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Gaining a Competitive Advantage Within the Confines of the Salary Cap

Gaining a Competitive Advantage Within the Confines of the Salary Cap
How the Leafs have wielded the Collective Bargaining Agreement and other tools to maximize their potential success.

When the Toronto Maple Leafs hired Brendan Shanahan in 2014 to become President of the NHL franchise, it was understood to be the birth of a new era in Maple Leafs hockey. This extended to the front office as Shanahan has not hesitated to make the moves he deems necessary to give the team the best chance to reach the upper echelon of success. The first upheaval in Shanahan's scorched earth rebuild of the Leafs included the hiring of Kyle Dubas as Assistant General Manager. As many know, Dubas has gone on to the position of General Manager of the Toronto Maple Leafs, but not before winning the Calder Cup while managing the Leafs AHL affiliate Toronto Marlies. He has become the face of the modern NHL, driven by the use of progressive methods such as incorporating analytics into player assessment and improving performance with the help of sports science, nutrition and developmental specialists.

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However, many around the game of hockey will be sure to point out the influence that Laurence Gilman and Brandon Pridham have had in building and maintaining the current edition of the Leafs. When faced with the confines of the NHL's salary cap, balancing the need to compensate superstars such as Auston Matthews, John Tavares and Mitch Marner with the need to surround them with sufficient talent to become a cup contender is no small task. It requires a combination of shrewdness and an in-depth knowledge of the league's Collective Bargaining Agreement (CBA), which is where Gilman and Pridham are making their mark.

Who is Laurence Gilman?

Laurence Gilman currently serves as the Assistant General Manager of the Toronto Maple Leafs. After graduating from the University of North Dakota School of Law, Gilman served as the Senior Vice President and Assistant General Manager of the Winnipeg Jets (who would become the Phoenix Coyotes). The anecdote that has been told is that Gilman wrote a paper about mediation, arbitration and dispute resolution while in law school. His professor suggested that he follow his passion and he submitted his paper to numerous teams in the world of professional sports. It must have been quite the impressive paper as he was hired by the Winnipeg Jets who were looking for someone to bring a new perspective to contract negotiation. Following his tenure with the Jets, Gilman joined the Vancouver Canucks as Vice President of Hockey Operations and Assistant General Manager. His work with the Canucks included a run to the Stanley Cup Finals after which he was lauded for his work in maximizing the Canucks' flexibility under the salary cap.

In 2015, Gilman was dismissed by the Canucks and took a hiatus from team executive positions. He helped the NHL design the expansion draft as the Vegas Golden Knights joined the league. His knowledge in this area then led to a brief consulting stint with the Golden Knights as he assisted General Manager George McPhee in determining how to maximize the assets harvested both directly and indirectly from the draft. The Golden Knights ability to find value in expansion draft agreements as to who they would and would not select ended up landing them key players such as William Karlsson, Jonathan Marchessault and Marc-Andre Fleury. These players were acquired in addition to a slew of draft picks as compensation for foregoing certain selections and set Vegas up for not only an inaugural season cup run, but also with flexibility in building for the future.

This brings us to the present as he was hired by the Maple Leafs in 2018 to serve as the Assistant General Manager to Kyle Dubas following the departure of the highly regarded Lou Lamoriello. While Gilman is known mainly as a capologist, it seems a little disingenuous to pigeonhole him into such a narrow designation. Through his expertise on the salary cap and CBA, as well as his work with the expansion draft process, he provides valuable insight into areas such as negotiations and the application of analytics to personnel decisions. Laurence Gilman is undoubtedly an integral figure in the Leafs front office and his influence will be seen in the upcoming analysis of the Leafs recent moves.

Who is Brandon Pridham?

Brandon Pridham is also currently serving as an Assistant General Manager of the Toronto Maple Leafs. While he might not be as known by the average hockey fan as his colleague Laurence Gilman, his resumé and skillset are just as impressive. Pridham brings a wealth of experience and knowledge, beginning his career in the National Hockey League just over 20 years ago. Initially starting with the Central Scouting Bureau (CSB), Pridham worked as a co-ordinator and advanced to the position of senior advisor. He has also worked as a senior director of the league's central registry which provided an opportunity to constantly engage with the CBA and its many provisions. Pridham was tasked with answering the league's trade calls and ensuring that the deals were compliant with the terms and conditions of the CBA. He is credited with helping to create the league's salary cap system after the 2004-2005 lockout and will now be looked at by the Leafs to find the optimal methods of remaining compliant with that same system.

Like Gilman, Brandon Pridham is thought of as a capologist. His time spent in the league's offices has left him with an extensive knowledge of how the salary cap and CBA function. This was presumably put to the test as he worked as the assistant to former Leafs GM Lou Lamoriello, who has gained a reputation for testing the limits of the CBA after his use of "Robidas Island" for expensive players whose bodies and performance levels were deteriorating and the infamous Kovalchuk contract circumvention punishment. This is not to say that Pridham is tasked with finding loopholes in the CBA to exploit, rather his job is to interpret the agreement and provide options that will maximize the Leafs roster while not exceeding the limits of the CBA. His expertise on the Collective Bargaining Agreement and the salary cap allow the Leafs a degree of creativity as they attempt to find solutions to injuries and other issues that arise over the course of a season.

What is the Collective Bargaining Agreement?

From the NHL's Website:

"The Collective Bargaining Agreement between the NHLPA and the NHL sets out the terms and conditions of employment for all professional hockey players playing in the National Hockey League, as well as the respective right of the NHL Clubs, the NHL, and the NHLPA."

The current edition of the CBA came into being in January of 2013, just in time to salvage a shortened 2012-2013 season and lasts until September of 2022. At the time of writing this, negotiations are set to begin next week on the next version of the CBA, with both parties aiming to avoid a lockout while simultaneously addressing issues such as escrow, the "long-term" designation of injured players and the NHL's participation in the Winter Olympics.

The Plan in Action

While the Leafs have made numerous transactions over the past few seasons, throughout this series I will analyze a select few and discuss how the front office has gotten creative to make the numbers balance. I will introduce the issue and the solution, as well as the relevant provision from the CBA in an attempt to show how the Toronto Maple Leafs have used their knowledge of the CBA and the salary cap to gain a competitive advantage. This first part will focus on how the Leafs were able to convince NHL superstar John Tavares to leave both New York and money on the table, to come home to Toronto and play for his childhood team.

The Utilisation of Signing Bonuses to Land John Tavares

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The Canada Day 2018 signing of John Tavares, a superstar who grew up in nearby Mississauga, Ontario, created a frenzy in the hockey world. Leafs fans swooned as Tavares tweeted out a picture of him in his childhood tucked into a bed with Leafs bedsheets, commenting that it's not every day that you get to live a childhood dream. After failed attempts at signing locally developed superstars such as Steven Stamkos, it had finally happened: a hometown hero had decided to come home. It was a chance to bring the prized Stanley Cup to the team he had grown up cheering for and to a fanbase that has been starving for a taste of success.

It was reported that the San Jose Sharks offered as much as $91,000,000 over 7 years, $14,000,000 over what he accepted from Toronto. Without going into an in-depth discussion of Canadian and American taxes, Toronto's high tax rates and cost of living put them in a disadvantageous position relative to many of their competitors. Since players are taxed at both the provincial and federal level, it's odd to see a player take less money to play for the Leafs. Generally, one would assume that players would want an even higher pre-tax salary to compensate for the disparity in tax rates. This played out in the aforementioned Stamkos negotiations as it was said that if the Leafs wanted to match the Lightning, they would have to offer over $12,000,000 per season, a stark increase from Tampa Bay's $8,500,000.

This is where the Leafs financial might and willingness to be creative came into play. While the emotional ties and sponsorship opportunities surely played a role in the negotiations, as did the recruitment video that featured clips of Mitch Marner performing various skills as a preview of his future linemate, the Leafs were able to structure Tavares' contract to provide financial benefits and stability.

Here's a breakdown of the money in Tavares' contract from years 2-7 (courtesy of CapFriendly):

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As you can see, the majority of Tavares' money is delivered through signing bonuses and in the first few years of the contract. While the term implies that he would receive the bonus in full upon signing in 2018, NHL signing bonuses are typically structured to be paid out on July 1st of each contract year.

50.6 Maximum Player Salary and Bonuses; Fixed Dollar Amount of Player Salary.

(a) No SPC may provide for a total aggregate Player Salary and Bonuses that is in excess of twenty (20) percent of the Upper Limit for any League Year (the "Maximum Player Salary and Bonuses"). For a Player signing a multi-year SPC pursuant to which he receives the Maximum Player Salary and Bonuses in any League Year during the term of such SPC, the Maximum Player Salary and Bonuses for every League Year covered by the multi-year SPC shall be based upon the Upper Limit at the time the SPC was signed.

*SPC - Standard Player Contract

As per Section 50.6(a) of the CBA, there is no limit on how large a signing bonus itself can be. The only restriction is that the bonus and the player's salary must not aggregate to over 20% of the upper limit of the salary cap for the season in which the contract was signed.

So now you're wondering: why does this matter? I'm glad you asked. Signing bonuses carry with them a variety of incentives from the time value of money to financial stability.

There's the saying that a dollar today is worth more than a dollar tomorrow. Aside from the concept of instant gratification, a dollar today is deemed more valuable because of the ability to invest it immediately. Tavares could theoretically take his $14,990,000 signing bonus on July 1st and begin to accrue interest. If his contract was mostly salary based, he would be receiving the majority of that on a periodic basis throughout the season. If Tavares earned even a 3% non-compounded return (the Dow Jones' average annual return was 5.42% through May 2018), his actual value received is another $450,000 or so higher than his signing bonus. With a savvy financial advisor, his take home is potentially even greater than that. The front-loaded nature of his deal means that he earns a significant portion of his deal in the early years. If Tavares is earning a return throughout his seven-year contract, by the end of his term you could see how his take home pay starts to become more comparable to what he was offered by more tax friendly environments.

As mentioned earlier, the CBA is set to be re-negotiated over the next two years in the leadup to its expiration in September 2022. While neither party wants there to be a lockout, it's a contentious period and the league has been prone to lockouts over the last decade; losing half a season in 2012-13 and a full season in 2004-05. For the duration of a lockout, the players forego only the salary portion of their contract. Their signing bonus is paid out in July which means that Tavares doesn't stand to lose as much. Of the $7,950,000 he's owed in the 2022-2023 season, only $910,000 of that is at risk of being lost to the lockout and he's guaranteed the other $7,040,000. This form of "lockout proofing" is a tremendous benefit over other teams who don't necessarily have the capabilities of loading contracts with signing bonuses.

Now that I've laid out some of the benefits of signing bonuses, the question that naturally follows is: why doesn't every team do this? It certainly seems like it would benefit their ability to acquire and retain star talent.

For the same reason that a dollar today is more valuable than a dollar tomorrow, giving away a dollar today costs an organization more than a dollar tomorrow. A team could be earning a return on the money which they are giving up in a lump sum at the beginning of the year. The Maple Leafs' parent company MLSE is jointly owned by two of Canada's telecommunications giants - Rogers and Bell. These two corporations have no shortage of money, so as long as the management team can show that such a move would benefit the on-ice product and the owners by extension, they'll typically give the green light.

In the case of Tavares, Rogers and Bell are reaping the rewards of their investment. In his first season with the Leafs he notched 47 goals. This was the highest single season goal total by a Leaf since Hall of Famer Dave Andreychuk scored 53 in the 1993-1994 season. He was named the 25th captain of one of hockey's most storied franchises in October of 2019, serving as recognition of the integral role that he plays on and off the ice for the Leafs. In terms of financial reward, Tavares had the 13th highest selling jersey in the entire league for the 2018-2019 season as fans rushed out to represent their hometown hero. It's been one season in Toronto and Rogers and Bell are already seeing the return on their willingness to spare no expense in the pursuit of success.

On the other hand, teams such as the Arizona Coyotes, Florida Panthers and Ottawa Senators have been notorious over the years for imposing strict budget constraints on the management team. It's important for the average NHL team, as with almost any revenue dependent corporation, to match the timing of their cash flows. It isn't necessarily feasible to frontload contracts in the early years of the deal and utilise heavy signing bonuses and then wait for the revenues to flow in over a longer period of time. The ability to manage cash flows in the manner that the Leafs have is unique to the large market teams backed by a generous ownership group. This means that many teams don't have the flexibility to provide the same level of financial stability and benefits. While paying $71,000,000 in signing bonuses on July 1st would burden many organizations and test the patience of their owners, the Leafs have turned it into a competitive advantage

When asked by Sportsnet's Chris Johnston about his team's propensity to use signing bonuses as an incentive, Dubas was unapologetic, "We're pretty fortunate in terms of the revenue that we're able to draw in... So I think for us to sit back and have the taxation argument used against us, but then not to be able to use any advantages that we have would be foolish on our part. I hear people bicker about it... but other teams aren't apologizing for using taxation or cost of living to aid their argument. So I don't think we should apologize either. And we won't."

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From Dubas' proclamation of "We can and we will" in regards to getting their big three prospects signed long-term to his mic-drop level comment on their financial flexibility, the Leafs have shown that they are committed to success and willing to explore all avenues open to them to gain a competitive advantage. The Tavares signing is just one of the many ways that they have flexed their extensive knowledge as well as their financial muscle.

Sources:

https://www.capfriendly.com/teams/mapleleafs/signing-bonus

https://www.nhlpa.com/the-pa/cba

https://www.pensionplanpuppets.com/and-now-you-know/2018/7/17/17575422/the-basics-on-nhl-contract-bonuses-maple-leafs-contract-slide-signing-bonus-performance-bonus

https://www.pensionplanpuppets.com/2018/5/26/17388856/who-is-laurence-gilman-toronto-maple-leafs-assistant-general-manager

https://www.sportsnet.ca/hockey/nhl/kyle-dubas-wont-apologize-flexing-maple-leafs-financial-muscle/

https://www.theglobeandmail.com/sports/hockey/leafs-beat/maple-leafs-hire-nhls-brandon-pridham-as-capologist/article20118811/

https://www.thestar.com/sports/leafs/2016/06/28/reasons-why-steven-stamkos-stays-in-tampa-instead-of-leaving-in-nhl-free-agency.html

https://www.tsn.ca/ltir-a-lingering-issue-in-cba-negotiations-1.1345265

https://www.tsn.ca/tavares-took-less-money-to-come-home-1.1128490

https://twitter.com/NHL/status/1168963162793742338

https://www.vancourier.com/pass-it-to-bulis/toronto-maple-leafs-hire-former-canucks-exec-laurence-gilman-as-assistant-gm-1.23312949

https://www.wealthsimple.com/en-ca/learn/average-stock-market-return#average_stock_market_return_over_time

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