LONG TERM CONTRACTS

LONG TERM CONTRACTS

Kevin Lowe has not hesitated in signing players to "long-term contract," or acquiring those who have such contracts already in place, under the NHL Salary Cap operating system. In this exercise, I examine and discuss various underlying motives for this strategy, their costs and benefits, and then apply the analysis to the case of the Edmonton Oilers. Please note there can be more than one possible motive for each individual player. Also, please assume for the exercise's purpose, a "long-term contract" is defined as a SPC equal or greater than 3 years and exclude all entry-level contracts.

Using this benchmark criterion, the table below displays the long term contracts Kevin Lowe has compiled, post-NHL lockout.

PLAYER	AVERAGE SALARY (USD)	DURATION (IN YEARS)
Horcoff, Shawn (2nd)	$5.500	6
Hemsky, Ales	$4.100	6
Gilbert, Tom	$4.000	6
Pronger, Chris	$6.250	5
Souray, Sheldon	$5.400	5
Visnovsky, Lubomir	$5.600	5
Penner, Dustin	$4.250	5
Staios, Steve	$2.700	4
Pisani, Fernando	$2.500	4
Moreau, Ethan	$2.000	4
Roloson, Albert	$3.667	3
Horcoff, Shawn (1st)	$3.600	3
Lupul, Joffrey	$2.667	3
Torres, Raffi	$2.250	3
Nilsson, Robert	$2.000	3
Stortini, Zachery	$0.700	3

I now discuss the underlying motives a General Manager may have for signing players to such contracts.

MOTIVE #1 – RISK & REWARDS OF CONTRACT TERMS ARE EQUITABLY DISTRIBUTED

The General Manager will sign a player to a long-term contract in a situation in which the risks and rewards of the contract terms are equitably distributed. In such a scenario, there are mutual benefits to both the player and the organization and consideration is given up by both of the mentioned parties. From the organization's standpoint, there exists at least a moderate possibility that the benefits of the player's services will exceed the value of the cumulative paycheques. From the player's standpoint, the security the contract provides is desirable, given consideration to possible unanticipated future events such as long term injury or declining performance. The marginal utility of security is such that the player would have a preference of it over the possibility of earning $X more dollars over the length of the contract, had the player signed a contract shorter in duration. In other words, the player is said to be risk averse, preferring instant gratification over the possibility of longer term gains.

This motive is appropriate in certain circumstances; not so in others.

Some examples of appropriate circumstances include:

• Relatively young players exhibiting escalating performance and are recently removed from their entry-level contract. The relatively young player is willing to commit a period such in length that it "eats" away the player's unrestricted free agency years.
  
• The player's cap hit : NHL Salary Cap ratio is progressively declining, and as a result, a long term contract becomes increasingly attractive to the organization, ceteris paribus.
  

Some examples of inappropriate circumstances include:

• Relatively older player, that has demonstrated declining performance, or there exists reasonable likelihood that the relatively older player will demonstrate declining performance, over the length of the contract and the contract term's are biased towards past, rather than expected future performance.
  
• Player has demonstrated a strong history of injuries, and it is reasonable to assume the prospect of future injuries is greater for such a player, as opposed to the average NHL player. This diminishes the likelihood that the benefits of the contract terms will exceed the costs, including the effects of replacement costs during the injury period.
  

MOTIVE #2 – LACK OF SUITABLE ALTERNATIVES

The General Manager will sign a team's existing player, whom is approaching unrestricted free agency, to a long-term contract when he feels the player fulfills a role or team need and that such role or need cannot be efficiently and effectively replaced by immediate internal recruitment.

The General Manager's grounds for justification for the length of the contract would be twofold:

• Losing the said player will presumably lead to a significant drop in overall team performance , and;
  
• Replacing that said player, either via trade or unrestricted free agency, will occur at an unreasonable cost, or such a cost that would make the team worse on an overall basis.
  

It would not be justified to sign a player to a long-term contract when:

• There is a strong network of replacements within the organization that can efficiently and effectively replace that said player and;
  
• A long term contract to such a player would result in greater long-term damage to the organization. Such a contract would be untradeable, and would presumably result in future years, due to the salary cap, a loss of other organization assets.
  

MOTIVE #3 – FREE AGENCY

The sheer nature of the NHL's Unrestricted Free Agency results long-term offers in obtaining the services of such a player. This, of course, makes sense; the leverage the player holds in such a situation leaves teams with no alternative option but to offer longer terms, to presumably improve their organization on an overall basis, at least so immediately.

This motive is once again, appropriate in certain circumstances; not so in others.

Some examples of appropriate circumstances include:

• Unrestricted Free Agent X fulfills a team need immediately. That need cannot be filled internally, and the cost in alternative routes, such as the trade market, would be greater than the cost in the unrestricted free agent market.
  
• The organization presently has an abundance of vacant cap space, and will so in the foreseeable future. As a result, such a contract will not adversely affect the team, and the alternative of obtaining the player's services benefits the organization more than the alternative of incurring vacant cap space.
  

Some examples of inappropriate circumstances include:

• The contract, immediately upon signature, becomes presumably untradeable
  
• The player has demonstrated a strong history of injuries, and future injuries are reasonably foreseeable, such that the contract's strength is undermined.
  
• A long term contract to such a player would result in greater long-term damage to the organization. Such a contract will presumably result in future years, due to the salary cap, a loss of other organization assets
  

MOTIVE #4 – RESTRICTED FREE AGENCY OFFERSHEETS

The sheer nature of the NHL's RFA Offersheet program, generally results a General Manager to offer long term contracts, in the process of obtaining the services of a restricted free agent. This is because RFAs subject to an offersheet are typically young players with escalating performance, and in an attempt to ensure the benefits of the player's services will exceed the cost (Salary + Draft Picks), a long term contract is offered. Such an RFA will likely be overpaid in earlier years, but the underlying goal is such a player overperforms the contract in the later years. Such overperformance is more likely if the contract is greater in duration.

This motive is once again, appropriate in certain circumstances; not so in others.

Some examples of appropriate circumstances include:

• There is greater than moderate probability the organization benefits from RFA X's services will exceed the cost (Salary + Draft Picks), over the life of the contract.
  
• There is a strong probability the team's draft slot in the year(s) of draft pick(s) compensation will be closer to the draft slot of the Stanley Cup Champions, rather than closer to the lottery draft winner.
  

Some examples of inappropriate circumstances include:

• There is greater than moderate probability the organization benefits from RFA X's services will NOT exceed the cost (Salary + Draft Picks), over the life of the contract.
  
• There is a strong probability the team's draft slot in the year(s) of draft pick(s) compensation will be closer to the draft slot of the lottery draft winner, rather than closer to the Stanley Cup Champions
  

  
  

MOTIVE #5 – CONTRACT STRUCTURE PRESENT UNIQUE OPPORTUNITIES

An innovative General Manager may sign a player to a longer term contract, such that the contract is structured in a manner to present the organization with unique opportunities in later years. These opportunities are discussed below:

• The contract is structured in such a way in which the salary is frontloaded. In later years, the salary payable will be significantly lower, which would make the contract attractive to budget-minded organizations in the NHL. Also, in later years, if the performance is not in close proximity of the cap hit, the team has the ability to buy-out that said player.
  
• The contract is structured in such a way in which the salary is frontloaded. In later years, the salary payable is significantly lower, such that, the player would give strong consideration to retirement. If the player was signed to this long term contract before he turned 35, the player's cap hit is eliminated the moment the retirement papers are signed.
  
• The owner(s) of the team is (are) operate under a results-oriented (Stanley Cup) approach rather than a profit-oriented approach. Such, the owner(s) is (are) willing to in the future, if the player's performance is not in close proximity to cap hit, send the player to the minors and pay his salary there. Such a move would eliminate the player's cap hit to the organization, if such a player was signed before he turned 35.
  

APPLYING THE CASE ANALYSIS TO THE EDMONTON OILERS

1. MOTIVE #1 – RISK & REWARDS OF CONTRACT TERMS ARE EQUITABLY DISTRIBUTED
   
   1. Appropriate Circumstances
      

      Horcoff, Shawn (2^nd),
      

      Hemsky, Ales,
      

      Gilbert, Tom
      

      Pronger, Chris
      

      Visnovsky, Lubomir
      

      Penner, Dustin
      

      Horcoff, Shawn (1^st)
      

      Lupul, Joffrey
      

      Nilsson, Robert
      

      Stortini, Zachery
      

   2. Inappropriate Circumstances
      

      Souray, Sheldon
      

      Roloson, Albert
      

      Moreau, Ethan
      

2. MOTIVE #2 – LACK OF SUITABLE ALTERNATIVES
   
   1. Appropriate Circumstances
      

      Horcoff, Shawn (2^nd)
      

      Hemsky, Ales
      

      Visnovsky, Lubomir
      

      Staios, Steve
      

      Pisani, Fernando
      

      Moreau, Ethan
      

      Horcoff, Shawn (1^st)
      

   2. Inappropriate Circumstances
      

      Roloson, Albert
      

3. MOTIVE #3 – FREE AGENCY
   
   1. Appropriate Circumstances
      

      N/A
      

   2. Inappropriate Circumstances
      

      Souray, Sheldon
      

4. MOTIVE #4 – RESTRICTED FREE AGENCY OFFERSHEETS
   
   1. Appropriate Circumstances
      

      Penner, Dustin*
      

   2. Inappropriate Circumstances
      

      Penner, Dustin*
      

5. MOTIVE #5 – CONTRACT STRUCTURE PRESENT UNIQUE OPPORTUNITIES
   
   1. Appropriate Circumstances
      

      Souray, Sheldon
      

      Visnovsky, Lubomir
      

      Staios, Steve
      

      Roloson, Albert
      

   2. Inappropriate Circumstances
      

      N/A
      

      
      

• Too early to evaluate the appropriateness
  

CONCLUSION

There are several motives for an NHL General Manager to sign players to a long-term contract, or acquire players who are in one. The above compiled analysis does not evaluate the actual contract, which is influenced by other factors. Rather, the analysis evaluates the underlying motive behind the long-term contracts, and whether the circumstances surround the motive was appropriate or not. In appears on surface, Kevin Lowe has reasonable grounds for justification of the majority of his long-term contracts either signed or acquired.

Please review the analysis, and chime in with your opinion and/or feedback.