Tuesday, June 28, 2011

The economics of the salary cap

Several years ago it was believed that it would be next to impossible to trade a player with a monster contract. The only way a deal could be made would be in exchange for a player with a similar contract. The past week has shown that this is not the case. The Flyers moved both Mike Richards and Jeff Carter for cap relief and found teams with cap space and prospects to a make deals. Calgary was able to move Robyn Regehr to Buffalo and Florida took Brian Campbell off the hands of Chicago.

Why is happening? Well because the salary cap has been rising and with it the salary floor. Both create demand for players with high salaries.

Let’s take Scott Gomez who was once considered untradeable but was picked up by Montreal two years ago and might be moved again. When he signed with the Rangers in 2007 his salary for the first year was $10 million and the cap hit was $7.357 million. His cap hit was about 15% of the total cap and his salary was too rich for almost every team. Today his cap hit 11% of the total cap and his salary in the 3 remaining years are $7.5 million, $5.5 million and $4.5 million. So the last two years he will be paid less than the cap hit which is one of the advantages to front end loading.

If you are a small market team that has not been making money and will make even less with a $48 million cap floor, Gomez becomes attractive. In the last two years of his contract he will earn $10 million but will use up $15 million of cap space. If you can find a few players like this then your payroll can be substantially less than your cap hit which allows you to save money.

Meanwhile the higher cap ($64.3 million in 2011-12) provides big market teams with more to spend pushing salaries up even more. In the first year following the lockout, the salary cap was $39 million which limited the number $5 million or more players to just 1 or 2 per team. There were only 23 players with salaries at $5 million or more in 2005-06. Now teams can carry 3 or 4 such players. So far there are 88 players that will earn at $5 million in 2011-12 before the latest crop of UFAs have signed.

With 30 NHL teams spending potentially $150 million more in salaries the inflation rate on salaries isn't much different than before the cap. The only difference is that small market teams are desperately looking for contracts to get them to the floor which is a worse situation than existed before the lockout.

So Brad Richards will be a very happy man in a few days from now.

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