Confidential to Craig M.: How do you square the fact that you’re taking an MBA that is based, in part, on case studies, which are basically an opportunity to pick apart the decision making of others and learn from what they did, with the following statement about Sam Gagner: “Decisions are never made in hindsight so it’s never really that productive to go back and analyze what we could have done three years ago”?
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Imagine, for a minute, that you’re Kevin Lowe. You’ve got six Stanley Cup rings, a bank account, a house and a car. Nine assets? Holy mackerel! Life is pretty good.
You’ve got a problem though. As a result of your decision to add Sam Gagner to the team in 2007 instead of letting him finish his career in junior and then spend a year in the American Hockey League, Gagner will be eligible for unrestricted free agency in the summer of 2014 instead of the summer of 2017. Moreover, Gagner’s up for a new contract this year. He’s been alright through his first three seasons; he’s established himself as an NHLer, although the jury is probably still out as to whether he’s going to be a star or a second tier guy. While you’re no longer the titular head of the team, shortly after the season ends you’re going to get a telegram from Steve Tambellini asking what the results of his assessment of Gagner are and what he should do as far as a contract for him.
Here’s where a goofy aspect of the collective bargaining agreement comes into play. When the CBA was negotiated, I suspect that a major concern was teams “cheating” to beat the salary cap. One way to do this would be to pay a guy very little in some years and much more in others, which would let you have years in which a fellow’s salary hit was relatively small, permitting the addition of other players and the stacking of a team to try and win the Cup. The “solution” was the introduction of average annual value – pay a guy whatever you like in a given year but his cap number will be the average of all of the years of his contract.
As I’ve talked about here before, this has led to a certain form of absurdity, as you now see players signing contracts that have a couple of cheap years tacked on at the end. There’s a tacit understanding on the team’s part that the player won’t be playing in those years. The player effectively gets the lion’s share of his money in fewer years than he’s contracted to play for and the team gets the benefit of the lower cap number.
That works at the end of a player’s career. What about at the start though? Darryl Katz is required, pursuant to the CBA, to spend a certain amount of money on his hockey team every season. Currently, there seem to be a lot of indications that the 2010-11 Oilers don’t intend to be very good. These are factors that should impact on Sam Gagner’s new deal.
Assume, for the sake of discussion, that Gagner is willing to agree to a seven year deal with the Oilers, if the numbers make sense. Let’s consider two possible scenarios.
Scenario A: Gagner signs a three year $7.5MM deal, making him a restricted free agent in the summer of 2013, with one more season owed to the Oilers. We’re pretending to be Kevin Lowe here, so we’ll bless ourselves with omniscience too – in this scenario, we know that he’ll sign a four year, $20.5MM deal with the Oilers in the summer before he becomes an unrestricted free agent, resulting in a cap hit of $5.125MM.
Scenario B: Gagner signs a seven year $28MM deal with the Oilers in which he’s paid $12MM, $6.5MM, $4MM, $2MM, $1.5MM, $1MM, $1MM, for a $4MM cap hit for cap hit.
In Scenario A, the Oilers get three years of a $2.5MM cap hit and four years of Gagner at a $5.125MM cap hit. In Scenario B, they get seven years of Gagner, at a cap hit of $4MM all of the way through. In both scenarios, Gagner gets the same amount of money over the next seven years but the cap hits associated with each differ significantly.
The cap functions, in effect, to prevent teams from making decisions that might be economically beneficial for them. In the case of rich teams, in markets that can support larger payrolls, their ability to spend more is significantly impaired. I assume that there are teams for whom spending more than the cap permits would make financial sense.
While the cap prevents you from having spending (in cap dollars) more than a fixed amount, it does not currently prevent wealthy teams from making Scenario B type expensive bets on players in the hopes that they will pan out, resulting in the team having the rights to a player at a lower price than they otherwise might.
The attraction of the Scenario B type contracts is that, in the event Gagner never becomes more than a so-so second line option, the low salary number makes him attractive in trades to smaller market teams that don’t approach the salary ceiling.
A Scenario B contract is of the type that should be attractive to the Oilers next year. The usual sources have hinted that the Oilers are getting ready to write off next season. They’re required to spend a certain amount on salary regardless. Their goal in spending that money should be to have it pay dividends for them in a year or two, when they’re ready to compete. A contract like this for Gagner seems to me to make a reasonable amount of sense.
If Gagner turns into a good first line option, the Oilers would have him locked in at a contract he can easily beat going forward while at the same time having additional cap room to add other parts. If he’s never more than a so-so number two, he’s probably pretty easily moved for the final four years of his deal, while also bringing back some value.
In essence, this type of deal involves the Oilers making a bet. I am assuming that there is a rational basis for the bet, on the premise that there are teams for whom spending more money on payroll than the cap permits makes economic sense, in that the expected return on the investment of more dollars into payroll exceeds the cost and that the Oilers are one of those teams. Alternatively, I think you could also argue that the Oilers are better off running with Gagner at a $4MM hit next year and some AHL scrubs than they are to have Gagner at $2.5MM and then run out some proven veterans with him, if the year is to be a rebuilding year.
To be clear, I’m not arguing for a specific number here, only making a point about how teams wealthy teams should possibly act where good cap hits are assets to the franchise. The current CBA punishes teams that behave responsibly when they’re terrible and wait to see what they have on their hands before making a commitment of the type that I’m suggesting, in that they end up with a lower cap hit when they aren’t very good and then a higher cap hit when the team is (oh god please) better.
If you can afford the risk inherent in a contract like I’m suggesting (in the sense of it still making business sense once you allow for the various potential outcomes), superior financial resources will effectively let you buy a bit of an advantage. It strikes me as a bit of a bug in the CBA but then the CBA wasn’t really designed with parity in mind – it’s more of a hash of various subrules in support of one central rule: the players never get more than their designated percentage. If there’s an advantage to be had by taking advantage of the solutions to the problems that were foreseen by creating ones that weren’t, the Oilers should take advantage of it.
Glovetap to kris, a commenter at Lowetide’s, who got me thinking about this in detail.