On the first day of free agency this past summer, the San Jose Sharks signed forward Mikkel Boedker to a 4-year, $16M contract ($4M average annual value (AAV)). The breakdown per year of the contract was $5M/$5M/$3M/$3M with a $1M signing bonus included in Boedker’s salary for the first two years of the deal. A few days later, the now defunct General Fanager reported that the NHL had rejected San Jose’s contract with Boedker as it violated the Collective Bargaining Agreement. Specifically, it violated the league’s 35% variability rule (Rule 50.7(a)). San Jose was able to shift salary from one year to another to satisfy the league’s variability rule and to keep the contract’s length and cap hit the same. Boedker’s contract now is broken down at $5.2M/$4.8M/$3M/$3M per year.
It was very surprising to hear that an NHL team offered and signed a player to an illegal contract. One could assume a team would employ a capologist or use a computer program to ensure compliance. There are great tools publicly available for buying out contracts, calculating a restricted free agent’s qualifying offer, and determining a player’s waiver eligibility but nothing to confirm whether a contract satisfies the league’s variability requirements. Could the lack of publicly available tools hurt teams in this regard? In a similar fashion, as Boston Bruins President Cam Neely was searching for a replacement to Peter Chiarelli, he said potential general managers struggled to grasp the team’s salary cap situation after CapGeek shut down.
The CBA contains meticulously worded information written by lawyers including several contract requirements to keep teams from circumventing the salary cap like the New Jersey Devils tried to do with Ilya Kovalchuk. The year-to-year variance of a player’s salary is one of the main topics. The league has dismissed the notion of dramatically lowering a player’s salary cap by adding years of lower salaries onto the end of the contract. CBA Rule 50.7 (page 282 of the 2012 NHL CBA) lists numerous variability rules teams must comply to when negotiating a multi-year standard player’s contract (SPC). To make things more complicated, the NHL has different variability requirements depending on whether the contract is front or back loaded in terms of total salary.
I have developed a spreadsheet that takes all of the variability rules into consideration and determines whether a potential contract, based on length and yearly salaries, is legal:
How it works: enter a player’s name, team, and salary breakdown by year in the gray boxes in the “Type of SPC” tab. The spreadsheet will automatically calculate the blue boxes to determine whether the contract is a front loaded SPC or a non-front loaded SPC. You can flip over to the next two tabs depending on the type of contract to see a breakdown of how the contract fares against its corresponding variability rules. A green “OK” means the contract is valid and enforceable, where a red “NOT OK” means the contract is invalid and illegal.
Determining Whether a SPC is Front or Non-Front Loaded
To determine if a contract is front or non-front loaded, the first-half averaged salary of the contract is compared with the average amount for the entire length of the contract. To determine the first-half averaged amount, first the first-half term is calculated by dividing the total contract length by two. Next, all player salaries and bonuses in the first-half term are added together and then divided by the first-half term. This gives us the first-half averaged amount. If the SPC has an odd length of years, half of the middle year’s total salary is added to the numerator (this also means the first-half term will not be a whole number). The first-half averaged amount is then compared with the averaged amount for the entire term (simply calculated by the total salaries divided by contract length). If the first-half averaged amount is greater than the averaged amount, the contract is a front loaded SPC. If it is equal or less, it is considered a non-front loaded SPC.
Using Boedker’s contract as an example, the contract’s first half averaged amount ($5M) is greater than the AAV ($4M) so it is considered a front loaded SPC and must follow the the requirements that follow in the next section.
Front Loaded SPCs
There are two variability rules that front loaded SPCs must satisfy. First, the salary variances of adjacent years cannot exceed 35% of the salary in the first year of the specific deal. This requirement holds true for both salaries increasing and decreasing. The second requirement is the year with the lowest total salary cannot be less than 50% of the year with the highest salary.
Analyzing Boedker’s original contract, the first requirement is not met. The year to year variability cannot exceed $1.75M ($5M * .35). The drop of $2M from $5M in year two to $3M in year three triggers this requirement. The contract does in fact pass the second requirement as the minimum yearly salary ($3M) is only 60% of the maximum yearly salary ($5M). To fix this issue, San Jose raised the salary in the first year to $5.2M (this increased the maximum year-to-year variance to $1.82M) and lowered the second year’s salary to $4.8M. The variance between the second and third years now is only $1.80M which falls under the acceptable threshold and makes Boedker’s contract legal.
Non-Front Loaded SPCs
Non-front loaded SPCs have two different variability rules that such contracts must satisfy. Unlike front loaded SPCs, the variability rules specifically account for whether the salary is increasing or decreasing from one year to the next. First, any increases in year-to-year variances may not exceed the lower of the first two years of the contract. Second, any decreases in year-to-year variances may not exceed 50% of the lower of the first two years of the contract.
Vladimir Tarasenko’s contract is a fun example of a non-front loaded SPC as there are a number of both increasing and decreasing salaries over the eight years. His contract is considered a non-front loaded SPC because the first half averaged amount was equal to the contract’s AAV. Had just $1.00 been allocated from the second half to the first half of the contract, it would have been considered a front-loaded SPC and failed the 35% variability requirement. As Tarasenko’s salaries in the first two years are so high, the contract has much more wiggle room, for variances of both increasing and decreasing amounts, than a contract with much lower starting salaries. The contract easily passes the first requirement as no increasing variance comes close to $8M (lower of the first two years of the contract). The second requirement allows decreasing variances of up to $4M (50% of the lower of the first two years of the contract). The contract has two negative variances of exactly $4M which passes the test and renders the contract to be valid.
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