For the last couple of offseasons, an easy story heading into July 1 was to goggle at how much the Leafs were going to pay out in signing bonuses. The Leafs flexed their rich-team muscles by signing John Tavares, Auston Matthews, Mitch Marner and William Nylander to contracts with huge signing bonuses and very low base salaries in every year of the deal. Those deals were all front-loaded as well, so that the player would have a high percentage of the total contract value spent on Gucci beanies before the contract ever ran out. That was the best way for a player to gain an advantage from a team when all those deals were signed, and it was a good way for teams to negotiate away from even bigger AAVs on those deals by giving that monetary advantage to the player.
Those days are over.
The 2019-2020 salary was paid out in full with a final last paycheque issued during the pandemic pause in July. That final paycheque went right into the escrow account in full, and the new CBA Memo of Understanding (MOU) that was signed in early July had the entire escrow account paid out in full to the owners immediately. The expectation is that when the final accounting is done on this season, the players will owe even more than the 20% of their salaries already paid in because the NHL revenues were so low.
For 2020-2021, the escrow is set in the MOU at 20% again. In addition, the players are deferring another 10% of salary to the owners. That 10% is supposed to be paid back over three years. But it still erodes the value of front-loaded, signing-bonus laden contracts in the short term.
Salary lost to escrow and deferral
Escrow and the salary deferral in the 2020-2021 season are both calculated on Total Salary, not the Base Salary after bonuses are paid.
The escrow amount for the 2020-2021 season is not expected, by any but the sunniest optimist, to ever be paid back, so most of the monies lost for this coming season will never be recouped. The pain continues in 2021-2022 with a 14-18% escrow rate, and it drops to 10% in 2022-2023.
Case Study: Jonas Brodin
A look at Jonas Brodin’s contract extension illustrates how this new reality will affect contract structure:
Brodin’s contract for the coming season is already set. He’ll be paid $3,500,000 less the escrow of $700,000 and the deferral of $350,000. He’ll actually get $2.45 million on an AAV of $4.167 million. His old front-loaded deal worked out pretty well for him by chance.
His new deal has its lowest salary year in 2021-2022, when escrow will still be high and also unlikely to ever get paid back as past overages will be still sitting there sucking up the excess, if any exists. That same low salary amount is there on the last year of the deal when he’ll be almost 35. His deal bulges out in the middle, giving him a higher chance of actually receiving more of his salary — his major concern. While the Wild take some comfort that when he’s getting older, the deal is tradable and also can be bought out without too much pain.
Front-loading had become the norm for almost all contracts beyond the classic depth-player two-year deal where year-two was always higher to make the cap hit lower than minimum salary in that second year (the Frederik Gauthier special). The assumption is that the cash-rich Leafs can just offer big money now, and hook any free agent. But the UFA with the smart agent wants the least amount possible now. A signing bonus that gets 30% chopped out of it before taxes take another bite isn’t a lure.
We casually use the term front-loaded to refer to contracts with big first or second years like the four on the Leafs. But there is a more specific definition in the CBA that amounts to this: if the average of the first half of the contract’s total salaries paid is more than the AAV, it’s front-loaded.
Front-loaded deals have new, tougher restrictions in the MOU on how much the salary can vary from year to year. The intent of these restrictions is to stop teams from signing an aging free agent to a long-term deal, thereby reducing the AAV, with the intent to just buy it out when the salary becomes very low in the future.
What the CBA and now the new MOU rules have been trying to accomplish, the pandemic-flattened salary cap is going to achieve more dramatically. The cash-focused player wants the big numbers in years where they’ll get to keep it, not 2021.
If you look at Brodin’s deal again, you’ll see that the average of the first 3.5 years of salary is exactly $6 million, the same as the AAV. It falls under the general variability rules for salary in a contract, and not the more restrictive front-loading rules that allow the biggest change from year to year to be only 25% of the first year.
The Brodin deal avoids the onerous front-loading restrictions, but it still has to meet the non-front-loaded variability rule called the “100% rule”. To figure that rule out, you take year-one and year-two, and note the lower total salary. Then you calculate the difference, and that difference can’t be greater than the number you just made note of. It can’t be greater than 100% of the lower year’s salary, in other words.
Once you’ve done that, you then check every year-over-year increase in total salary and it can’t exceed 100% of your noted amount.
And then, lastly, you check every year-over-year decrease in total salary and it can’t exceed 50% of your noted amount.
The lower of years one and two is $4 million. We note that down. The difference between year-one and year-two is only $1 million, so all is fine. The only other year-over-year increase is year-two to year-three, and it’s only $3 million, which is, calculates carefully, less than $4 million.
Now the decreases. They can’t be more than 50% of the $4 million or $2 million. And they are $500,000, $2 million and $1.5 million as the deal declines from year-four through to the end.
So his deal drops nearly as much as it’s allowed to, to get to a lower salary in the final year — something the team likely wants more than the player, but it also shifts most of the salary allowed to the middle years where hopefully his team thinks he’s worth it, the actual amount of the salary that’s paid to players is higher than it will be in the next two years. Everyone loves this compromise which is a miracle.
Cash Isn’t King
The one thing that hasn’t changed is that players care about cash, and most teams care more about the AAV. But a team that has cash to spare isn’t calling the tune this offseason. No one wants the John Tavares deal. They want a Brodin.
Rich teams now will have to accept they’ll be paying salaries much higher than the AAV for older players at exactly the point when their on-ice production will start to decline. They will have to give up some of the ease with which they can trade or buy players out in the waning days of contracts as well.
Ryan Suter has a very ugly-looking contract if all you see is the AAV, but take a look at the salary structure and you see the open door for the Wild in the very near future. No one will sign a deal like that this year.
The muscle of a cash-rich team means less now than it did, and teams that have internal budgets can make deals they’ll be happier with (low salaries in the first two years suits them too).
Brodin’s deal is exactly the sort of contract a medium-status player should demand as a UFA in October. The higher the status of the player, the closer to the smallest possible salary in the first two years it will have. Back-loading will be in this season.
Even low-status players are going to try to get deals that work with this new reality. Jared McCann, an RFA signed by the Penguins to a two-year deal, has a salary structure of $2.5 million in year-one and $3.38 million in year two. He is gaining quite a bit of actual cash value by backloading his salary to that extent. His deal expires while he is still an RFA, so his Qualifying Offer will be that $3.38 million.
The MOU has new rules on QO amounts: They can’t exceed 120% of the AAV of the deal, and his maximum on his AAV would be $3.528 million, so his contract was structured to be very nearly the best deal he could get at an AAV of $2.94 million.
What does this mean for the Leafs?
It’s still better to be rich, that hasn’t changed. Some of these teams with new internal budgets lower than the actual salary cap can’t be sure their fiscal constraints will change in time to pay the big years on a Brodin-style deal for a UFA. They might make it through this season, only to discover they need to economize even more for a few years. Big signing bonuses will still get written into deals, just not in front-loaded structures.
But for the Leafs, who are trying to wedge some players that actually improve the team into a cap space narrower than a looney end-on, they can’t just wave their cheque book and expect the prospect of a huge bonus paid on October 9 to be a lure. They need to present the best possible Brodin-style middle-loaded deal they can, and the cost will be flexibility in the future. The risks to the team are greater with a Brodin than with a Tavares.
Attracting a big-name this offseason is a tougher job for the Leafs than it was when they hooked Tavares. But if they’re willing to give up some of the advantages of having the salary decline when the player is declining, they’ll still be able to win by having more money than anyone else. (Even if it is Canadian dollars.)