• So much for idiot proof

    by Tyler Dellow • July 13, 2009 • Uncategorized • 10 Comments

    From Larry Brooks:

    Indeed, several general managers have told Slap Shots they believe a rollback of up to 15 percent plus a round of amnesty buyouts will be necessary at the end of next season in order to accommodate a decrease in the 2010-11 cap that is expected to be meaningful.

    A significant drop in the salary cap seems pretty likely to me – there’s a story floating around out there involving a leaked NBA memo cautioning its member teams that their salary cap will be down significantly for the 2010-11 season. I don’t see Brooks’ idea as being very likely to happen though. The PA would have to agree to this and I have a hard time imagining that they would. I kind of see this as a different issue than applying the 5% escalator. Unless a majority of NHL players are without contracts at the end of a given year, it’s never in the interest of the membership as a whole to have the escalator applied. The majority of players would always benefit from a smaller cap, as they’ll get a larger piece of the pie. Still though, agreeing to that is a bit academic – it’s not hard numbers or anything.

    A 15% hit is something real. It’s not some ethereal thing that will only come into play at the end of the year. Assuming Brooks’ sources are right though, and such a request will be made, one has to be impressed by the brass balls on NHL management. A year of hockey lost to get an idiot proof CBA, and it takes five years to get to the point where they return, cap in hand, to ask the majority of the players to make concessions to help them get out of the fix.

    I’ve mentioned this before, but the way to avoid having to deal with this issue was percentage contracts. As I said in February:

    Amend the CBA so that it provides that contracts are expressed in terms of percentage of cap, not absolute dollars. This is, in my view, desireable because it means that general managers would be focused on what percentage of a team’s payroll a player should earn – something that is (in theory, right Dustin Penner?) their strength – rather than having to figure out what percentage of cap is appropriate for that player AND THEN figure out what that amount will be in the 2015-16 season or whatever.

    This is also, in my view, desireable from the position of the PA as a whole. Right now, they’re fighting one another for every dollar. If the cap jumps suddenly or falls suddenly, a certain group of them get an unearned windfall – if it jumps a lot, those players who are free agents will get a huge benefit over those who have signed longer term contracts, in that that largesse will be rained upon them. If it falls suddenly, those who have guaranteed contracts already will get a windfall in that the ones without contracts are left fighting over the diminished cap space that remains.

    This is more true than ever, I think. The PA should demand this in the next CBA, just to prevent demands like 15% rollbacks and issues like the cap escalator from arising and dividing their membership.

    About Tyler Dellow

    10 Responses to So much for idiot proof

    1. tangotiger
      July 13, 2009 at

      I wrote this on my blog several months ago:

      Tom Benjamin and mc79 discuss how to handle (equitably) the shrinking pie, and how there’s less money for next year’s free agents, under the current CBA.

      The answer to me is pretty clear: (pretend) forecast revenues high enough to create wiggle room for next year’s free agents, AND propose an escrow rate so high as to get the (true) forecast revenues to where it should be.

      For example, suppose that the current cap is 56.7MM. With all those guaranteed contracts, and normal inflation, maybe the expected forecast would have been say 58MM. So, you use that. You sign your free agents as if that’s the working number.

      But, in reality, say that the real forecasted revenue is 50MM. Well, you hold 8 of that 58 in escrow (14%). If the true revenue comes in at 50MM, guess what… you got a defacto salary rollback of 14%.

      The key is to think of the forecasted revenues and player salaries in terms of “chips” not real dollars. And then the chip-to-dollar conversion happens after the money is actually counted.

      I would imagine this is exactly how the NHL/NHLPA will work it.

    2. oilswell
      July 13, 2009 at

      If the contracts are signed in cap percentage, what happens to that derivative market that is the difference between actual salary and cap hit?

    3. Gerald
      July 13, 2009 at

      Tyler, as I said over on Tom Benjamin’s site, this is a non-story. The escrow mechanism already provides a perfectly suitable “rollback” mechanism, and both sides already know this. There is nothing to argue over.

      This issue was hashed out on Tom’s site back in February. I still do not see the “problem” in a reduced cap, at least from a systemic point of view. I certainly see it from the POV of a free agent who is presented with drastically lower cap space. At the end of the day, people will have to sign for whatever is available. If people have to be bought out, they will be bought out and the cap hits administered. If trades have to be made with teams who are not cap-challenged, they will be made.

      Regarding your percentage concept, I have never seen where that solved anything (assuming there was ever a problem to be solved). Instead of players competing with each other for dollars, they will be competing for percentage points. As well, what would the percentage points be out of – the cap? The midpoint? The floor? Actual team HRR? Keep in mind that it is not the cap that matters in determining eventual salary, but rather the midpoint. That also ignores the problem of actually paying the guys throughout the season. What do you cut the cheques for twice a month? At the end, you still have to make an estimate of revenue and cut cheques accordingly, which is more or less what we do.

    4. mc79hockey
      July 13, 2009 at

      I still do not see the “problem” in a reduced cap, at least from a systemic point of view. I certainly see it from the POV of a free agent who is presented with drastically lower cap space. At the end of the day, people will have to sign for whatever is available. If people have to be bought out, they will be bought out and the cap hits administered. If trades have to be made with teams who are not cap-challenged, they will be made.

      The “problem” is that there are going to be teams that get butchered because of their cap situations. The problem with the escrow thing is that it doesn’t help the teams that are screwed in the same way a 15% rollback of everyone would. We’ll see if trades involving disparate money are available; my sense is that they won’t be.

      Tom’s point above about keeping the cap set artificially high and then just having an escrow bloodbath seems reasonable to me as far as a solution.

      Instead of players competing with each other for dollars, they will be competing for percentage points. As well, what would the percentage points be out of – the cap? The midpoint? The floor? Actual team HRR? Keep in mind that it is not the cap that matters in determining eventual salary, but rather the midpoint. That also ignores the problem of actually paying the guys throughout the season. What do you cut the cheques for twice a month? At the end, you still have to make an estimate of revenue and cut cheques accordingly, which is more or less what we do.

      Contracts are a percentage of cap. You know what cap is each year so it’s easy to cut the cheques. What you won’t end up with is a situation where the cap falls and teams are hard to the cap, with only 17 guys signed. Well, I suppose you might, but those teams are just beyond help. You still run the escrow and everything else.

    5. Corey
      July 13, 2009 at

      I’ve been thinkign about this for a while too, ever since the threat of a decerease in cap became apparent.

      Basically scaling the contracts up and down according to the cap, but as you elude to, keep the % of the cap hit the same.

      Would there be any way to make this come into effect as an emergency measure if both the PA and NHL were in agreeance, or are GM’s and players screwed next year?

    6. July 13, 2009 at

      Amen, Tyler.

      And speaking as a guy who was broadly on the side of ownership last lockout, I’d be fully behind the players telling the owners to shove it if they requested rollbacks.

    7. mclea
      July 13, 2009 at

      The first problem I have with your idea is that it would be impossible to implement. If we were starting from scratch, then I think it makes sense, but we’re not, so I don’t see how you can go out and tell guys who have fixed contracts in place that they’re now getting paid at a variable rate. Sanctity of the contract and all that.

      Secondly, your idea would also screw low revenue growth teams. If your revenue growth is lower than the cap growth, you’re now facing a situation where your costs would be increasing at a higher rate than your revenues. To a certain extent this problem already exists, but this would make it worse.

      Lastly, your idea would basically be a mechanism created for the purpose of bailing out financial imprudent teams, teams that didn’t give themselves enough wiggle room with respect to the cap. If I had properly managed the cap, with a certain percentage of contracts coming off the books each year in order to account for the potential for a decreasing cap, this would piss me off to no end.

      But other than that, I like the idea. It’s pretty much how partnerships work, where everybody gets a piece of the pie based on what their percentage in the partnership is (roughly). But you can’t just ignore the fact that the compensation structure as it currently exists can’t accommodate this kind of change. The escrow roll back took the existing structure and imposed a penalty equally on everybody. Your idea would fundamentally change the way players get compensated, creating significant winners and losers along the way, and all for the purpose of bailing out teams who screwed themselves under the cap. Ideas like that usually don’t fly.

    8. pete
      July 14, 2009 at

      majority of players would always benefit from a smaller cap, as they’ll get a larger piece of the pie.

      I don’t follow this. Why does a player care what percentage of the pie he gets? Isn’t the absolute $ number his only concern?

      So by extension, a larger cap means more dollars that can go to him.

    9. Triumph
      July 15, 2009 at

      the illusion here is that ‘teams are hard to the cap’. they’re not – they just have to waive or buy out contracts until they are under. the tools to get under the salary cap are right there in the CBA. ignorance is not an excuse; teams knew this was a possibility from january 09 on.

      pete: a larger cap won’t mean that – i’m not clear on the particulars of the escrow system, but basically the players have some % of their paychecks held in escrow each season depending on how revenues turn out. this past season, players did not get all of that money back, as they had the previous three – revenues were down from what the nhl expected. if the cap goes up artificially, the owners will no doubt insist on an increased escrow payment, which means that players already signed will likely be making LESS than what they were making.

      i don’t see a higher cap with larger escrow payments to be in the best interest of the entire PA, and i don’t expect that to be negotiated. it’s clear which teams think it will happen (or which don’t care about it) and which feel it’s not a foregone conclusion.

    10. HBomb
      July 15, 2009 at

      Would there be any way to make this come into effect as an emergency measure if both the PA and NHL were in agreeance, or are GM’s and players screwed next year?

      Probably wouldn’t be too difficult to do – look at every contract’s cap hit relative to the NHL salary cap on the day said contract was signed, and calculate the percentages that way.

      You’d have a stink raised from guys who signed extensions during the 2007 and 2008 off-seasons, but the guys who signed long term deals in the previous two summers would stand to benefit.

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