NFL Teams are Undervaluing Future Year Draft Picks
Future draft picks are typically discounted by a round per year but the math does not justify such a penalty
Last week, I stumbled across a Twitter/X thread from Wash U Law Student and NFL Contract enthusiast Daniel Salib on why he thought that future draft picks should not be discounted, especially by a full round, as has been commonplace in the NFL to date. For context, what Salib is referring to is that a team trading a 3rd round pick in the upcoming draft, for example, can expect to receive a 2nd round pick in the following year’s draft.
On the surface, the principles of finance - namely the Time Value of Money - would indicate that is logical. A dollar in the present is worth more than a dollar in the future because if held today, the holder can invest it in the market and see its value increase over the course of the year. Furthermore, inflation reduces the purchasing power of a dollar with each passing year. Both factors impact the discount rate used to compare the value of a dollar in the present and the future. However, the economics of the NFL Draft are such that there should not be any discount on future picks. Since 2011, the league has implemented a rookie wage scale that determines how much each draft pick makes over the course of their contract. That scale is tied to the salary cap, meaning inflation should not affect the discount rate.
Furthermore, teams cannot invest draft picks as they can a dollar. In fact, once picks turn into actual players, they often lose value. One example is when the Las Vegas Raiders drafted Kentucky Wide Receiver Lynn Bowden Jr with a 3rd round pick in 2020 (No. 80 overall) and then traded him after Training Camp along with a 2021 6th round pick for a 2021 4th round pick. Another example is when the Baltimore Ravens drafted Ohio State Cornerback Shaun Wade in the 5th Round (No. 160 Overall) of the 2021 Draft and then traded him midseason for a 2022 7th Round pick and 2023 5th Round pick. Lastly, the Arizona Cardinals drafted UCLA Quarterback Josh Rosen with the 10th overall pick in the 2018 NFL Draft. Just one year later, they were only able to recoup a 2019 2nd Round pick (No. 62 Overall) and 2020 5th Round pick. These three players are just a few examples of the many players to see their market value decline shortly after getting drafted.
Since there is no inflation and because picks usually lose value over time once they become players, the math indicates that the discount rate for future picks should be 0%. If anything, the discount rate might actually be negative due to that loss in value as well as the fact that veteran contracts at several positions are rising at a rate higher than the salary cap - making rookie deals even better values. However, in reality, Joseph Hefner at KC Sports Network found that future picks are discounted by a whopping 55% based on a variety of trade charts. In the financial world, those kinds of returns on an annualized basis - and therefore usage as a discount rate - are unheard of. I’d strongly encourage anyone reading this and being promised such returns by an Investment Manager to visit this website.
Therefore, the current way that the NFL approaches discounting draft picks is financially illogical. Also from a football standpoint, a team is likely to upgrade their chances of hitting on the pick substantially by waiting a year for a pick that could be even more than a round higher. One such example was in the 2010 NFL Draft when the Carolina Panthers traded a 2011 2nd Round pick for the 89th overall pick. The 2011 pick ended up being the first pick in the 2nd Round, No. 33 overall, meaning the Patriots were able to move up in the draft by over 50 picks through waiting a year. While the Pats did not hit on their selection that year, they substantially improved their odds of success in the Draft with that trade. Of course, there is uncertainty involved in future picks, which plays into the calculation teams have to make, but Hefner’s research shows that teams trading current picks into the next year are in aggregate coming up significantly on top in these deals.
NFL teams with stable Front Offices take advantage of this dynamic. The New England Patriots under Bill Belichick were a prime example, frequently trading back a year for higher future picks. In fact, under Belichick, the team did not trade a future pick on draft day until 2020 - twenty years into his tenure with the organization. The Philadelphia Eagles under Howie Roseman are another example of a team more than happy to take higher comp in future years versus lower comp in the current year. GMs and Front Offices fearing they will not be around in future years, on the other hand, will understandably be hesitant to trade away current picks for future ones they may not even be able to make.
The undervaluing of future draft picks is one small part of what I believe to be the greater problem in football - the lack of patience afforded to General Managers and Front Offices in team-building. So many of the inefficiencies in roster construction - be it overcommitting to non-elite QBs, high-priced free agent spending sprees, consistently kicking salary cap issues down the road, and undervaluing future draft picks - all have something in common; prioritization of short-term gains over long-term planning. With an average NFL GM tenure of just 2.1 years, it is understandable that many executives feel the need to make moves with job preservation in mind. But a look at the most successful franchises in the NFL over the past 15 years - such as the Kansas City Chiefs, Patriots, Los Angeles Rams, Ravens, Tampa Bay Buccaneers, San Francisco 49ers, Green Bay Packers, Cincinnati Bengals, and Eagles - shows that they have all had remarkably stable Front Offices over the years with infrequent turnover at the top. Everyone makes mistakes, but in aggregate, these franchises typically avoid the known pitfalls in roster building - instead taking a more patient and prudent approach. They have been rewarded with frequent deep playoff runs. Owners constantly changing up their Front Offices, on the other hand, tend to keep fielding losing teams despite their efforts to shake things up.
I think we’re starting to see some Owners learn the importance of stability and the more sustainable approach to team-building it enables. Franchises that were once the laughingstocks of the league like the Browns and Lions have kept their GMs in place since 2020 and 2021 respectively, even through some losing seasons. Both teams are now in the upper echelon of the NFL with bright futures ahead. The Pegula Family, owners of the Buffalo Bills, presumably gave General Manager Brandon Beane assurances of job security going into what is likely to be a bridge year. As such, he made the tough but necessary decision to move on from high-priced but post-peak veterans even when it came at a significant cost to the salary cap like with the Stefon Diggs trade. The more expensive years of QB Josh Allen’s extension (as measured by base salary) are now kicking in and the Bills will have to put together a younger and cheaper core around him to compete, as opposed to a veteran heavy roster that they could afford during the first few years of the deal when he had sub-$20m cap hits. While the Bills may regress next year, Beane’s moves will allow him to assemble a talented team more quickly around Allen without being weighed down by future dead cap hits as a result of kicking the can down the road. Other more trigger-happy Owners would be wise to look to the Browns, Lions, and Bills for clues on how to better position their teams to legitimately compete on an annual basis.