The salary cap officially will drop by $15.7 million, in comparison to last year. By next Wednesday, all teams must be in compliance with the 2021 cap limit of $182.5 million. Several teams will be scrambling to get out of the red. Others that are in the black will be trying to create even more cap space to permit offseason spending.
So how does a team create cap space? Let’s consider the various strategies.
First, a team can cut one or more players. That wipes out all compensation due to be earned this year: salary, roster bonuses, workout bonuses, and/or so-called “likely to be earned” incentives. For many players, the savings from cutting the player becomes balanced by the fact that premature termination will trigger cap charges from signing bonuses, option bonuses, and/or restructuring bonuses that were spread over multiple cap years.
For example, a player with a $10 million salary in the third year of a four-year deal that included a $10 million signing bonus would have $5 million in unallocated signing-bonus dollars. Cutting the player creates $10 million in cash and cap savings; however, it also creates a $5 million charge for the previously-paid signing bonus. (Teams can split that charge between two cap years by cutting the player with a post-June 1 designation, something that each team can do for up to two players per year.)
Second, a team can get one or more players to take pay cuts. This method creates raw cash and cap savings by reducing compensation.
Third, a team can restructure one or more contracts, by taking the compensation for the current year, reducing it to the CBA-mandated minimum salary, and paying the rest as a signing bonus that gets spread over up to five years.
For example, if a player with seven or more years of service is due to make $20 million in base salary, his salary can be reduced to $1.075 million with $18.925 million converted to a signing bonus that can then be spread over the life of the deal, and into voidable years if need be. By spreading it out a full five years, the cap number drops from $20 million to $4.86 million.
Of course, the other $15.14 million eventually will hit the cap. As the cap goes up, however, those dollars have a relatively smaller impact.
Fourth, a team can convert current-year compensation to an easily-reachable “not likely to be earned” incentive. If/when the incentive is earned this year, it counts against next year’s cap.
There may be other ways that people who create cap space for a living know about. (And if any of you want to share those techniques, please do.) These are the most basic ways to do it, and more and more teams will be doing it over the next week. Several already are.