Monday, August 20, 2007

The collective bargaining agreement
The NHL's changing salary structure
... and what it all means

My apologies, but this is going to be a beast of a post. Grab a snack.

It's something we've heard more than a few times since the lockout ended two years ago: How will the league's new CBA and the salary cap affect which players are paid?

With younger unrestricted free agency and a limit on just how much the big-budget teams can spend, we've seen quite the shift this off-season in who gets the big payday. Thomas Vanek gets a $50-million deal at age 23; Dustin Penner signs an offer sheet with the Oilers for more than $4-million a year after his rookie season.

Sure, we've certainly heard about the trend towards younger stars receiving more of that "cost certainty" pie, but how pronounced is it? And whose pocket are those dollars coming from?

In order to get a closer look at how the NHL's salary structure is evolving, I took the 20-man rosters of all 30 teams from two time periods — early in the 2003-04 season and at the end of the regular season of 2006-07, this past campaign — and ran that 600-player sample through a spreadsheet.

So, what's the difference between salaries prelockout and postlockout?

The average team's 20-man roster in 2003-04 cost approximately $41.3-million; last season, it was down to $38.5-million (based on individual player cap hits). That 6.5-per-cent dip wasn't a uniform one, however, as goaltenders and forwards felt the pinch (to the tune of close to 10 per cent) and defencemen didn't.

But the biggest trend, by far, was the jump in salaries of the five youngest players on the average 20-man roster, who increased their take by 31 per cent over 2003-04.

A look through the results:


The superstars


2003-04

2006-07

Difference

Dollars Percent
Dollars Percent
Dollars Percent
20-man $41.29

$38.53

-$2.76 -6.68%
Top $ player $6.43 15.57%
$5.99 15.55%
-$0.44 -6.84%
Top forward $6.07 14.70%
$5.28 13.70%
-$0.79 -13.01%
Top defenceman $4.03 9.76%
$4.16 10.80%
$0.13 3.23%
Top goalie $3.41 8.26%
$3.23 8.38%
-$0.18 -5.28%


The top player on the average 20-man roster is still getting the same share of his team's salary — about 15.5 per cent — but the high-end forwards and starting netminders have seen their salaries drop. Snipers, in particular, have been brought back to the pack because of the team maximum, as back in 2003-04, several players were receiving $10-million+ per season (Fedorov, Forsberg, Tkachuk and Jagr). The top-paid forwards last season were Brad Richards and Alexei Yashin — the only two to top $7-million.

On the flip side, more defenders were the top-paid players on their teams this season, including Scott Niedermayer, Nicklas Lidstrom, Rob Blake, Ed Jovanovski, Jay McKee, Zdeno Chara, Wade Redden and Sergei Gonchar. This is part of the reason the top defenceman total is the only figure to have remained relatively static.

'Top goalie' in this data refers only to the highest-paid netminder on a team — not necessarily the player who started the majority of his team's games. Only four netminders were the highest-paid players on their teams this season (Khabibulin, Turco, Luongo and Kolzig).


How much goes to the high-end talent?


2003-04

2006-07

Difference

Dollars Percent
Dollars Percent
Dollars Percent
20-man $41.29

$38.53

-$2.76 -6.68%
Top $ player $6.43 15.57%
$5.99 15.55%
-$0.44 -6.84%
Top two players $11.47 27.78%
$10.67 27.69%
-$0.80 -6.97%
Top five $22.06 53.43%
$20.48 53.15%
-$1.58 -7.16%


Note the percentages here are almost identical to prelockout numbers. The high-end players have all taken a small paycut, but percentage wise, remain in the same territory of their team's salary structure.

The average team still spends more than 53 per cent of its 20-man salary on its top five salaried players, and this was a group led by Tampa Bay this season at 64.9 per cent spent on just five players. Prelockout, Colorado spent approximately 69 per cent of its salary on its top five paid players.

This year's Stanley Cup champs, the Ducks, were right behind the Lightning at 64.6 per cent.

That's not much of a shift.


A breakdown by position


2003-04

2006-07

Difference

Dollars Percent
Dollars Percent
Dollars Percent
20-man $41.29

$38.53

-$2.76 -6.68%
Goaltenders (2)
$4.51 10.92%
$4.09 10.62%
-$0.42 -9.31%
Defence (6)
$11.92 28.87%
$12.00 31.14%
$0.08 0.67%
Forwards (12)
$24.87 60.23%
$22.43 58.21%
-$2.44 -9.81%


Ten per cent for goaltending, 30 per cent for defence and 60 per cent for forwards seems to be a fairly uniform breakdown. But this one calls for a chart:

Groovy.

Again, you can see the influence of the top-end defencemen getting higher salaries last season compared to three years ago. The average goaltender received $2.26-million in 2003-04 and $2.05-million three years later, while forwards went from $2.07-million to $1.87-million (partly a result of more checking liners being given minimum contracts) and defencemen stayed at roughly $2-million apiece.

Backup netminders took a backseat under the new agreement, as their salaries declined from an average of $1.1-million to $860,000 — a 22-per-cent drop that makes up most of the goaltenders' paycut.


The fountain of youth


2003-04

2006-07

Difference

Dollars Percent
Dollars Percent
Dollars Percent
20-man $41.29

$38.53

-$2.76 -6.68%
Five youngest $5.39 13.05%
$7.05 18.30%
$1.66 30.80%
Five oldest $14.55 35.24%
$12.25 31.79%
-$2.30 -15.81%


This is the biggest swing, one that's going to become even more pronounced after the 2007-08 season and the wave of big deals signed by the 25-and-under set. Some teams last season even had youngsters as their highest-paid players (Hemsky, Gaborik, Kovalchuk and Staal), something that was virtually unthinkable back in 2003-04 when old man John Leclair was still pulling down $9-million.

The so-called legacy contracts we saw prelockout from higher-salaried teams have all but vanished, and it's common for players in this 'five oldest' group to be on a league-minimum contract. (That said, there are more than a few oldtimers still among the top two highest-paid players on their team, a group that includes Sakic, Fedorov, Norstrom, Roloson, Blake, Weight, Naslund, Kovalev, Brodeur, Yashin, Jagr, Shanahan, Hatcher, Gonchar, Sundin and Kolzig).

The 10 players on the average 20-man roster that aren't represented here — the middle men we'll call them — went from an average salary of $2.1-million to $1.9-million.

Here's a look at the average salary for players falling into the three age ranges on their teams:




What I didn't get into was how the top producing players are paid; perhaps that can be something to look into at a later date (although there's certainly been enough said for how valuable producing youngsters can be under a cap system).

All of this gives us, I think, a decent idea of where the league's headed, and makes you wonder just how tilted the salary landscape can get in favour of the younger set. There's certainly something to be said for paying for an established veteran, and that apparently still holds weight, but how far away are we from seeing players on entry-level contracts catching up to more established players? And why has unrestricted free agency not tipped things in favour of the middle group, where you'd expect most 26- to 30-year-olds would be?

Comments and queries welcome.
.

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19 Comments:

At 8:53 AM, August 20, 2007, Anonymous David Johnson said...

When Dustin Penner's and Thomas Vanek's contracts start to ripple through the arbitration process the young players are going to be getting an even bigger piece of the pie than they are now. What we have seen is only the beginning and all of this is going to mean that draft picks are going to become less and less valuable. One of the largest benefits of smart drafting was that you could get a quality player to play on your roster cheaply for sometimes as much as 10 years under the old CBA. Under the new CBA you are only really going to get them cheaply for their first couple of seasons in the NHL while they are on their capped entry level contracts. After that they are going to get much closer to their fair market value (what teams would pay on the open market). This is all going to shift the advantage to big market teams that can afford to pay to the cap and while under the old CBA small revenue teams could stock up on cheap young talent through smart drafting and remain somewhat competitive (i.e. Ottawa, Tampa, Carolina, etc.) they won't be able to do that to the same extent now.

 
At 10:02 AM, August 20, 2007, Anonymous Anonymous said...

I recall the Summer 2006 conventional wisdom that only balanced teams like Carolina, Buffalo, and Edmonton could succeed in the New NHL. It's therefore interesting to learn that Cup-winner Anaheim had the second most money tied-up in its top five players.

 
At 10:40 AM, August 20, 2007, Blogger Knotwurth Mentioning said...

There are two things that may come into play here for the next couple seasons. One is Crosby's contract. Arguably no arbitrator would award players more than Crosby, and most teams won't offer much more than the arbitrator's likely to in order to keep around the players.

The other is offer sheets, which could counter the Crosby Cap. When keeping around your RFAs, you may not offer more than Crosby's getting. But if you're a desperate team looking to steal another team's top star, that may be a bigger temptation.

We'll see just which factor wins out. If Crosby's contract serves as a model, inflation (at least for young forwards) should keep to a minimum for the next little bit. If offer sheets become less of a taboo, though, it won't work out so nicely!

 
At 10:52 AM, August 20, 2007, Anonymous David Johnson said...

Crosby is set to make $8.7 million which will make him the highest paid player before reaching unrestricted status ever in NHL history. Crosby's contract does nothing to slow inflation of the contracts for young stars.

Crosby: $8.7 million/year
Vanek: $7.14 million/year

Those two contracts are setting new standards on salaries for young star players coming off their entry level contracts. Look for Ovechkin to sign in that range too.

 
At 12:26 PM, August 20, 2007, Anonymous Gerald said...

One of the largest benefits of smart drafting was that you could get a quality player to play on your roster cheaply for sometimes as much as 10 years under the old CBA.

That was and is a myth.

The rest of your post is equally misguided, David. Draft picks are, if anything, more valuable than they were. The greatest source of undervalued talent is and always has been the draft and the entry-level system. As for the supposed advantage of big-market teams, this type of flawed reasoning is based upon the idea of big market teams constantly having unlimited cap space.

Excellent work, James. Very well done. What it appears to indicate to me is that the market is becoming somewhat more "fair" (whatever that means, as the inherent variations of athletic performance mandates that there will always be over- and under-performance). Recent performance is now more quickly and efficiently rewarded, or so it would appear with a limited data set which has almost assuredly been skewed to some degree by the particular set of contracts that have come up within the past 2 years.

I will be very interested in reviewing the data again in five years time.

One thing, however. By my calcs, player compensation is down much more than 6 percent and change since 2003-04. I am not sure where the variance comes from.

 
At 12:28 PM, August 20, 2007, Anonymous Baroque said...

I think teams still need to be balanced in talent; the difference is that teams used to be able to be highly imbalanced in payroll (with cheap young players and "legacy" contracts for veterans) and still be relatively balanced in talent. I think that will start to change, but it will take several years yet.

And I'd hold off on the idea that Crosby will depress salary inflation until he signs his next contract. I expect that one to be enormous once he has proven himself for a few more years and decides whether to go to another team or stay in Pittsburgh for another few years.

 
At 12:33 PM, August 20, 2007, Blogger James Mirtle said...

One thing, however. By my calcs, player compensation is down much more than 6 percent and change since 2003-04. I am not sure where the variance comes from.

There are a couple of reasons for this, I would guess. For one, I didn't include injured players in the 20-man rosters, and players like Pavel Bure, Jason Allison and Al MacInnis were pulling down huge contracts in 2003-04.

The other reason there'll be a variance is that I'm only using the 20-man roster, and three years ago, teams would often have 26, 27 players on the payroll whereas many cut down the number of one-way deals they had to fit under the cap last season.

I think we could be looking at anywhere between a 8- or 9-per-cent variance with those factors included — but remember, I wanted to measure salary structure, how teams are built, not necessarily the drop in spending on salaries.

 
At 12:34 PM, August 20, 2007, Blogger Steve said...

Great post.

Do you think the defense salary's taking up a relatively larger share of the pie is CBA-related, or do you think it's just a market fluctuation whereby we happened to see demand for free agent defense greatly exceed supply right before the 2006-2007 season? Do you think GMs are building their teams differently now, putting a higher priority on defense, or do you think that the positional breakdown of a team's salary will, in the long run, be about the same post lockout as it was pre?

 
At 1:18 PM, August 20, 2007, Blogger James Mirtle said...

Do you think the defense salary's taking up a relatively larger share of the pie is CBA-related, or do you think it's just a market fluctuation whereby we happened to see demand for free agent defense greatly exceed supply right before the 2006-2007 season?

Both. I think the biggest reason we're seeing it, however, is that as payrolls are squeezed, the third- and fourth-line forwards are all really being scaled back.

The 2003-04 Rangers, for example, had somewhere in the neighbourhood of 12 forwards making $1-million. That's virtually impossible now (and why would you want such a player on your fourth lines anyway?).

Granted, fifth and sixth defencemen have been squeezed a little, too, but in general, they're playing a more significant role on your team (especially in case of injury) and many teams had decently salaried blueliners on their bottom pairing last season (think Joe Corvo, etc.).

 
At 1:32 PM, August 20, 2007, Anonymous David Johnson said...

Gerald, first you call this statement I made a myth:

One of the largest benefits of smart drafting was that you could get a quality player to play on your roster cheaply for sometimes as much as 10 years under the old CBA.

Then you write this:

The greatest source of undervalued talent is and always has been the draft and the entry-level system.

You are contradicting yourself. Using your words let me state that under the old CBA good drafting could land you undervalued talent for up to 10 years. Under the new CBA good drafting could land you undervalued talent for as few as 3 (see Crosby who will make $8.7 million in year 4) or even less (see Vanek $7.2 million in only his 3rd season or Penner who will make $4.25 million in only his second full NHL season). There is still an advantage to good drafting and player development, but not as much as previously. The value of draft picks has diminished under the new CBA.

 
At 1:54 PM, August 20, 2007, Blogger David Johnson said...

The 2003-04 Rangers, for example, had somewhere in the neighbourhood of 12 forwards making $1-million. That's virtually impossible now (and why would you want such a player on your fourth lines anyway?).

It is not impossible and actually going to be quite common. In the upcoming season, the Flames might have as many as 16, the Oilers 15, and the Leafs, Senators, Canadiens and Canucks will all have 13 million dollar players. In fact, most teams will likely have 12 or more $1 million plus players. Doing a quick scan of my salary database the following teams will have fewer than 12 players with a $1 million or more cap hit.

Phoenix (8)
San Jose (8)
Dallas (10)
Washington (10)
Islanders (11)
Rangers (11)
Chicago (11)
Columbus (11)
Detroit (11)
Nashville (11)

And most of the leagues worst teams are in that list so I don't think it is anything to strive for. Detroit still has a lot of money to spend and I'd bet on them adding at least another million dollar player. The best teams have a balance of top talent and depth. It is difficult to win if you can't put out 3 solid lines and at least 2 very good defense pairings and some extra depth to handle injuries.

 
At 2:05 PM, August 20, 2007, Blogger James Mirtle said...

I meant to say the Rangers had 16 forwards making close to $1-million, not 12.

And I'm talking about forwards only. Your tallies appear to be for all players, which is irrelevant to the discussion of how much fourth-line forwards are paid.

 
At 2:53 PM, August 20, 2007, Blogger Shane Giroux said...

This was an excellent post, James. Lots of people are talking about how the salary cap is changing things but mostly based on feel rather than numbers.

It must have been a fair bit of work but it was worth it.

 
At 3:17 PM, August 20, 2007, Anonymous Frank said...

Good piece of analysis James. While we will still need another 5 years under the CBA before we can analyze with certainty what is happening, I think two trends are apparent.

First, the level of inequality between the top elite players and the rest of the league is growing; and second, younger players are being paid more than similar established veteran players - as you have well pointed out.

This later development should not be surprising, as it is simple economics. Look at the stock market. Company A and Company B are identical with both producing the same annual earnings but Company A sells at a higher price (P/E ratio) than Company B, because Company A is PERCEIVED as being able to grow its earnings in the future at a higher rate than Company B.

Therefore NHL GMs, just like investors, are willing to pay more for young player with potential (even though it may never be realized) than for a veteran of equal ability with lesser PERCEIVED potential for further growth. Of course RFA arbitration and offer sheets now facilitate this over payment for future growth.

With regard to the inequality thesis, it is becoming apparent that teams are devoting most of their salary cap to what I term the Elite 7.

The Elite 7 is comprised of a starting goalie, a power play quaterback defenceman, a shut down defencemen, and 4 scorers - 2 each for the top two lines.

Based on a 22 man roster the Elite 7 represent 32% with the remaining 15 players representing 68%. Yet when it comes to salary dollars the Elite 7 receive 66% while the bottom 15 receive 34%.

Two teams which have done the most restructuring of their rosters over the first 3 years of the CBA - the Rangers and Flyers - comfirm this trend. Based on their projected 2007/08 roster and salaries (from NHLnumbers.com) the
results are as follows:

Rangers: 67% salaries to the top 7
Flyers :64% salaries to the top 7

With regard to the bottom 15 players receiving approximately 34% of salary dollars - this amounts to $17 million (assuming a $50 million budget) or an average of approximately $1.15 million per player.

This bottom 15 is comprised of three groupings: recent draft picks, young RFAs and veteran non elite players (27 to 35 years old)

Given that top round draft picks are now being paid over a million per year (with bonuses) and young RFAs are now being paid close to $2 million a year - as you have pointed out - this means the third group of veteran players will have to start being paid close to the minimum wage of $500k - in order for the bottom 15 players to average out at $1.15 million.

Therefore, over the next several years we are going to see the salaries of non elite veteran players continue to drop towards the league minimum. As a result, more and more veteran North American players - and not just the Euros - will leave for European Leagues.

Clearly, there is going to be major tension within the NHLPA over this development as these veteran non elite players represent nearly one half of the membership. As a result, it is likely the NHLPA will try to re-open the CBA at the earliest opportunity to try to raise the minimum salary to $1 million - or more - in order to redistribute some of the money from the elite and young players back to the non elite veteran players.

This development was entirely predictable as it also occurred within the NFL when a cap was impossed. To counteract it, the NFL CBA implemented much higher minimum salaries for veteran players.

Once again it shows how poorly prepared the NHLPA was in negotiating the last CBA.

 
At 5:58 PM, August 20, 2007, Blogger Stevens8204 said...

Why did we lose a season? The NHL now overpays a different way to achieve the same end. The gap between the superstars and role players will keep widening to the point where more middle of the road players just go elsewhere. Great post James!

 
At 8:23 PM, August 20, 2007, Blogger Joe said...

Two teams which have done the most restructuring of their rosters over the first 3 years of the CBA - the Rangers and Flyers - comfirm this trend.

Rangers: 67% salaries to the top 7
Flyers :64% salaries to the top 7


I find it interesting that you cite the two teams who are most likely to have the contracts they just signed this summer blow up in their faces 2 years from now. Everyone seems to be forgetting that the growth of the salary cap is NOT infinite, and that this is the first accurate salary cap we've had, because the first one was missing a ton of revenue from sponsors and such. The cap is going to start flattening out dramatically now. I would venture to guess that 4 years from now, we're at or under 60 million for the overall salary cap. The top 7 dynamic that you cite is extremely dangerous, because all contracts in the NHL are guaranteed. Giving 60-67% of your teams money to 7 guys, considering the length of UFA contracts that is being established, is tremendously risky. If you miss with ANY of those 7 contracts, you're going to be screwed, because you're going to be carrying a lot of dead cap space for a long long time. This strategy is most effective in a short term "win now" attitude. Also don't forget that this year's salary cap is artificially high, because of the NHLPA enacting their option to raise it 5%.

Let's look at the Flyers in two years. Next year, the 5% increase will fall back. However, the NHL will probably increase revenues a little more, but not much. It is reasonable to assume we will be dealing with a cap in the 50-52 million range.

http://www.nhlscap.com/salarynumbers/philadelphia.htm

1. BRIERE, DANIEL (6,500,000)
2. TIMONEN, KIMMO (6,333,333)
3. GAGNE, SIMON (5,250,000)
4. HARTNELL, SCOTT (4,200,000)
5. BIRON, MARTIN (3,500,000)
6. HATCHER, DERIAN (3,500,000)
7. KNUBLE, MIKE (2,800,000)
8. LUPUL, JOFFREY (2,311,667)
9. GAUTHIER, DENIS JR. (2,100,000)
10. KAPANEN, SAMI (1,250,000)
11. UPSHALL, SCOTTIE (1,225,000)
12. NIITTYMAKI, ANTERO (1,225,000)
13. KUKKONEN, LASSI (875,000)
14. EAGER, BEN (600,000)
(not counting Mike Rathje, as his effect on the cap is unknown)

All of the above mentioned contracts are guaranteed, is generous with Rathje, and does not take into account any 2 way contracts at all. Quite generous, I'd say.

That leaves the 2008-2009 Flyers with 14 players under contract, for a total of 41,670,000. That leaves the Flyers, two years from now, with 10 Million in cap space, and as I said, this is being quite generous. Also, after the coming season, right before the 2008-2009 season, the Flyers will have several RFA's up for signing. RJ Umberger, Jeff Carter, Braydon Coburn, Mike Richards, Lars Jonsson, Nathan Guenen, Randy Jones, Stefan Ruzicka, Jussi Timmonen, Rejean Beauchemin, Riley Cote, Alexandre Picard, Triston Grant, and Martin Houle will all be RFA's in the offseason previous. Now of course, most of those players will be let go, and thats fine. However, the Flyers need at least 6 to 8 more players that year, and only have 10 million with which to get them. They will want to keep some of those RFA's, but they will have earned raises, or even if resigned for depth, will be pulling 800K-1Million. The Flyers need to ice a 20 man roster, but if they want to sign someone to a significant contract, it has to come at the cost of all their RFA's and thus, a lot of depth. And like I said, this is being quite generous with Rathje, not counting 2 way contracts (not all of them will be in the minor leagues, many of those 2-ways are draft picks who should be playing 2 years from now, and thus earning money against the cap). Essentially, the Flyers appear to be stuck icing nearly the same exact team two years in a row. That's fine if you're already at the top of the game, but considering the Flyer's likely will be competing just to get into the playoffs, thats not good. Following the 2009-2009 season, when the Flyers finally get some cap room again, if they make a couple more long term contracts (and at that point, they'll have signed some of their young guys to extensions) with big prices, you can see how they would already have squeezed themselves tight for 2011 and 2012. The teams that do this to themselves, unless every single contract is a home run, are going to end up stuck either at the playoff fringe, not drafting high but not having serious success, like the Maple Leafs have for the last few years, or will end up stuck in the basement until they get out of salary cap hell and have to go through a huge and painful rebuilding process.

 
At 9:33 PM, August 20, 2007, Anonymous Gerald said...

You are contradicting yourself. Using your words let me state that under the old CBA good drafting could land you undervalued talent for up to 10 years. Under the new CBA good drafting could land you undervalued talent for as few as 3

Evidently I did not state with enough particularity the "myth" that I was referring to (although you sort of get the point in the second half of your post).

The myth to which i refer is the myth that players under the old CBA were undervalued until they became 31 years of age. THAT is the myth. With the combination of arbitration and - even more importantly - the threat of arbitration, players were getting "overpaid" well before they reached UFA age. Under the old CBA, players began to receive market value or close to market value as soon as they becqame arbitration-eligible (5 years out). The only difference now is that the arbitration threat happens one year early.

 
At 11:12 PM, August 20, 2007, Blogger The Forechecker said...

Great stuff, James - this is the kind of stuff that could be a case study in salary cap economics.

 
At 9:34 AM, August 22, 2007, Anonymous Anonymous said...

While I do agree to some extent with Joe on the cap not growing as quickly, I think we will still see a raise after this season. Sure the 5% NHLPA clause has been used this time, but I think the league will see a large increase in revenue from jerseys. I'm sure a ot of people will be replacing their old style jerseys for the new ones. I think we will still be a few years away from an accurate cap.

 

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