NHL Economics Part II The Salary Cap

It’s time for Part II of NHL Economics.  Part I was an exploration of the development and viability of the NHL economic model.  In Part II we examine the National Hockey League Salary Cap.

It has been 1 month since the cash began to flow out of NHL coughers to free agents.  Well actually the more appropriate term is probably something along the lines of gushing out.  Hundreds of millions of dollars and decades of contracts have been doled out this past month.  It has become an annual event in hockey for the 30 clubs to go to join the free agent bonanza at the NHL free agent super store.   Every off season teams fight for the premiere talent available and are prepared to offer top end money to those players, but there are also teams that like to dish out a whole lot of silly money.   It seems a new trend has developed in the post lockout years; an explosion of over inflated contracts in both term and dollar.

Six not so long years ago the NHL owners locked out the players to try and facilitate economic change.  Many teams were losing money and some teams were considering relocating because they could no longer compete with the top spending teams.  After a 300+ day slug fest between the NHL and NHLPA a new CBA was ratified and a salary cap was in place.

In theory every team would now be guaranteed economic parity and that parity should in theory transfer onto the ice.  With cost certainty in place small market teams would have a better chance at economic viability and all teams would have the same chance at signing the world’s premiere hockey players.  The salary cap minimum was set out at 22 million USD and the ceiling was 39 million USD.  It seemed all teams would have an equal shot at top players and there would be more than enough to go around.

Skip ahead to July 1^st 2011; the salary cap is now just north of 64 million dollars and the floor is over 48 million.  The salary cap appears to be in some ways successful and in some ways it appears to be failing.  Consider this there isn’t one NHL player going into the 2012 campaign that will earn more than 12 million dollars.  When you compare top player salaries between the NHL and the other big three leagues the NHL has the lowest top paid players in North American pro sports.

Below are two charts one showing the top 4 cap hits for 2011-2012 and the other showing the top 4 NHL player salaries for 2011-2012

As you can see no single player in the NHL will earn more than 12 million dollars for the upcoming season.  This is much better than the other 3 big North American Leagues which will all have players earning more than the NHL maximum.  It appears that the NHL salary cap has been effective at stopping runaway upper dollar contracts, but the floor of the salary cap is almost 10 million dollars more than the original cap and many teams have been signing players to mega front end loaded contracts in recent years.  So the question must be asked is the NHL Salary Cap effective?

That answer appears to be a two part answer.  When compared to other Leagues the NHL has the lowest top payed players.  As mentioned above nobody in the NHL will make more than 12 million this upcoming season.  Compared to the other big North American Leagues it appears that the NHL Salary Cap has been at least somewhat effective in preventing top end runaway salaries.  Consider Major League Baseball, multiple players earn more than 20 million per season and some analysts are speculating that Albert Pujols could become the first 30 million dollar player in the MLB.

With that said recent signings in the NHL point so some flaws that exist in the system.  The first flaw of the NHL CBA is the salary cap floor.  What the floor has done is create a system in which some teams are required to hand out over inflated contracts to some players in order to make it to the floor.  Many of the floor teams don’t generate enough revenue to make money so they try to remain as close to the floor as possible.  When big money players leave these teams a void is created and it must be filled.  These teams must go out and sign players to get to the floor.  In order to achieve this some teams hand out what has become known as “silly money.”  They intentionally over pay because they must get to the floor.

When a team over pays a player it contributes to the tier inflation effect.  What is the tier inflation effect?  It is a term the I believe describes a central problem to the current NHL CBA.  The tier inflation effect describes how over paying one level of players increases the salaries of the next level.  Think of it like this; the NHL has different calibres of players ranging from below average bubble players to world class superstars.  Each different category is comprised of many players.  Some are under contract, some are pending free agents, and some are free agents.  The free agents set the standard for not only their category but the categories above them as well.  Each July 1st certain players become free agents and each player belongs to a certain category.  The NHL operates on the basic principle of capitalism.  Supply and Demand.

Certain off season’s one category will have an overabundance of free agents and another will be low on players.  Usually there are plenty of bubble players or average players available but a low amount of superstars.  When a team is required to spend to the floor and needs to spend 10 or 15 million to get there they need to sign players to big deals.  But there are only so many spots available on rosters so teams have to commit money that is more along the lines of star player money to average or below average players to get to the floor.  When a player of lets say average quality is paid star player money it can set a precedent across the league.  Every level above the initial over payment will want more money.  Now when a few players are over payed there isn’t really inflation.  But when there are multiple over payments made then inflation can enter the equation.

Inflated contracts aren’t just about money either; they can also be about the term given out.  Most of the time in an ideal situation a team will reserve long term deals for star calibre players.  If a GM is over aggressive and makes a bad long term signing that took can be precedent setting.  The Calgary Flames are a team that has handed out long term deals in the past and many so far havn’t paned out.  For example Matt Stajan.  When a team signs one of its players to a long term deal other players on the team will want the same type of term on their new deals.  This can spill over to other teams and then there are a whole bunch of players that have to much term on the contracts and can’t be traded.

For an example of how the tier inflation effect can work let’s look at the James Wisniewski contract in Columbus.  5 years 33 million are year. Many people were surprised when he was signed to that deal.  It’s no disrespect to Wisniewski but that type of deal is usually reserved for a little higher calibre defenseman.  The big surprise was the fact he will make over 7 million dollars this year.  Considering an arbitrator just awarder Weber 7.5 million Wisniewski is probably being over paid.  With Weber still in need of a long term deal and many other top grade defenseman like Doughty, Hedman, and Schen being free agents or soon to be free agents it will be interesting to see if the tier inflation effect does in fact inflate their salaries.

Another major flaw in the CBA is front end loaded contracts.  Currently many players have been signed to these mega deals so their clubs can circumvent the cap and get them for lower cap hits.  Example: Kocalcuck , Luongo, Hossa, Richards, and the list goes on.

The NHL CBA is up for renegotiation in one more year and it will definitely be interesting to see how it is reworked.