CBA Analysis

Why the NHL’s push for a variance limit matters

TORONTO — The Globe and Mail

New Jersey Devils star forward Ilya Kovalchuk, of Russia, smiles during a news conference in Newark, N.J., Tuesday, July 20, 2010. Kovalchuk is staying with the Devils after agreeing to a staggering 17-year, $102 million deal with the team. (Mel Evans/AP)

Oh the many tricky plot points still to run in the NHL lockout.

Once again, this is going to be a very nitty-gritty, in-depth look at a small but integral issue in CBA negotiations, so if that’s not your cup of tea, sit this one out.

But you’ve no doubt heard the word variance thrown around a lot lately, and it’s a given it will become part of the NHL fan’s lexicon after this is all over.

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What variance is, in essence, is a limitation on the amount a contract can vary from year to year.

That sounds simple, but it’s not given the way the league and NHLPA have come to define it.

Here’s the very basics of what’s believed to be on the table right now: A 20 per cent variance limit based on 20 per cent of the first year of a multiyear contract.

That means that, if the first year of a deal is $5-million, the max it would be able to vary each season for the life of the deal is $1-million.

So a contract could go for seven years and look like so: 5-5-5-4-3-2-1, meaning the player would receive $25-million with a cap hit of just $3.57-million.

The NHL’s last CBA had a variance limit, but it was very loosely defined and players were getting all kinds of back-diving deals.

The Ilya Kovalchuk one is one of the most egregious, as it fluctuates as high as $11.8-million in some years and as low as $1-million in three others. Kovalchuk will receive $10-million or more in six years of the 15-year deal despite carrying a cap hit of only $6.67-million.

Hence why Gary Bettman and the league are waging war on those deals.

Kovalchuk’s contract will not be possible in the new agreement. There’s going to be a term limit of seven or eight years, for one, and the 20-per-cent variance rule would cut down on the kind of extreme varying that’s going on.

How much could you vary, if the rule stays as has theoretically been proposed? Well here’s a long look at what various deals would look like with a 10 and a 20 per cent variance and no other stipulations:

10%

Y1

Y2

Y3

Y4

Y5

Y6

Y7

 

Cap hit

 

12.00

10.80

9.60

8.40

7.20

6.00

4.80

 

8.40

 

11.00

9.90

8.80

7.70

6.60

5.50

4.40

 

7.70

 

10.00

9.00

8.00

7.00

6.00

5.00

4.00

 

7.00

 

9.00

8.10

7.20

6.30

5.40

4.50

3.60

 

6.30

 

8.00

7.20

6.40

5.60

4.80

4.00

3.20

 

5.60

 

7.00

6.30

5.60

4.90

4.20

3.50

2.80

 

4.90

 

20%

Y1

Y2

Y3

Y4

Y5

Y6

Y7

 

Cap hit

 

12.00

9.60

7.20

4.80

2.40

0.60

0.60

 

5.31

 

11.00

8.80

6.60

4.40

2.20

0.60

0.60

 

4.89

 

10.00

8.00

6.00

4.00

2.00

0.60

0.60

 

4.46

 

9.00

7.20

5.40

3.60

1.80

0.60

0.60

 

4.03

 

8.00

6.40

4.80

3.20

1.60

0.60

0.60

 

3.60

 

7.00

5.60

4.20

2.80

1.40

0.60

0.60

 

3.17

 

As you can see, it’s a pretty remarkable difference between the two. While a 10-per-cent variance presents some strict limitations, with a 20-per-cent one, it’s easy to drop down to the new minimum salary (roughly $600,000) in short order, even from a near maximum salary (roughly $12-million).

That kind of variance would allow not necessarily for a Kovalchuk deal, as his is varying at more than 80 per cent at one point, but you could do something like 10-10-8-6-4-2-0.600 and give a player nearly $30-million in the first three years ($9.3-million a year) with only a $5.8-million cap hit.

That’s along the lines of the deal that Chris Pronger signed, as it was a seven-year deal, signed at age 35 that looks very much like it was intended for him to never play on the last two or three years of it in order to bring down the cap hit.

So the possibility for back-diving and circumvention to some extent potentially still exists, if the only rule put in is a 20-per-cent variance.

There are two big caveats to all this, however.

One is that the new CBA is likely to include a cap benefit recapture formula, as outlined here.

Two, more importantly, is that there is likely to be a minimum salary shift level set as part of the agreement. The NHLPA previously proposed a minimum level that was 25 per cent of the highest year in a contract, meaning no single year could go below that figure.

That would mean that, in the charts above, on a deal that started at $10-million, it couldn’t drop below $2.5-million in any year of the contract.

That would push the cap hit up like so:

20%

Y1

Y2

Y3

Y4

Y5

Y6

Y7

 

Cap hit

 

10.00

8.00

6.00

4.00

2.50

2.50

2.50

 

5.07

 

Is that enough of a safeguard against back-diving deals? Probably not. So it’s certainly possible that that minimum comes up significantly.

(*- Elliotte Friedman has reported the league is willing to go to 30 per cent variance if the minimum is as high as 60 per cent, which I've included as an option in the line graph above. Needless to say, that wouldn't allow much circumvention at all.)

One of the tricky things for the PA in negotiating over the variance is that the extreme deals like Kovalchuk’s obviously affect so few players in the league positively and the massive frontloading can negatively impact other players via escrow payments.

There’s a balance there between (a) allowing contracts to be creatively constructed in order for teams to keep their talent and stars to get paid and (b) the lower and middle class of the NHLPA not being squeezed by these deals to a select few.

How the players work that out remains to be seen.

But whether the ultimate solution allows the Pronger-type contracts will be the most interesting thing to keep an eye on. As we’ve seen in the past, if there are loopholes, they’ll be exploited to their fullest extent, and variance is tricky enough that they could leave a few options open.

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