Thursday, January 3, 2013

Thoughts on Anti-Back Diving Measures


There has been a lot of discussion about the so-called "anti-back diving measures" (hereafter ABDM) being negotiated into the CBA. The idea is that the owners need protections against their own inflationary tendencies. Sounds a bit childish, but that's the NHL.

There are two main ABDM in play: term limits on contracts and a cap on year-to-year salary variance. Technically the salary cap is a mitigating factor in this discussion as well.

*Note* there is still some mystery surrounding the topics and how they will ultimately work out/be worded. In other words: there are some assumptions being made in this discussion and it's all subject to change when the final CBA is written and known.

Term limits are pretty self-explanatory. They owners are looking to kill the Ilya Kovalchuk, Zach Parise, Ryan Suter type deals and their ability to circumvent the cap by spinning the term out so long (and the annual salaries to such a low number) that the cap hit comes down. It appears the current numbers being negotiated is a 7-year limits if you sign a player as a free agent, or an 8-year limit if you re-sign your own player.

All else being equal, this doesn't serve to fix the problem, however. The benefits of back-diving contracts in a salary cap league are three-fold:

1) you get to pay a player a higher salary (market value; e.g. in his prime years) than his cap hit

2) you get to spread out the total dollar value of a deal over a longer (read: more manageable) term (off-set by the fact that the player will be on your payroll for a longer period of time, even if he's not counting against your cap that entire time, assuming all contracted monies are guaranteed)

3) you can structure the terms so long that the player may retire before the deal's conclusion

In the (in)famous Kovalchuk deal, the agreed-upon structure was this:

Year Salary Variance
1 $6M
2 $6M 0.0%
3 $11.5M +91.6%
4 $11.5M 0.0%
5 $11.5M 0.0%
6 $11.5M 0.0%
7 $11.5M 0.0%
8 $10.5M -8.7%
9 $8.5M -19.05%
10 $6.5M -23.53%
11 $3.5M -46.15%
12 $750K -78.57%
13 $550K -26.67%
14-17 $550K 0.0%

The total dollar amount due to Kovalchuk in the deal is $102M. But the cap hit is $6M per year. And, from year one's $6M to year 17's $550K, the total contract variance is -90.83%. If you go off the highest annual amount in the deal ($11.5M) to the lowest ($550K) it's a variance of -95.22%.

Looking at those three benefits of back diving deals, the Kovalchuk contract hits all three. But, getting back to term limits in a vacuum, even with 7-years max term available to the Devils, they could still go to Kovalchuk and say "We can meet your $11.5M salary, but we need the cap hit to come in around $6M to make it work. So we could do this:

year 1 $11.5M
year 2 $11.5M
year 3 $11.5M
year 4 $7M
year 5 $550K
year 6 $550K
year 7 $550K

That's a total of $43.15M, and a cap hit of $6.16M." With a variance of -95.21%.

In other words, term limits alone don't prevent back diving.

The other piece the league is looking for is the variance cap. This is essentially a maximum amount of change in salary during the contract. There are two interpretations of how this would work:

1) defined max variance over the life of the contract

2) fixed, recurring year-over-year max variance based on the salary in year one of the deal

Current reporting is that they are loooking at a 20% variance cap, so I'll use that number here.

In the first interpretation, the Kovalchuk 7-year example above would look like this:

Starting at $11.5M in year one, the lowest a successive annual salary could be inside that contract is $9.2M (80% of $11.5M). That's fairly restrictive, and makes it difficult to structure a deal that back dives (dives back?). And, if the lowest-allowable annual salary in this example is $9.2M, then the structure that allows the "most" back diving would look like this:

year 1 $11.5M
year 2 $9.2M
year 3 $9.2M
year 4 $9.2M
year 5 $9.2M
year 6 $9.2M
year 7 $9.2M

The total amount of dollars paid over the seven years is $66.7M and the AAV/cap hit would be $9.52M. Again, variance is -20%.

In the second interpretation, the Kovalchuk 7-year example above would look like this (assuming maximum allowable variance used each year):

year 1 $11.5M
year 2 $9.2M (20% of $11.5M is $2.3M. $11.5 - $2.3 = $9.2)
year 3 $6.9M ($9.2M - $2.3M)
year 4 $4.6M ($6.9M - $2.3M)
year 5 $2.3M ($4.6M - $2.3M)
year 6 $0.0 ($2.3M - $2.3M)
year 7 $0.0 ($0 - $0)

The total amount of dollars paid over the five years is $34.5M, with an AAV/cap hit of $6.9M.

Uh oh. See, if you take 1/5 (20%) of the nut away every year, you obviously make the entire nut disappear after 5 years. So this second interpretation (which is how James Mirtle of the Globe and Mail, for one, sees the variance cap language working)
would seem to obviate any term limit where the limit is in excess of 5 years.

Now, just as obviously, a contract needn't be structured using the maximum allowable variance every year. Teams could structure/propose deals that only vary by, say, 10% or 19% (or any percentage less than 20%) of the year one salary, and potentially stretch those deals out to seven years. So I'm not saying the second interpretation is fatally flawed.

Comparing these two interpretations, it's clear that, if the goal is preventing back diving, then the more-restrictive (better) option is the first interpretation. What's interesting is that, in that first option, Kovalchuk receives more dollars, over a longer term, than in the second. It's also clear that term limits alone do not protect owners from themselves on this subject.

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