I’m going to try to keep this one short and sweet, because for a lot of us math isn’t why we watch the game. I know that others only like the math and don’t watch the game, so for you I apologize, as this isn’t going to be a fun read.
It seems that deferred salary popped up as an option overnight, but it’s been part of the CBA for a long time, it’s simply rare for teams and players to see eye to eye on using it and I’ll try my best to explain why.
For starters, here’s how deferred salary affects caphit.
The simple explanation is that you don’t save the amount of deferred salary against the cap, but rather the potential earning power of the salary that’s being deferred minus the interest rate. For example, if a player is being paid $2M on a one year contract and agrees to defer $1M of that salary to the following year, he isn’t left with a $1M caphit. Instead, the calculation looks something like this:
Caphit in year 1: $1M
Plus calculated caphit in year 2: $952,381 multiplied by 5% equals $1,000,000
Total caphit: $1,952,381
I should point out that I choose 5% randomly for simplicity, the interest rate at the time of the contract’s signing will determine the caphit. However, the very basic idea of it is this; if you had $952,381 right now and were able to invest it at an interest rate of 5%, that money would equal $1,000,000 a year from now. That means that a few different variables can change the outcome of deferred compensation. The first, obviously, is the current interest rate. The higher the current interest rate, the more caphit would be saved. Another is the amount of time between the contract and the deferred payments.
In the above example we deferred the payment for a calendar year, but let’s assume that we defer it an extra year. Here’s how we calculate the caphit:
Caphit in year 1: $1M
Plus calculated caphit in year 3: $907,029 multiplied by 5% equals $952,381 (this represents the first calendar year of investment). $952,381 multiplied by 5% equals $1,000,000 (this represents the second calendar year of investment)
Total caphit: $1,907,029
We see here that if you invest $907,029 over a 2 year time frame, at our imaginary current interest rate of 5%, you’ll end up with $1,000,000. This tells us that the longer a player waits to receive his deferred compensation, the lower the caphit will be for the team. Further to that, the actual amount of deferred salary means less than the time frame in which that salary is paid out. In both examples above there was $1M deferred, but due to the player waiting an extra year to collect that $1M, the team ended up with a lower caphit.
I’m going to leave the explanation there because I’m bored and I’m sure you are as well.
The obvious explanation as to why this isn’t a commonly used tactic is that money in hand is worth more today than tomorrow. If you give a player $1M today to invest, they’ll have more than that amount two years from now. The first reason I can give as to why a player would opt to go this route is financial security.
The example I’ll use is Frank Vatrano.
Vatrano signed a 3 year, $18M contract that will kick in this coming season. That amount would normally come with a $6M caphit, but Vatrano’s is just above $4.5M. What he agreed to do was defer $3M from each season, for a total of $9M and have that $9M paid out over a 10 year period, starting in 2035. This means that in 2035 he’ll begin to receive $900K a year for 10 years. It’s worth pointing out that in 2035 Vatrano will turn 41 years old, which means that he’ll be out of the NHL and, in theory, could be without any income sources. Essentially what he did was make sure that he’ll keep receiving cheques for 10 years after his retirement from the NHL. The bonus for him is longer term financial security, while the bonus for the team is a more conservative caphit. Also, the caphit is very low because some of that salary is being deferred for 20 years. From the teams point of view, this is the more ideal situation that they could find themselves in.
Another reason a player may go this route is simply to help the team. The example I’ll use this time is our very own Jake McCabe.
McCabe signed a 5 year deal worth a total of $23.5M that is set to begin next season. That would normally carry a caphit of $4.7M, but his is slightly above the $4.5M mark. McCabe deferred $3M from the 2nd year of his contract, as well as $2.5M from the 3rd year of his contract, with the entire $5.5M scheduled to be paid the year after his contract expires. Every penny counts, especially for a team that is constantly pressed up against the cap ceiling, but lets be clear that McCabe didn’t have to agree to this. He’s a solid player and if he pressed the issue he would have been well paid, up front, from the Leafs or another team. It’s also worth noting that McCabe is 31 years old and will be 36 by the time his deal expires. While he most certainly helped the Leafs’ cap situation, there is a dose of what Vatrano did here as well. It’s unlikely that McCabe, at 36 years old, will sign a big contract at the time, so he gave himself one more big payday towards the end of his career.
From here we’ll talk about how this can help the Leafs immediately and the focus has to go to one player in particular, John Tavares. As July 1st inches closer with no contract for Tavares, you have to wonder if he’ll be back with the Leafs at all. If he is back it will be partly because he was willing to make concessions within his contract to allow the Leafs more capspace to build a stronger team. He is still without a Stanley Cup and can see the end of his career approaching, that has to weigh on his mind. If presented with the idea of deferred payments, would be accept in order to help himself and the team win?
One reason that I would think he’d say yes to this, besides the lower caphit, is that he has made well over $100M through the course of his career so far. Yes, he had to pay his agent, taxes and all the other expenses that life brings, but if you’re starting with $100M it’s unlikely that you are in desperate need of a big payday. He’s already investing and is filthy rich, so why not string out the last big contract of your career? Also, when you look at it this way, it’s probably why you never hear of star players doing this when they sign their first big contract. They’re trying to set themselves up for the future and the best way to do that is to get as much money as possible, as quickly as possible and invest it wisely.
If Tavares is willing to defer payments and if he’s willing to take a page from the book of Frank Vatrano, it would really help the Leafs at this point in time. Here’s one possibility that’s based on the rumour that they could end up with a 4 year, $20M contract, as suggested by Pierre LeBrun.
Year 1-4: $2M per season
Year 5-16: $1M per season
Total estimated caphit: $3.95M
In this scenario Tavares would collect a cheque from the Leafs until the age of 50. While we’ll keep in mind that Tavares doesn’t need to set himself up for years to come because he’s already ridiculously rich, it’s possible that he could agree to this for no other reason than the fact that he signed here for $11M per season, hasn’t come close to winning a Cup and could be willing to do whatever’s necessary to make that happen.
Another, more realistic scenario would see him make the same $20M over a 4 year contract, while deferring 50% and taking an even $2.5M over 8 years.
Year 1-4: $2.5M
Year 4-8: $2.5M
Total estimated caphit: $4,524,581.
These two examples are using the current interest rate of 5.41471% as well, which means they should be relatively close to what the actual numbers would be.
If I were a betting man I would put my money on there being no deferred money within Tavares’ next contract. It appears, from a glance, that the “middle class” players are the ones that choose this route. It also appears to be something that players do when they’ve been part of a club for a while and want to help that organization push for a Cup. While that might not be the case with Vatrano, it is with Jake McCabe, Seth Jarvis and Jaccob Slavin. This is why I also wouldn’t predict any contracts to be signed on July 1st that involve deferred payments. Any free agents that the Leafs may sign will look at this from the point of view of not owing their new organization anything, because they just got here. While I’d be happy to be wrong about that, I don’t believe there are any examples of free agents being signed to deals that involve deferred payments and I wouldn’t expect them to start now.
What does interest me is if the precedent set by Frank Vatrano could catch on. That type of deal is something that the Leafs could take advantage of over and over, because money is no object to them. It’s a way to artificially raise your salary cap now, by paying it out later.