• A Second Look At Long Contracts And The CBA

    by  • December 11, 2012 • Hockey • 15 Comments

    The other day, I kind of indulged in a bit of theorizing about long term contracts and the possibility that the NHLPA has a point in resisting the imposition of the NHL’s proposed 5/7 rule whereby a team can sign free agents for five years and players that already play for it for seven years. (Aside: this would obviously be a tremendous potential advantage for the Oilers if the new CBA ran long enough; a system like this significantly benefits teams that draft a lot of talent which three number one picks in a row will force you to do, against your will if necessary.) I don’t have the pull that some people do, so I went and generated my own list of players on contracts longer than six years.

    I was able to identify 98 of these contracts, which includes 89 that would be in effect this year and 9 more next season. I’ve incorporated the length of the deal and whether it was signed by the team that already had the player under contract. This produces a list of 58 contracts that do not violate the term limit rule and 39 that do.

    Two initial observations:

    *These deals have become more popular. 2006-07 saw the first year of 2 of the 85. The next year was 12. That was followed by 21, 11, 14, 12, 17 and there are nine set to begin in 2013-14, although more would undoubtedly be added between now and the start of the 2013-14 season. It’s perhaps not unreasonable to think that, you might average 12 a year going forward, which would mean at least 72 of them in place at any given time.

    While Gary Bettman’s incorrect when he says that there was only one of these deals in place in 2003-04 (I can think of at least two off the top of my head – Jaromir Jagr and Alexei Yashin) it’s obvious that the volume of these deals increased dramatically when the new CBA was signed. When you can’t pay players with more dollars now, teams will compete where they can and extra years seems an obvious thing. I do suspect that that’s only part of it though – some of it is probably the fact that the UFA age is now four years younger. Five year deals for unrestricted star free agents were pretty common in the old NHL – when those guys can be as young as 25 now instead of 31, it probably shouldn’t be a surprise if these deals become more common.

    *Larry Brooks at the Post linked this issue to NHL concerns about the impact of the contracts on franchise values. It’s not hard to see what he means when you actually have some of the deals in front of you. The Isles have him locked up for another nine years at $4.5MM per. He’s played 47 games in the last four years. He sure looks like nothing more than a drain of $4.5MM a year for another nine years. If you’re putting a price tag on the Islanders, you’d need to factor in the value of his contributions less his cost. It’s probably almost identical to whatever the NPV of $4.5MM a year for nine years is. There are a lot of contracts that seem to me to have the potential to look like this.

    The existence of these contracts is, obviously, not just a problem for the teams that sign them but also for the teams that are competing with them for talent. You can believe in your own special, imaginary interpretation of the CBA all you want; that doesn’t get you any playoff games.

    Let’s look first at the contracts that don’t violate the term limit rule. There are 58 of these. Subject to the variance issue, these are going to be permissible under the new CBA if the NHL’s proposal is accepted in its entirety. Of these 58, 12 see the player getting paid the same in every year of the deal, with a 13th that sees the player make $4MM in the highest year and $3.8MM in the lowest year. Those deals are fine. That leaves 45 deals in which term is fine but variance is a problem.

    It seems to me that if a team and a player enter into a contract that calls for a steady escalation of payments, while this violates the variance rule proposed by the NHL, it’s not something that couldn’t be resolved without a higher cap hit for the player in question. Take Evander Kane as an example of this. His contract pays him $3MM, $4.5MM and then four years at $6MM per. It violates the proposed variance rule but it would be very simple to fix – the Jets could just pay him $5.25MM a year and there’s no problem. In fact, he might take a little bit less in order to get the money up front. We know that the term rule won’t affect these contracts and it’s difficult for me to imagine how the variance rule would. A proposition then: if a contract is backloaded, we can be reasonably certain that the team and the player would be able to find some way to structure a deal of the same term that doesn’t see the cap hit go up. If anything, you’d expect it to go down. There are 24 of these contracts in existence, as set out below.

    I note, in passing, that the elimination of these contracts might cause some unexpected discomfort to smaller teams. If you look at the teams that have handed them out, they’ve tended to be in the NHL’s lesser or middling markets. Just seven teams – Pittsburgh in the Igloo era, Buffalo pre-Pegula, Carolina, Los Angeles, the Island, Dallas and San Jose – account for 16 of those seven contracts. For teams without much in the way of financial resources, this permits them to push the financial obligation into the future, giving them more time to become less horrible and generate more revenue to pay the players.

    The disappearance of contracts of that nature could be of concern to the players in terms of reducing what players lower down the food chain make in markets like that. If those teams have a cash budget set somewhere below the cap, which they presumably do, the ability to defer the point at which a player becomes more expensive permits them to spend more on the rest of the roster early in the contract while they try and grow their business to the point that they can afford to spend more money on the rest of the roster while spending more money on the player in question. In 2008-09, Florida paid Nathan Horton $3MM, Rostislav Olesz $1.7MM and Stephen Weiss $2.5MM, a total of $7.2MM. Their cap hit was a total of $10.25MM. Assuming the Panthers had a cash budget, if they had to pay those guys their cap hit, $3MM that might be available for mid-tier players disappears.

    My takeaway here, therefore, is that while the contracts of this group of players could likely be easily redone to comply with what the NHL wants in terms of variance, in the case of poorer teams on a cash budget that’s significantly below the salary cap, doing that would diminish the money that they can spend on supporting pieces in an attempt to make a leap financially. If teams conclude that they want to make their long term deals with their young stars notwithstanding this and they’re just re-jigging the deals, that money has to come from somewhere. That’s not the case with all of these contracts, but it is with a lot of them.

    That leaves 21 contracts, as set out in the following table. I’ve added some columns to the end of this table, setting out how much money is payable in each half of the contract, with the percentage of second half money to first half money in the last column.

    I probably have classed Tyutin as a backloaded dead but it’s close. A defining characteristic of most of this group is that they’re guys who aren’t on their last contract. The first fifteen names on that list, plus Tyler Myers, I think the deals were probably signed in the full expectation that the player would fulfill the contract and be looking for another big deal. You might be able to add Shawn Horcoff in there as well. In that case, the allocation of money is relevant only insofar as frontloading the contract is preferable to the player.

    If those deals are going to be redone to push money back into the contract, the player will be looking for more money to make up for the fact that he’s not going to get his money until later. If GMs acquiesce, you could see cap hits for these players rise, as they either take shorter deals for higher average annual values or take longer deals with the money more equally distributed and a higher AAV to account for the delay in the money being paid to the player.

    There’s five contracts in that list that really stink: Timonen, Kronwall, Kiprusoff, Pronger and Savard. Those five deals all have years tagged on that would have seemed unlikely to be fulfilled when the deal was signed. In the absence of such provisions, you’d expect those guys to either take less money, if they wanted to be where they were, or to go to other places and get a similar (or higher) AAV over a shorter life of the contract. If the AAV is higher than under the contracts that were permitted under the 2005 CBA, well, that money has to come from somewhere. If they went to cash poor teams that could no longer sign deals with their younger players that defer the big payday into the future, that’s going to reduce the amount of money available to lesser payments.

    The 36 contracts that don’t comply with the 5/7 rule almost uniformly have variance problems as well – only two of them (Rick DiPietro and Dainius Zubrus) comply with the variance rule that the NHL is seeking. Those are both old contracts too; newer contracts tend to have tails that reduce the AAV. A lot of the comments I’ve made above are equally applicable here. If these players are getting shorter deals, they’re going to want more money. If a cash rich team can no longer fit Danny Briere, Chris Pronger, Ilya Bryzgalov, Kimmo Timonen, some of those guys will go to other teams for contracts with big cap hits.

    Tom Benjamin commented on his site on the last post that I wrote on this subject and said, amongst other things:

    Fehr’s premise is that Parise would get substantially more money per year on a shorter contract. I don’t think that is necessarily true. A team like the Canucks (or the Wild in this case) are willing to spend a lot more than the salary cap allows them to spend. The issue for the Canucks will never be the dollars. The issue for them will always be the cap hit. They would happily give a Parise quality player $12 MM a year, but they would never allocate that much cap space to him. Absent these long contracts, a Parise would get somewhat more on a shorter deal, but I don’t think he will get a ton more. Teams need top notch players to win, but they also need quantity as well as quality. Spending $12 MM (in cap space) on a single player is not a winning strategy in my opinion.

    Tom also seems confident that the impact of effectively eliminating the variance which allows players to earn significantly more dollars than their cap hit, with the money coming from the rest of the league, would wipe out the impact of this change. I’m not sure that that’s the case; I’m not sure how anyone could know what would happen without some pretty sophisticated modelling. I’m not sure why the league as a whole wouldn’t have a tendency to shift dollars towards the better players over the life of the CBA, reducing the price of lesser players and relying more on players who they were able to develop to fill in the rest of the roster.

    At the very least, it seems to me that it’s very difficult for anyone on the outside without some specialized training to predict what, exactly, would happen as a result of these changes. If, as I suspect, this sort of projection and modelling is an art rather than a science, I’d imagine that the NHL and NHLPA, while having a better idea than we do, aren’t entirely sure themselves.

    I hope I’ve convinced some readers that the rules that the NHL wants would create certain pressures, the effects of which are difficult to predict and which interact with other changes which compounds the whole thing. The concerns of the NHLPA seem, on the surface, to be legitimate to me. While I’m optimistic that there’s going to be a season, I am sort of surprised that it’s taken this long to sort this out and think that we can infer from how close the parties have gotten that they’re likely to be able to find some solution to the problems that stand between them and a deal, I think that it’s also worth pointing out that it’s complex enough that saying “Just split the difference” kind of fails to appreciate the complexity of the whole thing.

    With that said, this is an essentially an issue of allocation as between the players. If you consider that in 2004, the issue was whether or not there should be any allocation as between the NHL and the players and that the issue in 2012 was initially how much money each side should get, we’re now down to talk about how the player’s share should be divided. Someone ought to be able to come up with some sort of a mechanism to ensure that the NBA salary structure doesn’t come to pass.

    Email Tyler Dellow at tyler@mc79hockey.com

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    15 Responses to A Second Look At Long Contracts And The CBA

    1. Anonymous
      December 11, 2012 at

      excellent analysis

    2. December 11, 2012 at

      Im sympathetic to both your analysis and Tom’s points (some of which I made obliquely myself on the last post), but as you say, it’s hard to predict precisely what will happen once the games start again and the machinery is back in motion.

      The thing that the last CBA showed – and I think, markets in general often display – is that you can design all the specially tailored, top-down rules you want to try to guide or suppress demand, but ultimately that pressure will manifest itself somewhere one way or the other. Like pressing down on a balloon.

      And there will always be demand for talent acquisition/competitive advantage.

    3. Tom Benjamin
      December 11, 2012 at

      I hope I’ve convinced some readers that the rules that the NHL wants would create certain pressures, the effects of which are difficult to predict and which interact with other changes which compounds the whole thing.

      This is certainly true. Unintended consequences arising from this sort of complexity is very nearly inevitable. In the end, though I think this one is fairly straightforward.

      If you think Parise would get more than $53 MM over the five years Bettman is offering, the middle class will take a hit. If not, not. I don’t think he will get more. I think his salary and cap hit will be closer to $7.5 MM than 10.5 MM.

      With that said, this is an essentially an issue of allocation as between the players.

      Which is why I think it is crazy for Bettman to die on this mountain. Aside from the competitive advantage offered to the rich teams and squawks about fairness, it doesn’t matter to the owners.

      I think Fehr is fighting this mostly because he knows Bettman will cave on it, and because he’s making the league fight for everything to send a message for next time, and because he has learned it is fun to poke Bettman in the eye with a sharp stick.

      Someone ought to be able to come up with some sort of a mechanism to ensure that the NBA salary structure doesn’t come to pass.

      I think this is an interesting issue. Why? I’d like to see a free market, which, people tell me, will reward the few elite and really screw the grunts. My reaction is, “I don’t believe it, but if that’s the way it works out, so what? Maybe that Is the way it should be. Don’t we want players to be paid according to their skill and contribution to winning?”

      A CBA can obviously affect the salary structure and spread money from the rich to the poor, but I think the market itself will prevent the rich players from being overpaid relative to the grunts. The NBA structure is what it is mostly because an individual player can have an enormous impact on the quality of the team. Lebron is still way underpaid.

      I don’t think Parise is worth $10 MM in cap space so I don’t think he can get it. I’d rather have Burrows, Kesler and Raymond than Parise and two replacement level players. But if Parise can get $10 MM, so be it.

    4. Triumph
      December 11, 2012 at

      Moves don’t happen in a vacuum. One of the precepts that everyone seems to forget is that the team most likely to sign a would-be UFA is the team he’s already on – unless that player is on an extreme discount contract or there’s a lot of other players needing raises, they’ve already budgeted a bunch of cap room for that player. It seems strange to me that the NHL wants to limit player movement even more – it’s already very limited. And you can forget about long-tail deals with no NTC/NMC like Marian Hossa’s – all these 5 and 7 year deals, when they extend past UFA age, will have those attached. This leaves the skill of team-building to not handing out overly dumb contracts and winning the crapshoot that is the NHL draft.

      I’ll have a post on this at NHLNumbers or my own blog soon that will cover more. Basically the NHL is using the bogeyman of UFAs departing small market teams (something which barely happened under the last deal) so that once again, big market teams can save even more money on contracts and can make even more money. One thing this negotiation has convinced me of is that the owners really have no idea what’s going on day-to-day with their hockey team – they are only thinking in terms of the bottom line and franchise value. It’s not like I wasn’t convinced of this before given the men that they choose to run their hockey teams, but I’m doubly convinced.

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    6. Orville
      December 11, 2012 at

      What is your opinion on which scenario would be more beneficially for the players and which scenario do you see ending the lockout (could be the same)…the players agree to 5/7 year contracts with 5% variance b/w years but get 52% of HRR OR the players get 50% HRR but they get 8 year contracts with a 25% variance b/w years? I am not sure how Make Whole is ingrained in either scenario but I’ll assume it’s significantly lower if not eliminated in a situation where the players get a larger % of HRR.

      I have always thought the give and take b/w % of HRR vs. contract issues is how the negotiation should’ve gone in the first place instead of discussing them independantly from each other.

    7. Tach
      December 11, 2012 at

      I appreciate the effort to do this analysis, but I just find that so much of this is based on way too short a term of the agreement to flesh out the changes. I think a lot of the calculation of what the tail end of these deals would encompass was made with a rational expectation that it was too unforeseeable to worry about. From the team’s end, you didn’t know what the CBA, the cap expectations under such a new CBA and the possibility for new buyouts or trading of cap hits. From the player’s expectation, he doesn’t know if he is going to be hurt or any good. So you sign the deal with big money up front and hope for the best.

      What is more interesting, is the tail contract was a totally predictable way of cap circumvention. I would have to do some searches but I am pretty sure someone (Tom Benjamin?) had those pegged within a month or two of the last CBA being signed. If you want to know how contracts are going to look under the next CBA, start looking into ways around the new cap rules and I think that is the most telling marker of how contracts will look.

    8. Tom Benjamin
      December 11, 2012 at

      What is more interesting, is the tail contract was a totally predictable way of cap circumvention. I would have to do some searches but I am pretty sure someone (Tom Benjamin?) had those pegged within a month or two of the last CBA being signed.

      I didn’t predict it. In hindsight it seems obvious so we think we should have all predicted it. I did call DiPietro’s contract cap circumvention despite the fact that there was no tail and I wrote that Bettman should put the kibosh on lifetime contracts right away. He did not follow my advice.

      • Triumph
        December 11, 2012 at

        No, the league waited until a mid-market team (i.e. someone Bettman doesn’t need in his pocket for lockouts) tried a particularly egregious contract, stuck them against the wall, but then got hoist by their own petard by the second Kovalchuk deal, basically having to accede that yes, long-tail deals were legal up until age 40.

      • Tyler Dellow
        December 11, 2012 at

        The weird thing is that my recollection is that the rule against contracts dropping was originally presented by the NHL as being different than it was. Matt Fenwick and I had an email exchange with Bruce Dowbiggin about that after the Kiprusoff deal, because we couldn’t believe the term was legal. Then we looked at the CBA. I’m still sort of surprised that nobody figured long tail deals out until 2007.

    9. Luke
      December 12, 2012 at

      Why not just get rid of the AAV part? Cap hit = Salary. That way a long term deal like Pronger’s or Savard’s doesn’t mean anything and doesn’t exist as cap circumvention? It seems perfectly reasonable to me that a younger player might get a contract that increases as it ages (and the player gains experience) while an older player’s contract might decrease as he slows.

      • Triumph
        December 13, 2012 at

        The league didn’t want cap hit to = salary because it knew that teams would try to stagger salaries to hit possible windows of contention. And I think it wanted to give teams the latitude to pay people substantially different amounts in different years.

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