The NFL is not only one of the highest-grossing sports in the United States, it’s also one of the highest-grossing industries in the country.

With so much revenue being generated by the league, players are compensated quite well.  Still, there are rules in place that keep this money in check.

The salary cap rules are some of the hardest things to keep track of in football.  Contracts aren’t always clear on how much of a hit certain teams are taking in regards to cap space, and it can be difficult for fans to keep track of.

Here is a breakdown of some of the biggest aspects of the salary cap rules and how they impact teams.  Please note that this isn’t the entire set of rules, as there are so many different rules that it can be hard to keep track of.

Background

A salary cap is essentially an agreement between the league and players that places a limit on the amount of money a team can spend on salaries for players.  The NFL uses a hard cap, meaning that no team is allowed to exceed the cap limit for any reason.

The cap was introduced to the NFL back in 1994, with the cap set at $34.6 million. This number is determined each year and adjusted based off of the revenues of the league. 

Prior to the latest collective bargaining agreement, or CBA, this number was based off of defined gross revenue, or money earned from contracts with national television networks, tickets sales and merchandise.  This changed in 2006 and included things such as naming rights and local advertising. In the most recent version of the CBA, the cap includes essentially all streams of revenue.

Cap Constraints

For the 2013 season, the cap for each team is set at $123 million.  This means that no team can spend more than that amount of money against the cap (although we will talk later about what counts against the cap and what doesn’t).  Teams must be in compliance with the cap by no later than the first day of the league year.

There is also a minimum salary under the new CBA.  The salary floor for each team is 89 percent of the cap.  For 2013, this means that each team must be over $109.47 million.

Along with a team minimum salary, the league itself must spend 95 percent of the cap in 2013.  This means that all teams combined must average 95 percent of the cap or higher.  If the league fails to meet this mark, they must pay the remaining amount needed directly to players.

Contract Details

Normally contracts are reported as, for example, four-year deal worth $12 million.  However, there’s more to account for than just dividing the total contract by the number of years and figuring out how the contract impacts the cap.

Teams tend to make contracts like these back-heavy, meaning that the player gets paid more in the later years of the contract.  This helps lessen the impact in theory in the earlier years.  If a team wishes to not pay the player in the later years, they can either release the player or renegotiate the contract.

This would make players less likely to sign a back-heavy contract, but signing bonuses are used to persuade these players to sign anyway.

Signing Bonuses

In order to persuade players to sign back-heavy contracts, teams can offer signing bonuses.  This is guaranteed money that is given to the player and is given regardless of whether or not the player stays with the team.

This guaranteed money still counts against the cap, but not the way you might think.  In order to help this make a bit more sense, we will throw in a couple of examples.

Andrew Luck, the first overall pick in the 2012 NFL draft, signed a four-year deal worth $22.1 million and included a $14.5 million signing bonus.  Rather than have that $14.5 million count in just one year against the cap, it is spread out over the deal.  So for the Indianapolis Colts, his signing bonus would count for $3.625 million each year for four years.

Things also get a little confusing when a player signs a contract extension.

Aaron Rodgers recently signed a five-year extension with a $35 million signing bonus to extend his contract though the 2019 season.  With the signing bonus for the extension, it actually impacts the cap every year of his entire contract, rather than just the years extended.  This means that Rodgers’ signing bonus will be worth $5 million against the cap each year for the next seven years.  Any previous signing bonus will still count for the years under the previous contract.

If a player is released, traded or retires, the remaining cap hit is pushed up to the next season.  If Rodgers decided to call it quits after just one year, the Packers would take a hit of $30 million the very next season.

Ouch.

Any team that picks up a player that is traded or release does not have to pay any amount of a signing bonus.

Cash Incentives

In a way, incentives act like signing bonuses, but they are broken off into two categories, likely to be earned (LBTE) or not likely to be earned (NLBTE).

LBTE incentives are normally performance-based goals that are listed in a contract that a player was able to complete in his previous season.  For example, if there is an incentive for Adrian Peterson to rush for 1,000 yards in 2013, this would qualify as LBTE and is included in the team salary since Peterson ran for well over 1,000 yards in 2012.

Other things that are included as LBTE are incentives that require a player to report to offseason workouts, minicamps and things of that nature.

If a player has an incentive that is performance-based that he did not complete in the previous year, this is considered NLBTE and therefore not counted against the cap.

Things can get complicated with this as well, particularly for players who did not play in the previous season like rookies or injured players.  For disputes, there will often be arbitrators to listen to both sides and come to an agreement.

Like I said earlier, there is a lot more to know about the salary cap.  This is merely a brief synopsis of the cap, but hopefully it helps clear things for fans when looking at contracts.

Tyler Brooke is a current student at Indiana University and a direct admit to the Kelley School of Business.  He is planning on graduating in 2016 with a degree in finance.  You can follow Tyler on Twitter @TylerDBrooke