Friday, July 18, 2008

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 (2nd),

      Hemsky, Ales,

      Gilbert, Tom

      Pronger, Chris

      Visnovsky, Lubomir

      Penner, Dustin

      Horcoff, Shawn (1st)

      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 (2nd)

      Hemsky, Ales

      Visnovsky, Lubomir

      Staios, Steve

      Pisani, Fernando

      Moreau, Ethan

      Horcoff, Shawn (1st)

    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.

10 comments:

garg19 said...

what was the alternative to Roli at that time?

PunjabiOil said...

Manny Legace

Kish said...

THAT was one of the best posts on the 'sphere. ever.

garg19 said...

seriously? He looked terrible when the oil beat det to go to the cup. Even if we say its a lateral move (which i dont think it is), legace is not a good enough reason to say that re-signing roli was a poor decision. He was good for most of year 1 of the contract (much better than legace), we didnt need the cap space last year, We dont need the cap space this year, and his contract is off the books next year.

PunjabiOil said...

I disagree Kish, but thanks for the comment.

Garg: I understand your argument. However, leading up to the the end of 2006-2007, Legace posted 5 consecutive relatively strong NHL campaigns. At that time, their were arguments being thrown forward (mc79hockey.com) that he would be a great value contract.

True, he had a poor playoffs that year, but the key is establishing whether they were predictive of his future performance.

Legace has posted a .907 and .911 SV% on poor St. Louis Blues teams in the past two years. Roloson has posted a .909 and .901 during that span. I would argue they are relatively performed similarly, but Manny's contract provided more value. With Roloson, it was the 3 years that bothered me more than the money - especially with him being 35, the option to bury him in the minors never existed.

Of course, on the emotional level, signing Roloson would be much easier to the fan base. However, it is up to the GM to make decisions that represent the best interests of the team, rather than the ones that are the most popular to the fan base.

garg19 said...

First off, I think the rest of your post was fantastic.

However, I still disagree with your roli argument. Yes the 3 years were not a good idea, but I think Lowe wanted to do a 2yr deal, but roli wouldnt budge. Ive always guessed that OTT offered Roli the same contract they signed Gerber too.

Roli probably took it to the oil and asked them to match or hes walking.

Plus, we cant say for certain that legace would have come here.

So if you are Lowe, without the knowledge of what the stats would be going forward, and with the knowledge that Roli significantly outperformed Manny in the playoffs, you would still go with Legace?

In addition, you have Roli who may walk, and you dont have Legace locked up as an option.

I maintain that it was the correct decision, even if we had to give the extra year. If Lowe had to do it over again, I would hope that he would sign Roli. Otherwise the year after the cup *may* have been another season of Conks/Mark....If Manny turned him down

PunjabiOil said...

Garg19, you raise good points. I believe Lowe felt Roloson would be stronger in the 2nd year of the contract. You're right in the sense it was a difficult decision, with Roloson holding the leverage.

kurri_17 said...

That really was a great post.

I imagine it is going to be referenced all over the place.

Don't necessarily agree on Roloson, but I'm on the line for him.

Good work :-)

Gord said...

Thank you for the logical & useful analysis of long term contracts.

It explains why I had a heart attack when the Oilers offered Hossa one.....

PunjabiOil said...

open question: Where would Hossa, Nylander, and Vanek be classified in the motive theories?