some of the reasons that mind bending contracts are much more than meets the eye.

NO GUARANTEE

Sports contracts are usually presented with three numbers: a length of time, a big number, and a slightly smaller number. That smaller number is often the guaranteed money, which is what it sounds like. When a new contract is reached, the big headline number is not necessarily what that player will receive; like any employee, an athlete can be fired or quit, which voids any money left in the contract (note: this is only the case in the NFL. In other sports, the contract is often automatically guaranteed). Guaranteed money, though, cannot be voided. The team is on the hook for that money come hell or high water. 

Guaranteed money can be guaranteed for skill, salary cap, or injury, or it can be fully guaranteed. What these terms mean specifically isn’t important for the purpose of this article, as most of these massive contracts in recent years are fully guaranteed. The point is that the big numbers you see are not necessarily accurate. In the case of Justin Herbert, although his contract is for $262.5 million dollars, only $133.7 million is fully guaranteed. If he stops being a top five quarterback, he might not see all of it.

It would be remiss in a section on guaranteed money not to mention Deshaun Watson. Last year, the Cleveland Browns—never known for making good choices—gave Watson a $230 million contract that was fully guaranteed. While there were concerns that this would become the norm for quarterbacks, and even rumors that it was delaying other deals, no contract has since come close. It seems that, rather than the new norm, the Watson contract was another example of the Cleveland Browns taking an…innovative approach to management.

CASCADING CLASSES

Another factor to consider with all of these repeat headlines is how quarterbacks enter the league. Whenever a quarterback is offered their initial contract, there are rules and regulations, laid out in collective bargaining agreements, that have to be followed. For quarterbacks, the first contract is almost always four years with a fifth year option. A common time for the negotiation of the second contract is after the fourth year. For example, both Herbert and Hurts were drafted in 2020 and just finished their fourth year in the league. That class also featured phenom/heartthrob Joe Burrow, who will probably quickly dethrone Herbert once his extension is negotiated. Basically, the reason you see a flurry of records made and broken every offseason is because classes of quarterbacks come up for extensions at the same time. Those that take longer to be negotiated often end up being worth more money.

RESTRUCTURING, DESTRUCTURING

When I started this article, I included the note that Herbert’s contract is the largest by average annual value, which is calculated as the contract value divided by the number of years it covers. Contracts rarely work that cleanly, though. Let’s return to the case of Deshaun Watson. Watson’s deal had an AAV of $46 million, but his actual salary in 2022 was just over $1 million (the lowest possible salary according to union rules). Structuring a deal like this allows a team more wiggle room in any given year to pay more players more money, rather than be stuck with a big contract every single year. NFL teams have a salary cap that determines how much their total payroll can be, so deals like this allow you to build a better team at the cost of eventual pain. 

The wizardry doesn’t stop there, though. Earlier this year, the Browns restructured Watson’s contract to open up $36 million dollars in cap space this year. Sounds great, right? Unfortunately, there’s always a need to pay the piper. From 2024-2026, the Browns will owe Watson an astounding $63.96 million every year. They’ll also have to throw in almost $9 million dollars in 2027, a year he is not under contract for them. 2023 might be make-or-break for this team. When you hear about a contract in AAV, remember that it’s rarely that simple in practice. 

HUT, HUT, HIKE!

So, it turns out that record breaking NFL contracts might be smaller and less record breaking than they first appear. Whether it be due to a lack of guaranteed money, a destiny to be upstaged a couple weeks later, or front office witchcraft, these deals are much more than you just see in a headline.