CBA Debate – Contract Length & Structure Limits

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Over the next few weeks, The Business of Hockey’s Mike Colligan and Jeff Angus of Angus Certified will make sense of the most pressing issues facing the players and owners in this summer’s CBA battle.

Today’s topic: Should there be restrictions on contract length and/or structure?

[Click Here to read more of the CBA Debate series]

JEFF ANGUS: In their initial offer to the NHLPA a few weeks ago, the NHL proposed to limit contracts to a term of five years. Several NHL GMs have been able to circumnavigate the salary cap through lengthy deals with “add on” years at the end. The purpose of these “add on” years is to lower the average salary (the cap hit). There are several contracts where the player’s salary drops dramatically during the final few years of the contract’s life (Roberto Luongo is an example, as are the recently signed Zach Parise and Ryan Suter).

With a five-year limit, the NHL is hoping to put a stop to these mega-contracts. However, a five-year limit would also increase cap hits dramatically.

Take a star player. If he signs a 10-year deal worth $50 million, his cap hit is only $5 million. But say he earns the majority of that $50 million in the first seven years of the deal – he is essentially signing a seven year deal with “add on” years to reduce the cap hit. This does assume that the player will retire before playing the final few years.

That player isn’t really “earning” $5 million annually, but closer to $7 or $8 million. The cap hit is reduced because the final few years lower the average. If that player were to sign a four or five-year deal, the cap hit would undoubtedly approach $7 or $8 million. Would this make it harder for lower payroll teams to keep their star players? It likely wouldn’t change much, as they are currently unable to take advantage of these long term deals because front-loaded contracts require a significant up front commitment (this is the major reason why a few were surprised that the Predators were able to match Philadelphia’s megabucks offer for Shea Weber).

A contract length limit would eliminate these front-loaded deals, but would it improve the escalating salaries? The answer remains unclear.

MIKE COLLIGAN: As I mentioned last week in our debate on entry-level contracts, I think a salary-capped market is fairly efficient over time. We’ve never seen a player earn maximum allowable money under the current CBA because it’s just not worth it for a team to commit 20-percent of their payroll to a single player.

The lengthy, front-loaded deals you mentioned definitely allow teams to circumvent the cap, however there are a few ways to look at the situation.

First, these lifetime deals of a 10+ years with no-trade clauses restrict players from switching teams. Trades and free agency keep fans engaged 12 months a year. This summer was entertaining because everyone was anxious to see where Zach Parise and Ryan Suter would land. Do we want the Free Agent Frenzy to be focused on where the P.A. Parenteau’s of the league will sign?

On the other hand, I don’t know if the front-loaded deals are really that much of an issue. Sure, the big market teams have more ability to sign these deals, but who says the NHL needs to be a totally even playing field for all 30 teams?

The Red Wings kept their roster intact longer than they should’ve been able to because they signed Henrik Zetterberg and Johan Franzen to cap-friendly lifetime contracts. Does Zetterberg, who will turn 32 in October, still have seven seasons (not including “add on” years) of elite hockey left in him though? We’ve really only seen the front-end “value stage” of these contracts so far.

ANGUS: I think that speaks to the shelf life of GMs. They don’t mind giving these 10+ year deals because many of them know that the odds of them still being employed by the same team at that time is very low (kind of like global warming and the recent financial meltdown — create a mess for someone else to clean up).

I agree that a salary-capped market is efficient over time. And any inefficiencies are either short-lived (the Ilya Kovalchuk saga with his contract getting rejected) or not as good as they at first appear (I bet many of these front-loaded deals will appear this way in another five or six years).

Look back at the NHL 10 years ago. Look how different the rosters look. These long term deals are great for the immediate future, but there is a huge opportunity cost down the road if a team is unable to move a 33-38 year old who is taking up a significant portion of the cap.

This also relates back to prime years. Statistical evidence gathered in recent years shows that players typically peak well before 30 (especially forwards). You could argue that Rick Nash and Alex Ovechkin have both peaked already (for different reasons, and a motivated Nash may get back on track in New York).

I think we are on the same page here, although we may have arrived there on different routes. I don’t see setting a length on the term of a contract doing anything besides acting as a babysitter for trigger happy GMs. The rich teams will still get the players they want, but they will have to find a new way to do it.

COLLIGAN: It’s like the tax code here in the US. Every year they add more rules and regulations. Every year taxpayers find new ways to wiggle around the system. I prefer giving GMs some flexibility to build their teams in a number of different ways.

Before we wrap this up, let’s touch on salary cap dynamics. I don’t like the idea of cap hit equaling salary each year. That just opens the door for teams to play shell games. But what about a restriction that states no year can be more than a 50-percent drop from highest paid year of the contract?

If Sidney Crosby earns $12 million a year in the early part of his contract, the lowest he can be paid in any later year is $6 million. This type of rule would discourage GM’s from the front-loaded contract abuse, but still allow them the flexibility to spend aggressively if they really want to (which the NHLPA will be happy about).

In the reverse, a younger player that starts out earning $3 million a season can only earn a max of $6 million later in the contract. We might finally see the return of the “bridge contract” that you mentioned last week.

ANGUS: That is a great solution to the problem, and as you stated it would keep flexibility in the hands of the GMs. There is no way Ryan Suter and Roberto Luongo are going to play out their careers while making $1 million or less in the final few years. Obviously those are retirement years, and it is blatant cap circumvention. The 50-percent rule makes sense, for sure.

And the bridge contract isn’t completely dead (Erik Johnson just signed one), but it does need to come back. Teams need to be rewarded for good drafting and development, and having to shell out big money for 20-22-year-olds puts a serious damper on that. Just look at the Jeff Skinner contract. The ‘Canes made a great draft pick, and their reward (asides from having Skinner) is paying him close to $6 million per season.

COLLIGAN: I think there’s a third factor besides drafting and development: contract management.  If an 18-year-old like Jeff Skinner is playing on the top line and powerplay, he’s going to deserve big money on his next contract.  Vancouver, Pittsburgh, Detroit, and other perennial playoff contenders do a great job of not rushing their young talent.  This not only ensures the players are ready when they finally do make the jump to the NHL, but it also keeps their cap hits under control in the early years.

Pittsburgh added Jordan Staal to their lineup at age 18, but they kept his playing time down and put him in mostly defensive situations.  It wasn’t until last season – Staal’s sixth in the NHL – that he started to shirk his defensive responsibilities in the interest of scoring more goals and earning that big next payday.

Vancouver managed Cody Hodgson perfectly as well.  They made him earn his playing time and only handed him a limited role until they decided to put him on the trading block.  Hodgson showed his capabilities in the expanded role before being shipped to Buffalo.  The ability to delay gratification is an important GM trait in the salary cap world.

ANGUS: That is an excellent point. The big money is still there for these young players, but they don’t get it until later on if they start out with a club like Detroit or Pittsburgh.

Look at Jordan Eberle as an example. If he were on the Wings, the chances of him scoring 34 goals last season would be pretty low. Not to knock him as a player at all, but on Edmonton he received prime offensive minutes and little pressure to play well defensively (easy to do that on the worst club in the league). Eberle is going to command upwards of $6 million on his next deal, as will Taylor Hall, Ryan Nugent-Hopkins, and Nail Yakupov a few years later. Edmonton’s tanking strategy benefited them in the way of three or four elite young talents, but they won’t be able to afford them all, as they are already counted on to play significant roles for the NHL club.

The teams that draft well will get rewarded if they develop properly. Setting a limit on contract length won’t “level the playing field” any more than it already is. Your proposed solution of a limit on the amount a salary amount can change during the lifetime of a contract makes a lot of sense.

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