Happy Tuesday, friends. Doug mentioned in this morning’s Lard that he and I had discussed Elvis Dumervil, and his associated costs, and I wanted to amplify my thoughts on him. His cap number of $12.5 million is pretty high for 2013, but since his $12 million salary is fully guaranteed, there should be no doubt that he’ll be a Bronco.

The question is whether he’s properly valued. Not to spoil the surprise, but I think the answer is yes. Let’s first talk about the contract Dumervil is working under, which is what I’d call a Broncos-style contract. They’ve been leading the NFL in moving away from the concept of signing bonuses, and instead going to more of a guaranteed base salary concept, like MLB and the NBA do.

That’s smart from a cash management perspective, because much of the cash inflows that the team receives come during the season, from ticket sales, and concessions, and corporate sponsorships. I don’t know when the networks and DirecTV pay the NFL, but I think it’s a reasonable assumption that it happens during the season, because that’s when they’re getting cash from their advertisers and (in DTV’s case) subscribers. By paying out a larger salary during the season, the team times its outflows to match when its inflows are highest.

I used to work with a lady who’d previously been the controller of a manufacturer of Christmas ornaments. Their sales season lasted 2-3 months, because no retailer is buying ornaments except during the Christmas season. They had to finance their business for the whole year, though, because manufacturing the product went year-round, and so did all of the indirect activities (marketing, accounting, human resources, etc).

That’s a tough way to run a business, and when teams give out big signing bonuses in March, that’s essentially what they’re doing. An NFL team has to pay every employee’s salary year-round, except for the players (they get paid 17 game checks for each week of the NFL season). They have to pay for benefits for all employees year-round.

There’s also per diem costs for voluntary workouts and OTAs, and travel expenses in the spring for scouting, and wining and dining expenses for free agents. There’s a lot of cost happening in the part of the year where there’s little cash coming in.

The Broncos have reduced the amount of cash they’ve had to lay out at a bad time of the year, and Dumervil’s deal is a good illustration of that.

Outlay (in thousands) 2010 2011 2012 2013 2014 2015 Total Bonus Amortization $500 $500 $500 $500 $500 $500 $3,000 Guaranteed Base Salary $630 $14,000 $14,000, $12,000 $- $- $40,630 Non-guaranteed Base Salary $- $- $- $- $10,000 $8,193 $18,193 Cap Number $1,130 $14,500 $14,500 $12,500 $10,500 $8,693 $61,823 Cash Outlay $3,630 $14,000 $14,000 $12,000 $10,000 $8,193 $61,823



If you look at that, the big amounts are front-loaded, so the out years dovetail pretty nicely with the anticipated decline phase for a player who is 29 years old. He drops from $14 million in 2012 to $12 million 2013, and he drops off $2 million more each year for the last two years of the deal.

The contract was pretty clearly written to be a legit six-year deal, unlike a lot of contracts that claim to be seven-year deals, but are really designed to end after four. If Dumervil continues to be a good player, the Broncos will be happy to keep paying him a diminishing amount for the last two years of the contract. If not, they can release him, and face only a very minor cap hit - $1 million if he’s cut in 2014, and $500,000 if he’s cut in 2015. Broncos-style contracts keep you out of cap jail that way.

On top of cash management reasons, there are three other good reasons to do Broncos-style contracts rather than bonus-heavy ones.

1. First, there is a consideration of the Time Value of Money. A dollar today is worth more than a dollar tomorrow. Using a 6% discount rate, this is the difference between the two approaches, with the same ultimate cash outlay:

Outlay (in thousands) Before 2010 Season 2010 2011 2012 2013 2014 2015 Total Broncos-style Outflows $3,000 $630 $14,000 $14,000 $12,000 $10,000 $8,193 $61,823 Present Value of Discounted Cash Flows $3,000 $594 $12,460 $11,755 $9,505 $7,473 $5,776 $50,563 Traditional Style Outflows $35,000 $630 $5,693 $5,500 $5,000 $5,000 $5,000 $61,823 Present Value of Discounted Cash Flows $35,000 $594 $5,067 $4,618 $3,960 $3,736 $3,525 $56,501



Six million dollars of present value is a lot of money, friends. Remember, the team probably had to borrow money to pay out a $35 million bonus all at once, when it’s effectively payment for services to be rendered over the next six years.

2. You can’t insure a signing bonus (or, operationally speaking, the cap hell that could potentially come with it) against future injury, because it was paid in the past, and because it’s not contractually tied to future performance. You can, however, insure future guaranteed obligations against injury. It happens all the time in the NBA and MLB, where all contracts are guaranteed.

3. Finally, doing a Broncos-style contract takes away renegotiation leverage from players mid-contract. They’re designed to be honored throughout the life of the contract structurally, but think about the implication of not paying the big bonus up front.

Under the traditional style, a player gets $35 million up front, and after 2-3 years, their agent is bitching in the media about how they’re underpaid. How can an All-Pro only make $5 million? If Dumervil’s base salary were only $5 million this year, his agent would be working on a renegotiation right after Paul Kruger gets his upcoming six-year, $75 million deal.

It’s easy to act like the signing bonus never happened, and to portray a guy as underpaid based only on his base salary. A lot of sportswriters aren’t too handy with the arithmetic, and they’re happy to have some muck to rake and a source to call in the agent, so they help drive the underpaid narrative.

With Dumervil being paid $12 million in 2013, nobody could make the case that he’s underpaid. Look back at the comparison between the two approaches above. Under Broncos-style, Dumervil has received $31.6 million in cash through 2012, and he’s got a high salary for 2013. Under the traditional style, he’s received $46.8 million over the same period, and he’s got some cover for griping about being underpaid.

The Broncos have done an outstanding job in changing the way that they do contracts, and it’s a competitive advantage for them. When you think of Dumervil’s deal, you should think of it in terms of the $10.3 million average annual value. He’s probably going to play every year of the six, and collect every dollar of the $61.8 million. That’s a good deal for a guy who’s been a top-flight pass rusher, and who portends to continue to be a good one. Tomorrow, schedule permitting, I’ll write some more about Dumervil as a player.