I’ve been an optimist that a deal would get done sooner rather than later throughout the lockout, largely because since the late October offers, it’s seemed likely to me that the majority of owners were better taking whatever was on the table rather than wiping out a season and the majority of players were better off taking whatever was on the table rather than wiping out a season. Decertification hasn’t seemed like a real threat to me because I think that most of the players are probably better off with a union. Slowly, things seemed to be heading towards a resolution.
And then yesterday happened.
As much fun as the dog and pony show was – and it was fun – I try and force myself to be more interested in the issues that divide the parties than I am in the spectacle of Gary Bettman going bananas on live television. The issue of length of contract and variance in terms of annual salaries seems to be a big one and one that’s worth discussing in some more detail.
It’s pretty easy to understand why this is an issue for the owners. When you squeeze the money that can be paid to the players, as the 2005 CBA did, people competing for the services of highly coveted players are forced to compete on something else. Length of contract is a pretty obvious one. It’s the exact same problem (from the owners’ perspective) that existed prior to 2004: it only takes one person willing to go very long in terms of years in a contract to force other owners to match it if they want to be competitive in getting the best players. If you’re an owner motivated primarily by a desire to increase the profits and value of your hockey team, this would be infuriating. It’s easy enough to see.
The player interest in all of this has been a bit harder for me to see. Kevin Westgarth set it out late last month, in an interview with James Mirtle:
As a fringe player, Westgarth added that he realizes some of what players are fighting for will never affect him directly, but he also argued that the trickle-down effect of eliminating creative contracts for stars would mean less cap space for the remaining players.
He also believes those contract rights are worth fighting for after other players lost a season in 2004-05 to get them.
“I will stand up for what I think is right for all the guys on my team,” he said. “The reason those contracts exist is because, in a cap system, that’s how you make room for paying other players. If we gave up the rights that the league wants, I believe it would annihilate the middle class of the NHL.”
My initial reaction to this was “Nahhhh” and I started to write a sarcasm laden post arguing that it was nuts. As I played with some numbers, I encountered a problem: I could kind of see what Westgarth’s point was. I hate it when this happens.
I’ve argued before that the best players did really poorly in the 2005 CBA, in that there was fantastic salary growth for lesser paid players, while the guys at the top saw marginal increases. Another way of expressing that is to look at how much the salaries have grown for the highest paid players in the game since 2000-01 – it comes out to about a 1.2% annualized growth in salaries. League revenues have grown by something like 7.5% per year. The people who have been rewarded by the growth in hockey since 2000-01 with a bigger piece of the pie each year aren’t the guys who bring people to the rink and lift them out of their seats; they’re the guys who fill out the rosters in the NHL’s cartel and the guys who run the cartel.
The one thing that the best players have been getting since 2003-04 though is longer contracts. When Bettman was spitting out facts last night he cited some number for guys with contracts that go for six years or longer – it’s something like 90 guys in the NHL, according to him.
If you or I were to hire an actuary to estimate the economic value of our working careers, it’s not as simple as just taking whatever salary we make, multiplying it by our working years and making certain allowances for promotions. They take into account positive and negative contingencies as well. For many of us, these aren’t going to create a massive swing. If you were to do this for a star NHL player, it strikes me that the negative contingencies are massive: injury or loss of effectiveness for some other reason are massive negative contingencies.
Intuitively this doesn’t seem true: stars are stars and they tend to have long runs as stars, right? Except when you look back at something as rough as the NHL scoring charts, it becomes clear that this isn’t the case. Take 1995-96 as an example. There are lots of guys in the top twenty in scoring who enjoyed long, productive NHL careers. There’s also Peter Forsberg, Eric Lindros, Paul Kariya and John Leclair, guys who were shadows of what they once were by the time they were 30. Look at 2002-03. There’s Todd Bertuzzi, having his last big year at age 27. Milan Hejduk having his last big year at age 26. Pavol Demitra’s last huge offensive year at 28. Ziggy Palffy playing more than 42 games in a season for the last time at 30. In other words, it’s a brutal sport, in which healthy and star calibre play can be gone in the blink of an eye. If someone writes a similar post ten years from now, he may well mention Dany Heatley.
Coming back to my point about contingencies though, it seems to me that the potential negative contingency of ineffectiveness for any star player five years down the road or so is going to be massive, larger than you’d think intuitively. If you’re a 25 year old player and the next season you play has an estimated value to your team of $10MM, it’s probably not accurate to value your season five years from now at $10MM; you have to take into account the possibility that you’ll be less effective, whether for injury or other reasons, and have significantly less value.
Let’s talk about Zach Parise’s contract for a minute. He’s 28 this year and his contract provides for him to make $12MM, $12MM, $11MM, $9MM, $9MM, $9MM, $9MM, $9MM, $8MM, $6MM, $2MM, $1MM and $1MM. When people, including me, have talked about long tails on contracts under the 2005 CBA, years tacked on to get the cap number down, we’ve talked about the years at the very end of the contract, the $2MM, $1MM and $1MM years. It’s possible that we should maybe be looking a little more closely at those later $9MM years and the $8MM and $6MM years in a similar way, in that they’re years in which the team plans to pay the player more than an actuary might assess his value at today, taking the risk of injury and decline into account. In effect, the team is using those years in which they’ll overpay him to reduce the immediate cap hit – a couple of $9MM years, an $8MM year and a $6MM year will reduces the cap hit that he’d get if he was paid properly now.
In other words, if there’s a five year limit on contract length, and teams can no longer make up for lower salaries up front with a long smooth ride into retirement, it’s reasonable to think that the price Parise demanded for the next five years – $53MM – is going to be higher, because he can’t effectively defer compensation to later in his contract. How much higher is an awfully complicated question; you’d basically need some way to figure out how much surplus value the Wild are paying him in years 6-13 versus his actual estimated value in those years as of today’s date in order to estimate that. My guess is that it’s significant.
Zach Parise’s one guy but there are a lot of these contracts floating around. If Parise would demand $60MM over five years instead of $53MM and there are 20 guys or 30 guys in the NHL in similar positions, you can at least understand the PA’s concern about a realignment of dollars and the emergence of an NBA style salary structure where a greater share of the dollars are directed to the better players. If it’s 30 players, at an average of $1.4MM per year (just based on my Parise number), you’re talking about $42MM a year that moves to the highest paid players in the NHL from the rest of the league. If that’s a conservative estimate and the Parises of the world are actually being grossly overpaid after year five relative to what an actuary would come up with, it could be considerably higher. I’ve got a hard time seeing it being significantly lower.
The way it works now, if Parise’s terrible after five years or so, he’ll still fill a spot on some bad team’s roster (like Minnesota!) as a “star” or go to the minors and get paid, like Wade Redden. He gets his money for being a star once and there’s room for the guys for whom there’s one big contract, like Kyle Brodziak because the overall cap hits are lower. If he needs to get all his money up front, which is basically what the NHL is demanding, that flexibility in the system is diminished. Minnesota can have Suter and Parise, but they’ll be more expensive up front, and the Wild will have fewer dollars for the rest of their roster today.
I’m still not entirely convinced by this reasoning – there are niggling doubts in my own mind I’d need to work through. I assume the PA has some pretty sophisticated economists on the payroll though and I assume that all of this stuff has been modeled. If nothing else, this makes more sense than “Scrubs holding out for stars? That won’t happen because it’s crazy.” If this analysis is right, the middle class isn’t holding out for stars; they’re holding out for themselves.Email Tyler Dellow at firstname.lastname@example.org