Contract Structures?

Discussion in 'The Business of Hockey' started by BlackOmen, Jul 3, 2006.

  1. BlackOmen

    BlackOmen Registered User

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    When a general manager signs a player to a multi year contract what would be a better way to structure a contract, back loading it or front loading it? Who is better to trade at the end of the contract?

    Example

    John Doe 4 Years/20 Mill.

    1st Year - 5 Mil.
    2nd Year - 5 Mil.
    3rd Year - 5 Mil.
    4th Year - 5 Mil.

    Bob Nobody 4 Years/20 Mill.

    1st Year - 3 Mil.
    2nd Year - 4 Mil.
    3rd Year - 5 Mil.
    4th Year - 8 Mil.

    Edward Drawde 4 Years/20 Mill.

    1st Year - 7 Mil.
    2nd Year - 6 Mil.
    3rd Year - 5 Mil.
    4th Year - 2 Mil.

    Which of these players (assuming they are having identical seasons) would be worth the most in a trade at the trading deadline in the 4th season? Also is there any point to front or back loading a contract because of the average salary during the term of the contract going against the cap not the salary paid that year to the player?
     
  2. Art Vandelay

    Art Vandelay Registered User

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    Edward Drawde, same cap hit as the others, lower salary.

    My take:

    There is a point for teams that are operating on a budget below the cap.

    Buffalo could be a good example, they have their own set budget at say 35 million/year in salaries which they wont go over, so for them it's very important.

    For teams like Detroit, Toronto and Philadelphia it's quite pointless since their pre-cap budgets were above 60 million.
     
  3. Irish Blues

    Irish Blues Worth waiting for :)

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    Because of the "100 Percent" rule in Article 50.7, the last two contracts would be disallowed; but I'll help you through this. Keep in mind that this is my opinion, someone else may see this differently and thus what really might happen could be completely different from what I think might happen.

    DOE: $5M, $5M, $5M, $5M
    NOBODY: $2M, $4M, $6M, $8M
    DRAWDE: $7M, $5.5M, $5M, $2.5M

    For Doe, the salary equals the cap hit in all years; teams would likely be indifferent toward acquiring him because there's no benefit gained comparing his salary to his cap hit.

    For Nobody, the salary is greater than the cap hit in the final 2 years; teams who will push the upper limit will want to get as close as possible without regard to actual dollars spent, so Nobody will be more attractive to those teams.

    For Drawde, the salary is less than the cap hit in the final 2 years; teams who want to reach the lower limit while spending as little as possible will want Drawde because he will save the team $2.5M toward reaching the lower limit.

    As a side note ... if each player was bought out in the final year of his contract, the cap hits would be:

    DOE: $1,666,666.67 for the 4th and 5th year
    NOBODY: ($333,333.33) and $2,666,666.67 for the 4th and 5th year
    DRAWDE: $3,333,333.33 and $833,333.33 for the 4th and 5th year
     
  4. BlackOmen

    BlackOmen Registered User

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    First off thank you for the detailed and informative response. I have a few question regarding your answer.

    When buying out why the large difference between each of the scenerios? Does Nobody actually have a negative cap buyout the first year?

    I read Acticle 50.7 and I have a question regarding the reason I came up with the original question.

    I read this article Thrashers sign free agent Rucchin and the part that made me think was.

    It can be agreed that Rucchin is backloaded. Now the Most Rucchin could have made in his third year would be $4.25 million because the lower over the first two years $1.85 million and added onto the 2nd year salary it comes out to $4.25 million. Okay that make sence to me. Thank you.


    Although Nobody's Contract would work out.

    lower is 3 over the first two years which makes the third year max at 7 and max for 4th year is 8. Doesn't it?
     
  5. Irish Blues

    Irish Blues Worth waiting for :)

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    I'll double check on this ... but I'm pretty sure that since the 1st year is at $3M and the 2nd year is at $4M, the most a team could give is $7M for years 3 and beyond. (And yes, I realize my 2-4-6-8 scenario would also fail this test ... which is why I'm checking it out.)

    A contract can't go up by more than 100% or go down by more than 50% in consecutive years; the drop from the 3rd year to the 4th year is more than 50%, so the contract would be voided.

    Explanation on buyouts coming in a little bit.
     
  6. BlackOmen

    BlackOmen Registered User

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    It would be very helpful for Atricle 50.7 to have an illustration with more then 3 years.

    Illustration #3 is interesting. It talks about the first year actually counting as the first two years in a two year SPC. What I get from that is that contract's can be backloaded to a maximum of..

    1st - X
    2nd - 2X
    3rd - 3X

    Then the 4th year could be 3X or 4X depending on what you find out.

    The maximum for Frontloading a contract would be

    1st - X
    2nd - X/2
    3rd - X/4

    Then the 4th year could be X/4 or X/8 depending on what you find out.

    Atleast that is what I believe to understand aftering reading the illustrations.
     
  7. BlackOmen

    BlackOmen Registered User

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    I also read Article 50.5, Section d, Part iii B regarding buyouts.

    Very Interesting to say the least. Found out how much Domi's salary counts against the salary cap for the Leafs. On a more facinating note I also think that you are correct with the 3rd year salary being a maximum over a SPC. I came to this conclussion because using 3rd year (is the max) you always come out with positive values for cap hits caused by a buyout. Using my theory above you come out with incorrect negative values as illustrated by your calculation above.
     
  8. Irish Blues

    Irish Blues Worth waiting for :)

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    It is possible for a buyout to be executed and the amount charged to the team in a year be negative (i.e. a credit to the team), but things have to fall in place just right. There's an example of this in the CBA.
     
  9. BlackOmen

    BlackOmen Registered User

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    That's crazy, having an additional amount of money under the cap for a year. Could be very useful for teams that are pushing for a stanley cup in a one year window.
     
  10. gooseman

    gooseman Registered User

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    I will throw in two cents if you don't mind. Those numbers that Irish Blues threw up look odd, especially the negative number, but they can work that way. Notice that the total hit from examples 1 and 2 are the same. If you structure a deal similar to what you proposed, then on a buyout you end up with a bit of a deferment on the cap hit, but not a relief, you still owe the same amount, just in a different year. The third example looks like there is a different hit, but that is actually because the "deferment" occurred earlier in the contact, and that hit still needs to occur, so the price is still owed against the cap.

    Sorry, correction, examples 1 and 2 differ in total cap hit for buyout years due to having to "pay back" the defered cap hit due to the staggered, contract, but the total cap hit for the five years would be the same. My bad.
     
    Last edited: Jul 6, 2006

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