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What Can GMs Do With Lifetime Deals?
by Mike Chen on 01/28/09 at 01:13 PM ET
Comments (14)
Another day, another monster long-term deal. This time, the deal keeps Henrik Zetterberg in Detroit until Miley Cyrus is in her late 20s. Yes, it’s that long, and it’s very similar to the deal that Tampa Bay gave Vincent Lecavalier.
It boggles my mind that teams would give any player that term if they’re over the age of 25. Even for players under that age (like the Mike Richards deal), it’s still a difficult number to accept but it makes a little more sense—you’d rather have the contract (and cap hit) run out when the guy is 35, not 40.
But it’s not all set in stone. The NHL CBA is a dense document filled with clauses and loopholes and all sorts of legal verbiage that will make your head spin. Inside the 100+ pages of legal mumbo jumbo, GMs have a few options for dealing with the end of a long-term deal. They’re not necessarily pretty, and the “fairness” of the whole thing can depend on how good the player actually is towards the end of his career. Here’s what they can do:
A) Keep the deal: If you keep things status quo and the player stays in the lineup in the latter years of the contract, the cap hit stays the same. Remember, the cap hit is the average over the lifetime of the deal regardless of the actual cash paid out. At this point, a GM can only hope that the player’s talent has longevity and that inflation/revenues have driven the salary cap up to the point where today’s $6 - 7 million is equivalent to tomorrow’s $3 - 4 million.
B) Retirement: If a player’s skills erode and he feels ineffective, then there’s a good chance that he will retire sometime between the age of 37 and 40 (when the bulk of star player retirements take place). In some cases, retired players still count against the cap—but that’s only when the contract is signed over the age of 35. If someone’s in their 20s and they sign a long-term (emphasis on long), retirement will remove the player from the cap. Of course, a helpful GM can entice this with the promise of a teary ceremony, jersey retirement, and a cushy office job.
C) Buyout: This is where the accounting gets a little clever. If a team buys out a player, then the following formula is used (courtesy of NHLSCAP.com):
When a player is bought out, the team still takes a cap hit for the player over twice the remaining length of the contract. The amount of the cap hit (by year) is determined as follows:
1. Take the actual salary due for each remaining year.
2. Take the Averaged Player Salary (cap hit) for the current contract
3. Calculate the buy-out amount (as described above)
4. Spread the buy-out amount evenly over twice the remaining years of the contract
5. Take the number in #1 and subtract the number in #4. This is the “buyout savings”.
6. Take the cap hit from #2 and subtract the buyout savings from #5.NOTE: This calculation has to be done for each year - meaning that the cap hit on a buyout will not necessarily be the same for all years (see examples below). It can even be negative (meaning the team gets a credit). However, it’s critical to have the correct information for #1 and #2 to get the correct cap hit. The cap hit on a buyout is only the same for all affected years if the remaining yearly salary is the same for all years. If it varies, then the cap hit on a buyout will vary.
Got that? In a nutshell, without getting out your sliding rule and graphing calculator, it’s a way to make the cap hit less. So for a player in the case of Zetterberg, the final two years of his contract are at $1 million each. Not only does that lower the average cap hit over the life of the contract, it makes buying out easier. Buy out the player and that $6 million annual cap hit becomes some cryptic number that’s far less than that.
The kicker is that the team buying out the player won’t be able to re-sign him. So if the Wings in the future decide that they can’t afford Zetterberg’s $6 million cap hit and he doesn’t want to retire, they can buy him out but will sever the ties to the team. GMs and owners will have to decide if that’s worth the PR hit for a beloved player.
D) Trade: Trades, of course, can happen but if a player is being made available for trade, chances are their skills are diminished beyond their cap worth. However, there’s always the “veteran leadership” paycheck (see: Sergei Fedorov going to Columbus), and a rebuilding team might look into bringing on a Stanley Cup veteran to guide the way.
Any way you look at it, these extremely long-term contracts look good for about 75% of their length, then they get iffy. If I was an NHL GM, I’d stay the heck away from them because you never know what will happen (see: Rick Dipietro’s hip/groin/lower body fiasco). The league itself is wary of them too, and when CBA negotiations re-open in a few years, look for the league to put a limit on length of contract.
Filed in: Salary Cap | Mike Chen's Hockey Blog | Permalink
Tags: Henrik+Zetterberg, Mike+Richards, Vincent+Lecavalier,
Comments
Very good point, Nathan. Having championship management in Detroit versus sheer insanity in Tampa Bay is a big difference.
Posted by Mike Chen on 01/28/09 at 01:38 PM ET
Congrats Kenny/Ziggy, Ya got the deal done Great. This is a FANtastic deal!! Us Redwingers are soooo GLAD . This now means that a Franzen AND Hossa contract deal IS Possible. Thanks Mr. Holland / Thanks Mr. Illitch. And thank You SIR Zetterberg for having the maturity to get this done. ALL pro’s here; when it comes down to business ,maybe the rest of the Owners/GM’s in this league can learn ;that , Professional Hockey is a business ; foremost , and an entertainment media outlet secondly. Our North American sport of Hockey can grow and be a successfull proposition. It is ALLways up to management to be prudent; when an asset of THEIR business, is managed over the long term (amoritization). I say again congrats to the leadership of the reigning Stanley Cup Champions , the Detroit Redwings. I can say no more ; but, 
sincerely a Detroit lifer FAN…...rayzredwing
Posted by rayzredwing on 01/28/09 at 02:23 PM ET
Very good point, Nathan. Having championship management in Detroit versus sheer insanity in Tampa Bay is a big difference.
So, in other words, what you are saying is your original post was a knee-jerk response without having put a whole lot of thought into it.
An unboggled mind is a beautiful thing.
Posted by O-Joe on 01/28/09 at 02:46 PM ET
Ok, I hate to get involved in comment battles, but O-Joe, did you read the post? All I’m saying is that A) GMs have no idea what will happen 10 years from now (injuries, etc.) B) if they want to get out of the deal, they have a few options. And C) I personally wouldn’t give anyone a deal of that length. I don’t care if it’s 21-year-old Wayne Gretzky, you blow out a knee or a groin or get a concussion and you just don’t know how it’ll affect them the rest of their career. Eric Lindros is a good enough example of that.
So I’m not saying Zetterberg is great or Holland is stupid or anything inbetween. This isn’t a fanboy post against the Wings or for the Wings. Here’s a summary of the post: “Lifetime deals seem like a bad idea to me. If you’re going to do one, you have options for getting out from it should things go bad.”
Posted by Mike Chen on 01/28/09 at 02:58 PM ET
Mike—-you doubted Ken Holland, that is all the reason the 19 need to start lashing out at you, and it wouldn’t matter if you put all the logic, statistics, behind it while saying “this is JUST MY OPPINION”, you say anything that could be perceived as bad mouthing Tick Tock, and Wings fans are going to react.
What team in the NHL wouldn’t take Zetterberg for 6 mil per season? ABSOLUTELY NONE.
What team in the NHL wouldn’t take Zetterberg for 12 years at 6 mil per season? I think few would pass on that chance.
This deal did a number of things
1. Made sure that Z sticks around long enough to take Lidstrom’s “C” when he hangs up the skates
2. Allowed Ken Holland to make one more move before the playoffs to resign either Hossa or Franzen
3. Set an example for said upcoming free agents for how classy this organization is and how ELITE players are willing to take a hometown discount to stay in the D.
What should be mind-boggling (and not just to you) is how we managed to sign the Conn Smythe winner and Selke finalist for 4 mil a season less than Dany Heatley, 3 mil less than Sidney Crosby, and 2 OR MORE mil less than the likes of Scott Gomez, Daniel Briere, and Kimmo Timonen.
Think about it…this is a player who flat out outplayed Gary’s Baby Boy in the SCF this year and we have him for the rest of his career at 2/3 the cost? Mind boggling? You betcha!
Posted by Animal Drew from A Nightmare on Helm Street on 01/28/09 at 03:37 PM ET
It boggles my mind that teams would give any player that term if they’re over the age of 25.
That’s what I read—a blanket statement with no concession whatsoever that perhaps such signings need to be evaluated based on their own individual merit (and, as you later admitted in response to Nathan, consideration of which GM is pulling the trigger on such a deal).
Under the present CBA, if Zetterberg suffers a debilitating injury, LTIR takes his salary off the cap. The only thing the Wings are out in that case is money, and Ilitch has tons of that.
Assuming the verbage in the next CBA mirrors the present one regard to the age 35 rule, an early retirement by Zetterberg also takes his salary off the cap. The declining skills argument is the only risk, and even then not so much, as Zetterberg will retire when it comes to that. Ilitch just gave him long-term security at a darn good salary. Z isn’t going to stab him in the back soaking him for millions after his skills decline. (Loyalty is a two-way street in Detroit).
Echoing Nathan (all though not as astutely), Holland did what he should’ve done—he got a franchise player (who is presently in his prime, by the way) not only under contract, but at a cap number that allows him to resign one or perhaps two others. He’s keeping his team in the hunt through the end of the present CBA, when, for all he (or anybody) knows, contracts will be voided and in need of restructuring to fit into whatever new guidelines are established.
Posted by O-Joe on 01/28/09 at 04:06 PM ET
“Lifetime deals seem like a bad idea to me. If you’re going to do one, you have options for getting out from it should things go bad.”
My point was that they will have options. You can’t cover EVERY possible problem scenario, sure, but this deal sets the team up excellently for the remainder of the current CBA, which is all you can realistically concern yourself at this point. There’s no point trying to prepare for something you don’t know the nature of yet.
Even if the cap were to regress back to where it was a season or two ago in one of the next two seasons before the CBA expires, 6/year is a very friendly number for a player of Zetterberg’s caliber.
I also have to believe that when the owners start discussing the next CBA amongst themselves, the likes of the ownership groups in Detroit, New York (Rangers), Philly, Boston, and the Canadian clubs will ensure that they are not forced to buy out/trade/lose talent they cultivated in the current post-lockout NHL—because unlike last time, these top clubs will have subsidized the lesser teams directly via revenue sharing, and will be able to use that as a negotiating chip for why they should get a luxury tax, “Bird rule”, ability to restructure contracts, etc. etc.—things that benefit the big earning clubs.
Posted by Nathan from the scoresheet! on 01/28/09 at 04:24 PM ET
Mike, you missed one thing. Someone else brought this up in another post, I’m not sure who and I’m too lazy to go check, but I don’t want to take credit for it.
Part D) Trade: If somehow the future CBA(s) look anything like the current (unlikely I know), Hank would be a great deal for some small market team looking for Veteran leadership. In the last two years of his contract for example, they would only have to pay him $ 1 million out of pocket and get a $ 6 million cap hit to help bring them up to the cap floor.
Posted by Dahrken from Grand Rapids, MI on 01/29/09 at 09:04 AM ET
Hey good post that brings a little bit of clarity to the salary cap issue. I would agree anything can happen to a player in that time span. 12 years for Zetterburg and 15 years for Dipietro. I guess they do have insurance to fall back on.
I thought the Islanders were crazy to give that 15 year deal to Dipietro, but then again look where their management has the team in the standings. On top of that Dipietro’s condition is starting to look cronic. You can’t play goal with bad hip’s and groin. Good luck with that.
Walt AKA All Sports on the Web
All Sports on the Web
Posted by Walt Webb from Brampton, Ontario on 01/29/09 at 09:07 AM ET
1) Also have to add its a BIG difference in whether the potential bust is due to performance or injury. There really is MUCH less risk for a team with respect to LTI than if the player’s production significantly declines.
2) In the former case the team in most cases doesn’t have the player count against the cap AND much of the contrcat is paid by insurance. So for instance IF DiPietro’s multiple injuries result in early retirement Mr. Wang & co, won’t be as bad off as if DiPietro started to play like his current GM
Posted by Faux Rumors from Globally- Here, there, Everywhere on 01/29/09 at 01:05 PM ET
Ah, but remember that LTI doesn’t necessarily have to take someone out of the game. It can just hamper their performance and lead to other nagging injuries. Look at how Lindros changed his game after all the concussion issues, and he was never as effective after that.
If in 1995, the Flyers said Lindros would be a Flyer for life, the Philly faithful would have rejoiced. Four years later, they would have been saying, “What have we done?”
So, let’s say that Lecavalier never fully heals from his shoulder injury. He loses strength on his shot, his control on the boards, and his reach. He becomes a 70 point guy instead of a 90 point guy and is less effective on the power play. It’s not a LTI that you can take off the cap, you just have to absorb it. Those types of things are unpredictable and it’s the reason why I personally don’t support anything over five years.
Posted by Mike Chen on 01/29/09 at 01:19 PM ET
1) We totally agree with the 5 year rule! Anything more is generally a HUGE risk/insane.
2) However we don’t think the NHL should force GM’s to limit deals, and we believe that they need to prevent the cap circumvention that the Redwings artfully performed in the Zetterberg contract. Adding 2 throw away years to reduce the cap number was brilliant, but that loophole needs to be closed!.
Posted by fauxrumors from Here on 01/30/09 at 10:23 AM ET
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Ken Holland did the right thing. As a GM in the NHL, I don’t see how you can concern yourself too heavily with doing what is right past the end of the current CBA.
Considering this CBA hasn’t exactly done what the pitiful owners expected it to do, I have to imagine that come 2011, the CBA will NOT be renewed in its current form. Dramatic changes will happen. And with these changes, the new CBA, like this current one had in its first season, will have to allow clubs methods of fitting into the new framework, whether that be via buyout, contract restructuring, luxury tax, etc.
From now to 2011, this deal is a total steal for a player of Zetterberg’s capability and leadership. It will allow the Wings to keep at least one more of Franzen, Hossa, and Hudler, and probably both of Franzen and Hudler. This puts them in a great position to win in 09-10 and 10-11 before the CBA expires.
I know some people will say this is short-sighted. But if you’re familiar with how Ilitch has done business, the fact of the matter is he wouldn’t have committed to this deal if he wasn’t ready, willing, and able to pay every last cent of the deal.
It would be naive not to consider what happens from September 2011 and on, but it would also be a useless exercise as an NHL GM to make decisions geared towards a future that is completely uncertain. Make decisions that will allow your team to win in the NHL climate you know will exist for at least two more years. If you spend time worrying about the unknown beyond September 2011, you’ll just prevent your team from having the pieces it needs to win until then.
The fact of the matter is that this contract in the hands of Mike Ilitch, Ken Holland, and the Detroit braintrust is very stable, whereas a similar contract in the hands of the sideshow in Tampa Bay is insane. Ultimately, whether or not a deal like this is good doesn’t just depend on the player, but it depends on the market he’s playing in, the solidity of his club within the NHL, and that club’s ownership strength. And Mike Ilitch and the Detroit Red Wings are second-to-none in the NHL, and really, are one of the best clubs in worldwide professional sports, when it comes to these things.
Posted by Nathan from the scoresheet! on 01/28/09 at 01:32 PM ET