American football: cap and trade

Value investing may now be a useless skill on Wall Street. In American professional football it remains as important as any on-field strategy.

The National Football League, which holds its Super Bowl on February 7, features franchise owners who are among the most successful capitalists in history. Yet the league has a feature associated with socialism: price controls. A salary cap, this season set at about $200m, forces teams to allocate money carefully across a 52-man roster. The game between the Kansas City Chiefs and Tampa Bay Buccaneers on February 7 features two of the game’s best quarterbacks, Patrick Mahomes and Tom Brady. Both earn relatively modest wages compared with their contribution on the pitch.

The NFL salary cap demands an element of financial engineering. Charges against the cap are not just a player’s cash salary for the year. Total expenses, called “cap hits”, include signing and other bonuses amortised over the length of a contract. Such ad hoc payouts form the bulk of player compensation.

The financial Holy Grail for an NFL team is a brilliant quarterback in his first five years of the league. Youthful players have low salaries mandated by a pre-set schedule. Mega deals can only happen after several years. When Mahomes led Kansas City to a Super Bowl victory in 2020, he was far from the best-paid quarterback. 

In the offseason, however, he signed what was described as a 10-year, $503m contract extension. That contract length is really a series of two and three-year deals that will be renegotiated several times. Thanks to clever structuring, Mahomes’ cap hit this season is a manageable $25m, making him only the 12th-highest quarterback in the league. Brady is the ninth-best-paid quarterback. He has consistently taken skinny deals to save salary cap space for teammates, making up for it with a rich haul of endorsements.

In 2021, the high-wire act is becoming more precarious. Because of a drop in revenue due to empty stadiums, the salary cap is expected to fall by more than a tenth. The “moneyball” wizardry required to meet the cap will become even more vital. Still, the NFL will recover. A system in which top players in the league must take discounts to compete for title glory will persist. The arrangement illustrates just which way the balance tips between labour and capital in America’s most hazardous popular team sport.