Tuesday, February 12, 2013

New NHL CBA: The Changing Salary Floor & The Disincentive To Dress Young Players



By Fraser Blair

One of the concepts that I wrote about in the first piece about the Tim Thomas trade was the salary cap’s Lower Level (the salary floor). Under the new CBA, the way teams will approach the Lower Level will be significantly different due to 2 changes in the operating structure of the payroll range system.

First, beginning in the 2014-2015 season the Upper and Lower Limits of the payroll range (the cap floor and the ceiling) will no longer be calculated using the current formula. The current formula adds or subtracts $8 million from the salary midpoint in order to determine the Lower and Upper Levels. The salary midpoint is determined by the following steps: (1) multiply hockey related revenue (HRR) by the player’s share; (2) subtract player benefits from (1); (3) divide the figure from (1) and (2) by the number of teams.

Midpoint = [(HRR*0.50)-Benefits] / 30 teams

Note: The previous formula also adjusted the midpoint upwards by 5% each season. The NHLPA CBA summary mentions a growth factor but doesn’t specify the amount.

Last season, the salary midpoint was roughly $56.3 million. As a result, the Upper Limit was $64.3 million and the Lower Limit $44.3 million.

The Upper and Lower Limits will still be calculated based on the cap midpoint under the new formula, but those figures will be determined by adding or subtracting 15% instead of $8 million.

Regarding the Lower Limit, the two systems would produce the same results if the salary midpoint were $53.33 million. At all midpoints below, $8 million exceeds 15%. Conversely, as the midpoint rises the cap floor is lower under the new formula than it would be under the previous system.

This appears to be a moderate victory for low revenue teams. Under the new CBA, the Lower Level will be lower than it would have been under the previous system. Furthermore, once the salary midpoint reaches $69 million, (likely between years 6 and 7 of the CBA assuming 5% revenue growth) the difference between the new and old formulas for calculating the Lower Level will be $2.35 million. That’s not an insignificant amount of money, though I’m sure the owners of the Florida Panthers and the New York Islanders would still tell you it’s too high. They may be right, but that’s not the point here.

Although the Lower Level won’t be increasing as much as it did in the past, the second change to the Lower Level system will make it harder for teams to reach the salary floor. According to the NHLPA summary, performance bonuses will no longer count in the calculation of a team’s Lower Level. This provision was featured for the first time in the NHLPA’s CBA proposal on October 17, 2012, and it’s not surprising that the players fought for it its inclusion.

Since 2005, Clubs have been able to offer performance bonuses to certain types of players. Performance bonuses are almost always offered to high draft picks and free agents who sign and Entry Level Contract (ELC). Under the old CBA, teams could offer up to $2.85 million in performance bonuses to players on their ELCs. Those bonuses counted towards the calculation of the Club’s Upper and Lower Level salary requirements but will no longer be counted towards the floor.

Performance bonuses were governed by Exhibit 5 to the previous CBA, and were broken down into two categories. The first category, Individual “A” Bonuses are linked to individual player accomplishments. There are nine categories of “A” Bonuses for forwards, ten for defencemen and eight for goalies. For skaters, the bonus categories include Ice time, goals, assists, points, points per game, plus-minus, blocked shots (defencemen only), selection to the All-Rookie team, selection to the NHL All-Star Game, NHL All-Star Game MVP. For goalies, in addition to the All-Rookie and All Star Game bonuses, the categories are Goals Against Average, Save Percentage, Wins and Shutouts.

The maximum value of any of these bonuses is $212,500, and a player cannot receive more than $850,000 in cumulative Individual “A” Bonuses. In other words, the ELC of a forward may contain $212,500 in bonuses for all nine categories, but if he hits on more than four, he’ll only receive $850,000.

The second category, Individual “B” Bonuses are bonuses payable in respect of League Wide Awards and Performance. The “B” Bonus categories are also listed in Exhibit 5 and the maximum value of any player’s “B” Bonuses in a single season cannot exceed $2 million. However, the CBA allows teams to negotiate the amounts payable individually with their players. For example, a most generous ELC will entitle the player to a $2 million bonus upon any of the following:

•   winning the Conn Smythe trophy
•   being named a 1st or 2nd Team All Star
•   finishing, 5th in balloting for the Hart, Norris, Selke, Richard or Vezina,
•   finishing 10th in scoring and/or
•   finishing 10th in points per game

***Note: Individual “B” bonuses in respect of winning the Calder Trophy ($212,500) and the Lady Byng ($150,000) are also permitted, but Clubs may not negotiate bonuses in excess of the stated amounts.

The bonus requirements can and likely are more strenuous for most players, although players like Justin Schultz who signed their ELCs as UFAs and players with a realistic chance of playing in the KHL may have enough leverage to negotiate better bonus packages. Even at the most generous end, it seems highly unlikely that a player on his ELC would reach the full value of his Individual “B” Bonus ceiling in each of his first three seasons.

I spoke with prominent player agent Andrew Scott of Octagon and he corroborated this theory for me. Mr. Scott told me that outside of the elite young players (think Sydney Crosby, Evgeni Malkin and Alexander Ovechkin), players on their ELC do not obtain the full value of their performance bonuses.

Given this, it’s safe to say that Clubs in need of reaching the Lower Level were able to gain a financial advantage under the old rules by, at least in part, writing large and unreachable performance bonuses into their ELCs.

For example, let’s take the case of Ryan Nugent-Hopkins of the Edmonton Oilers. Nugent-Hopkins received the full range of Individual “A” and “B” bonuses and we’ll assume for the sake or erring on the conservative side that he obtained the full permissible bonus for each category. We’ll consider the Individual “A” bonuses first.

Ryan Nugent-Hopkins: 2012 Statistics

Games
Goals
Assists
PPG
+/-
ATOI/EDM Forwards
All Rookie
All Star
All Star MVP
62
18
34
0.84
-3
4th
Yes
Yes
No

Nugent-Hopkins qualified for the PPG bonus, the ice time bonus, the All Rookie Bonus and the All Star Bonus. As a result, the maximum he would have received in Individual “A” bonuses last season was $850,000 As a result of not scoring 20 goals, notching 35 assists, finishing amongst the top-3 forwards in plus/minus or winning the MVP of the All Star game, Nugent-Hopkins did not qualify for those bonuses.

Turning to the Individual “B” bonuses, Nugent-Hopkins won the Calder Trophy and we’ll assume that the Oilers paid him a bonus of $212,500 for that trophy. He did not qualify for any of the other “B” bonus categories.

In sum, the most Nugent-Hopkins could have earned from Individual “A” and “B” bonuses in 2012 was $1,062,500. When we add in his salary ($925,000) and his signing bonus ($92,500), we get a maximum total value of $2,080,000. That figure is $1,695,000 below his cap hit.

This is already getting to be a long piece, so I’m not going to go through the other Oilers currently playing under ELCs (though it’s important to note that Jordan Eberle likely qualified for all of his $312,500 performance bonus money). However, it would appear to be the case that outside of the elite players alluded to by Mr. Scott, players on their ELCs do not hit on the full range of available performance bonuses.

With each of the last three first overall picks and Justin Schultz on their roster, the Oilers are probably the extreme end of the bonus spectrum. But the point here is that some teams have been able to gain a financial advantage through the performance bonus system by tying largely unreachable bonuses to ELCs.

Looking ahead to next year, the Edmonton Oilers’ cap hit of $44.5 million contains about $8.5 million for performance bonuses. With at least 7 roster spots to fill, the Oilers won’t have trouble reaching the floor.

The New York Islanders, on the other hand, will be an interesting club to monitor next season. With $29 million committed to 12 players, the Islanders will have to spread the remaining $15 million amongst the 9 (or so) roster spots available. Again, it’s not that this amount will be difficult to fill, but they won’t be able to rely on their prospects to carry the cap load the way the Oilers have in the past. Under the old rules, the cap hits of several near-NHL ready prospects like Griffin Reinhart (bonus: $2.35M), Brock Nelson (bonus: $1.925M), Nino Neiderreiter (bonus: $1.925M), Ryan Strome (bonus: $850,000) Mike Halmo (bonus: $850,000) and Calvin de Haan (bonus: $600,000), would have totaled $13.8 million. Under the new regime, the maximum value of those players relative to the Lower Level is only $5.3 million.

General Manager Garth Snow will have to walk the difficult line of ensuring a sound development for his Club’s prospects and making sure he reaches the floor. Perhaps this indicates that the trade for Tim Thomas was made for the purpose of reaching next season’s Lower Level. f Snow can slide Thomas’ contract to next season because of his suspension (which he will likely try to do) and avoid an NHLPA grievance for cap circumvention (which will form the subject of Part 2 of my Tim Thomas series), then he’s a lot closer to the Lower Level.

In conclusion, this is a bad provision for the fans who will have to wait longer in some cases to see their team’s top prospects wear an NHL uniform. There just isn’t the same business (non-hockey) incentive for floor teams to dress their young players as there used to be. 

On the other hand, this was a really shrewd inclusion by the NHLPA. The likely result is that floor teams will have to spend more money on veteran players in order to reach the lower limit.



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