Notes on “The Contract”

Notes on “The Contract”

by -
575

Got some interesting feedback from a couple sources regarding Kovalchuk’s 17 year deal, and its potential impacts on future CBA negotiations.

Source 1:

“These long-term deals are getting ridiculous. How many teams can compete? Kovalchuk only had two suitors due to the number of years he wanted. The league is going to look at both capping contract term and moving toward non-guaranteed contracts in the next CBA.  Contracts signed 1-2 hrs after FA are also going to be looked at and hopefully resolved. The gloves will be off on both sides, but this stuff needs to be done.”

Source 2:

“Kovalchuk may have unwittingly screwed the escrow issue for a lot of players. As more players make more salary than cap hit, payroll figures get inflated and the players end up paying a higher percentage of their salaries back into escrow. Kovalchuk’s salary will be 5.5m beyond his cap hit for five years of the contract, 4.5m and 2.5m above for another two years after that. He’s not the only player whose contract does this, but is the most high-profile given his standing and the absurd length of his deal. It’s going to be interesting to see how this affects negotiations as players will inevitably find themselves fighting opposing fronts — for contract freedoms such as term and front-loading, but against the escrow payments that result from those very freedoms. Advantage: league.”

The interesting part about the escrow concern is Kovalchuk’s salary doesn’t jump beyond his cap hit until the 2012-13 season — the same year it is anticipated a new CBA will be in effect (I believe the existing CBA has been or will be extended through the 2011-12 season). The contract was set up this way by design, and should be considered very telling as to what the focus of CBA negotiations will be from the NHLPA’s perspective.

Update: Some have been asking in the comments why Kovalchuk’s contract doesn’t violate either of the so-called “100%” and “50%” rules. The reason for this is after the jump.

NHL CBA
Article 50.7

The difference between the stated Player Salary and Bonuses in the first two League Years of an SPC cannot exceed the amount of the lower of the two League Years. Thereafter, in all subsequent League Years of the SPC, (i) any increase in Player Salary and Bonuses from one League Year to another may not exceed the amount of the lower of the first two League Years of the SPC (or, if such amounts are the same, that same amount); and (ii) any decrease in Player Salary and Bonuses from one League Year to another may not exceed 50 percent of the Player Salary and Bonuses of the lower of the first two League Years of the SPC (or, if such amounts are the same, 50 percent of the same amount).

Key Information:

(a) Item (i) in the above excerpt is known as the “100% Rule”.
(b) Item (ii) in the above excerpt is known as the “50% Rule”.
(c) Kovalchuk will earn $6 million in each of the first two years of his contract.
Therefore …
(d) According to the “100% rule” no increase between consecutive years of the contract can exceed $6 million, and …
(e) According to the “50% rule” no decrease between consecutive years of the contract can exceed $3 million.

The largest financial increase in Kovalchuk’s contract occurs in 2012-13, when he jumps from $6m to $11.5m (an increase of $5.5m). The largest financial decreases in the contract occur when he drops from $6.5m to $3.5m in 2020-21 (a difference of $3m), and then to $750,000 in 2021-22 (a difference of $2.75m).

In other words, in terms of getting around the CBA the Devils and Team Kovalchuk negotiated this one perfectly.

Update: Looks as though the NHL is none too happy with the contract, and has rejected the deal on an ethical basis despite its terms fully complying with the CBA as currently written.

Interesting food for thought as — extensions aside — the pending end of the CBA is on the horizon. I’ll be back with some thoughts on the Kaberle situation for you in a bit.