Tuesday, May 23, 2006

Tampa’s Trick: Richards Takes A 20% Pay Cut

We’ve had a great discussion below about the wisdom of signing 26-year-old Brad Richards to a six-year deal that averages $7.8 million.

Never one to mince words, Andy dubbed the signing “retarded,” and Mudcrutch agreed it was “insane.” Boltsmag thinks that Richards is a franchise player, but that the deal handcuffs the team financially, and perhaps implies the departure of St. Louis. A2Y calls the signing a “sickeningly familiar” strategy that’s led to a “top-heavy team.”

I disagree.

As the commentary makes clear, Richards is generally regarded as a top-calibre player, but people question the wisdom of signing any player for maximum-level money – much less signing three players for close to the individual cap.

That might be fair in the very short term – this year or next. But the CBA’s built-in escalator clauses are about to take elite-player salaries on a wild ride. Thanks to these long-term deals, the Bolts have insulated themselves against the coming wave of 70s-style inflation that’s going to wreak havoc on the elite free agent market.

Consider this:
(millions)NHL RevenuePlayer Share (%)Player Rev.Team Max.Player Max.Player Min.Entry Max.FA Age

These numbers are based on the NHLPA’s assertion that league revenues will increase annually by 7.3% over the next five years.

If that happens, then by the 2010-11 season:
  • NHL revenue will increase 42%.

  • The individual player maximum salary will increase 50% to $11.7 million.

  • The entry-level player maximum salary will increase 9% to $925,000.

  • The minimum salary will increase 17%, but remain a modest $525,000.

It’s clear who the winners will be.

Even if Tampa matched an offer sheet, Mr. Richards would have become a free-agent in 2007-08 thanks to declining age-eligibility. By then, the individual maximum projects to be $9.3 million.

That makes Richards a 16%-off discount against his likely re-signing price. Not a bad deal – although nothing compared to January shopping in Montreal.

It gets much better in the later years. By 2010, Richards will cost just 66% of the $11.7 million individual cap –- the equivalent of signing him for $5 million in today’s market. Averaged over the next five years, it works out to paying 20% less than the individual cap.

Feaster clearly believes in the long-term math. And as a GM, he’s surely in a position to know which way league revenues are going. If the league’s growing faster than 7% -- and there’s every reason to think it can –- then the math gets even more favourable for the team.

While Feaster may struggle to fill the rest of his lineup within next year’s budget, that problem also solves itself fairly quickly.

In 2005-06, the Tampa Trinity cost the team about 41% of the salary cap. With Richards’ new contract, the figure will rise to 48% next year and be back to 41% by the 2008-09 season.

After than, it just gets silly: in the last two years of the CBA, the Bolts will use just 37% and 35% of the cap to pay three players who are collectively worth close to 60%.

Not only have they locked-in three proven performers, Tampa has ensured that from 2008-11 they’ll have ample resources to sign free agents and make a run at the Cup.

That’s three franchise players for the price of 1 ½, and one helluva bargain no matter how you look at it.

Trinity Salary
% of Team Cap
Richards’ Salary
% of Individual Cap

I believe Tampa’s math. And all those who do should be very, very worried for small market contenders like the Oilers.

Mudcrutch nailed it at the trade deadline: “As the cap goes up and some of the bad contracts expire, the unnatural advantage enjoyed by the Albertan teams will disappear.”

Come the offseason, the Oilers had better break-out the long-term signing pen. If they want to compete in the future, they’re going to need it.


At 10:28 PM, Blogger Andy Grabia said...

Great post, Avi. I hope someone picks it up. Couple of things:

1) Does Escrow play into this at all?

2) You should include the team salary minimum in your graph, if you have it.

As for the disadvantage being eliminated once bad contracts expire, I have to disagree. Bad contracts will always exist. The key is to ensure that the two Alberta teams don't have GM's who are offering them.

At 10:37 PM, Blogger Avi Schaumberg said...

Minimum? Screw the minimum! I don't want to root for a bottom feeder.

The escrow provision just covers off the league if their revenue estimate is wrong - a portion of the salaries is held in escrow, and may not be paid if the revenues on which the cap was based was over-estimated.

I agree bad contracts will always exist -- management is capable of over-estimating a player's likely performance level.

But as the old bad contracts come off the books, and the cap room goes up, those teams will have a lot of money to spend: more money than teams like the Oilers who aren't going to spend up to the cap. (It surprised me that Tampa's payroll is just a couple of million shy of the upper limit already.)

At 11:09 PM, Blogger Andy Grabia said...

But there is revenue sharing to address that concern. From the TSN FAQ on the CBA:

The League has committed to enhanced revenue sharing in an amount that is necessary to allow all Clubs the ability to afford competitive payrolls within the payroll range.

All Clubs that: (1) are ranked in the bottom half (bottom 15) in League revenues, and (2) operate in markets with a Demographic Market Area of 2.5 million or fewer TV households.

At 11:29 PM, Blogger Avi Schaumberg said...

It would be just the Oil's luck to have the playoff-run push team revenues into the top-half.

At 3:59 AM, Anonymous David Johnson said...

That doesn't make it a smart move, just maybe not as dumb or as financially crippling long term. Richards needed to be signed in this market place, not a market place 5 years from now. Tampa made this move gambling that:

a) The salary cap, and thus the players cap, would rise this summer and that some team will offer Richards a contract in excess of $7.8 million.


b) The market for Richards caliber players rises beyond $7.8 million this summer.

The salary cap is certainly going to happen, but we just don't know how much. A 15% increase is probably about the max it would rise. But would someone be willing to bid more than $7.8 million for him? I have my doubts. First, it would cost another team 5 first round draft picks and we know from the last CBA how reluctant teams have been to do that. a) is not going to happen.

So, that leaves b). Will the market for Richards caliber players rise beyond $7.8 million this summer, or even in the next couple years? Possibly, but I doubt it. In 2003-04 only 18 players made more than $7.8 million. And that was in an uncapped world where only 5 or 6 teams paid players that much (and again, not when signing restricted free agents from other teams).

So, in my mind the worst case scenario is that the going rate for Richards is $7.8 million 3 months from now and quite likely it will be somewhat lower.

So, is it a smart move? No.

You also need to remember that it is unlikely that Tampa will spend near the league team salary cap. So, even if the league salary cap goes to $58 million, the Tampa Lightning self-imposed budget might still be in the $40-45 million range and those three players are still going to take up 40-50% of the teams budget.

At 8:30 AM, Blogger Avi Schaumberg said...

Good points, David, but I don't think it makes sense for Tampa to plan for one year from now when then can plan for five years.

Are they paying more for Richards than their competitors would be willing to in the short term? Yes.

But in the long-run, they'll be paying well below a market rate.

In the future, if Tampa "self-imposes" a budget that's significantly lower than the team cap (and right now they're near the ceiling), they'll still have an asset that's priced below-market, which puts them in a great position to trade Richards and get value in return.

And if Tampa's budget rises along with the cap, then they'll find themselves with lots of room to play with.

If they'd waited until 07-08 to sign a contract with Richards, they'd be paying a lot more than $7.8 million.

At 2:14 PM, Anonymous David Johnson said...

What I meant was not wait until 2007-08 before signing him long term, but wait until July/August and see what the market sets for a guy like him. If Marc Savard signs for $5 million per year and Patrik Elias signs for $6.5 million per year, is the market rate for Richards $7.8 million? If by waiting until July/August the worst case scenario is you have to pay him $7.8 million, why not offer him $6.5 million now and wait for him to realize that that is what his market price is or to have the market prove that his going rate should be $7.8 million. I don't understand what the rush was to pay him what is likely the worst case scenario 2 months from now.

At 2:27 PM, Blogger Earl Sleek said...

It would be just the Oil's luck to have the playoff-run push team revenues into the top-half.

You'll have trouble generating sympathy with this kind of complaint.

At 5:41 PM, Blogger Kevin Kimmis said...

I think the fundamental problem two months from now is that nothing changes except the fact that Richards will be less inclined to sign more than a one-year deal with TB in order to become an unrestricted free agent. In that context, signing Richards now to a long-term deal makes sense, and if the cap goes up again in 2007-2008, then Tampa is actually paying him less than he would be making with his new team (where he would surely get close to the maximum).

Isn't the real concern here (for those of us living in a small market) the fact that the NHL is actually doing so well? While US TV ratings stink, attendance at arenas is up almost a full percentage point over 2003-2004, and league revenues are much higher than expected. If this continues in the short-to-medium term, then the usefulness of the cap to teams like the Oilers and Flames, who will never be able to have a team payroll that approaches the top end of the cap, will be not much different from the way things were BS (before strike). And that is the case regardless of how well revenue sharing works.

In other words: We should enjoy these times, for they may not come to pass again for a long, long time.

At 8:44 AM, Anonymous Anonymous said...

Should there be a Salary Cap in English Football?
Personally I think there should be! It’s just getting to be stupid money in football at the top of the premiership!
It’s always the same teams at the top proving that football success is based purely on money which ruins the idea of it being a sport! They’ve done it in rugby, basketball, hockey and American football and it makes the sports more competitive and better to watch!
I do a little Spread Betting from time to time and most matches don’t hold much surprise who is going to win, its boring! I want to see a team at the bottom pulling off an amazing season beating last seasons winners in a close fought battle!
Make things fair! It shouldn’t be about money!
All there is all that money in the premiership and barely any of it stays in the UK so it’s not even helping the economy!
From my Spread Betting, if I ever win big (which is never, I’m unlucky) it’s still nothing compared to the average premiership players weekly wage!
This Rant was brought to you by Spread Betting Spike. 


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