This article is from the NYPD Blue FAQ, by Dave Chapman, Alan Sepinwall and Jeff Knapp with numerous contributions by others.
Caruso asked for a major-league raise in pay for the second
season, asking for $100,000 an episode (as opposed to the
$20,000 per episode he was paid in the first season). The
producers refused to go higher than $80,000 for fear of
upsetting the rest of the cast, and eventually, a compromise
was worked out: Caruso agreed to appear in the first four
episodes of the second season to allow the writers to give
John Kelly a graceful exit, at which point he would be freed
from his contract to do films.
Caruso's decision was not a particularly wise one. His first
film as a leading man, "Kiss of Death," received good reviews
for his performance, but did lousy at the box office. His
second film, "Jade," didn't even get the good reviews. Add
that to his reportedly difficult behavior, and he quickly
found the well of leading roles dry. He was offered a role on
a new legal drama in development for CBS, but had to plead
with Steven Bochco to let him out of the agreement he signed
when he quit "Blue" which said he couldn't work in television
until his original contract ran out.
Jimmy Smits, who was Steven Bochco's original choice to play
the lead in the series, was tabbed to replace Caruso. The rest
of the cast and crew considered Smits a major improvement over
Caruso, who was viewed as a real prima donna. Smits' presence
apparently had a lot to do with the series jump in ratings
last year (from the 29th show overall to the 8th).