34.5 million reasons I’d be against compliance buyouts in the next CBA if I were a player

Escrow has been a dirty word among players for the better part of a decade now, and it’s understandable knowing that they see an extra 10%, 15%, or even 18% shaved off of their every hard earned paycheck. However, it’s a necessary evil for the revenue sharing agreement in cap system to work. As it is right now, the salary cap system is set up to overpay the players from the outset of every season. The salary cap ceiling is set to create a 57.5/42.5 revenue split between the players and league. Escrow exists to redistribute the revenue so that it is split 50/50 at the end of every year, as the NHL and NHLPA agreed upon in the 2013 CBA. So every cap team in this league is an extra little bit of escrow tagged onto the players. There are also a few other well-known causes of escrow, such as the salary cap escalator, LTIR, and cap-advantaged contracts, that are explained here.

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There is, however, one unique cause of escrow spiking that I have heard little of. It is something that happened in the two years after the 2013 CBA was signed and that something is also being discussed as a likelihood in the next round of labor negotiations. That something is compliance buyouts. Compliance buyouts are get-out-of-jail-free cards for teams that don’t like one of their contracts. These buyouts still require the teams to pay the player a large percentage of his contracted salary, but there is no cap hit associated with the buyout (unlike regular buyouts). Continue reading “34.5 million reasons I’d be against compliance buyouts in the next CBA if I were a player”

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Dissecting the Odd Salary Structure of Hampus Lindholm’s Contract

Per Cap Friendly, Lindholm’s new contract has a rather odd salary structure that may confuse a lot of people:

Year Salary
2016-17 $3.00m
2017-18 $6.00m
2018-19 $6.75m
2019-20 $5.25m
2020-21 $3.75m
2021-22 $6.75m

We have generally grown accustomed to deals that are in some way flat, i.e., they may have a rising salary, uniform salary, or decreasing salary with term. And we have begun to grow used to either a salary drop in 2020-21 or an agreement that places most of that salary in signing bonuses. This latest tactic is “lockout-proofing” of contracts. So what gives with Lindholm’s tumultuous structure?

Variability Rules for Multi-Year SPCs

After all of the front-loaded deals helped set the 2012 lockout into motion, the Collective Bargaining Agreement (CBA), a labor contract between the NHL and the players’ union known as the NHLPA, came to include rules that were meant to eliminate such practices. One such set of rules is found in Section 50.7 of the CBA: Variability Rules for Multi-Year Standard Player Contracts (SPCs).

Paragraph 50.7(a) introduces the idea of “Front-Loaded SPCs.” Front-loaded SPCs are basically those aforementioned contracts that set the lockout in motion. A classic example is Marian Hossa’s contract:

Year Salary
2009-10 $7.90m
2010-11 $7.90m
2011-12 $7.90m
2012-13 $7.90m
2013-14 $7.90m
2014-15 $7.90m
2015-16 $7.90m
2016-17 $4.00m
2017-18 $1.00m
2018-19 $1.00m
2019-20 $1.00m
2020-21 $1.00m

The original intention of these deals was to drive down the cap hit of the contracts by adding on low salary years at the end of the contract that the player would skip over by retiring. The 2012 CBA negotiations sought to eliminate these contracts by (a) limiting contracts to 8 years max and (b) introducing rules for how salaries can be structured on a year-to-year basis.

So paragraph 50.7(a) introduces the following limits on Front-Loaded SPCs:

  1. Maximum of 35% change from year-to-year.
  2. Maximum of 50% change from highest-salary year to lowest-salary year.

It’s pretty clear that the Hossa deal would violate this agreement if it were signed today. And it appears at first glance that the Lindholm contract does as well. After all:

  1. It has a maximum year-to-year change of 50%, and
  2. a maximum highest-salary to lowest-salary change of 56%.

Then why was this contract allowed to go through? Well, that lies in the definition of a Front-Loaded SPC. The following process for determining if a contract is a Front-Loaded SPC is spelled out in items 50.7(a)(i)(A)-(E) of the CBA:

  1. Add up the total salary (including bonuses) of the first half of the contract. (Note: if there’s an odd number of years, take half of the “middle year.”)
  2. Divide the combined salary of the first half of the contract and divide it by half the number of years of the contract.
  3. Compare against the AAV of the full contract.
  4. If the “first half average salary” is greater than the AAV, then you have a Front-Loaded SPC.

So let’s go through this process with Lindholm:

  1. We know he has a 6-year contract with an AAV of $5.25m.
  2. So adding up and averaging the first three years of his deal: $3.00m + $6.00m + $6.75m = $15.75m.
  3. $15.75m / 3 yrs = $5.25m / yr
  4. $5.25m / yr is not greater than the AAV ($5.25m), therefore this is not a Front-Loaded SPC.

Thusly, we need to refer to the next set of rules to see what actually governs the salary structure of Lindholm’s contract. Paragraph 50.7(b) applies to all non-Front-Loaded SPCs and states:

  1. The difference in salary between the first two of the SPC cannot exceed the lower of those two salaries.
  2. A year-to-year increase cannot be greater than the lower salary of the first two years of the contract.
  3. A year-to-year decrease cannot be greater than 50% of the lower salary of the first two years of the contract.

Putting It All Together

It’s clear to see that there are many things going on with Lindholm’s contract here. To quote Walter Sobchak from The Big Lebowski, “It’s a Swiss fuckin’ watch.” Every single year is tangled with a requirement from at least one of the rules.

For starters, the first three years must sum up to no more than $15.75m in order to avoid having an average salary that does not exceed the AAV ($5.25m) of the entire contract.

Next, the first two years are specifically chosen to ensure that all of the year-to-year variability follows suit. The $3.0m and $6.0m salaries set the maximum year-to-year decrease at $1.5m (half the lower of the two salaries) and the maximum year-to-year increase at $3.0m (equal to the lower of the two salaries).

With the first two years set at a combined $9.0m, that means the third year must be $15.75m – $9.0m = $6.75m.

From there, the contract dips down as much as possible year-to-year for two years in order to create the lowest possible salary in the expected lockout year (2020-21). After two straight $1.5m decreases, the contract takes on salaries of $5.25m and $3.75m in the 4th and 5th seasons, respectively.

Finally, the last season is an attempt to have the highest possible salary, which leads to the maximum potential year-to-year increase of $3.0m. This puts the final season of the deal at $6.75m.

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Relationship between different Year 1 salaries and their resultant Lockout Year salaries for Lindholm’s contract.

Every single year is optimized here. Increasing the value of the first two years results in less lockout protection, no matter how you try to arrange the salary structure within the rules. (E.g., I increased the first two years to $3.25m and $6.5m and ended up with $3.8m in the lockout year, which is $50k more than in the actual contract.) Similarly, dropping the values of the first two years will result in some exceedingly suboptimal salary structures. (E.g., I dropped the first two years to $2.75m and $5.5m, which resulted in a salary of $4.75m in the lockout year, which is not at all desired.)

Concluding Thoughts

So ultimately, we see a pretty interesting salary structure that at first glance appears funky. But after going through the applicable rules, we can see that each year is a carefully designed puzzle piece to fit this specific puzzle. Now remains only one question: Why not avoid all this nonsense by just committing all but $1m of his salary in the potenital lockout year to a signing bonus? That would have afforded more protection and without the funky contract numbers.