June 30, 2009
Salary Cap 101
The Basics

by David Shapiro

You may not like it, or choose not to believe it, but the NHL is a business. The commissioner and the owners are there to make money, while putting a quality team on the ice that can put fans in the stands. By the end of the 2003-2004 season, the league was in trouble. The game had lost popularity, there was no more excitement in the game due to the clutch and grab systems that many teams employed, and most importantly, player salaries were out of control (see: Holik, Bobby).

Following the lockout, we were left with a hard-salary-cap. The definition of a hard-cap is that a team cannot begin a season over the salary cap ceiling, explained below. With this salary cap comes questions on its rules and functionality.

Salary Cap 101 is now in session, but you will have to excuse the Ranger player examples. I own a Rangers blog, thus these are the example I use, and hey, it’s easy to use them as an example; they do have the three worst contracts in hockey right now. Anyways, I'm digressing. Let’s continue with today’s lesson:

Salary Cap Ceiling: The maximum amount of money a team can spend on player salaries. This number varies from year to year based on the NHL’s revenue from two seasons ago. For example, the salary cap for the 2008-2009 season was set based on the NHL revenues from the 2006-2007 season. The NHL is looking at a decreasing cap figure for the 2010-2011 season due to fewer revenues during the 2008-2009 season.

• No player can earn more than 20% of the salary cap ceiling.
• The minimum player salary will rise to $525,000 by 2011-2012.
• There is a clause in the CBA (Collective Bargaining Agreement) that allows the players to enact a 5% increase on the cap ceiling. This clause was enacted in June 2009, thus preventing a decrease in the salary cap ceiling for the 2009-2010 season.

Salary Cap Floor: Similar to the salary cap ceiling, this is the minimum amount that a team must spend on player salaries. This is more of a formality, but it prevents teams from intentionally tanking the season, and ensures players are paid market value. This number is generally set at $16 million below the cap ceiling.

Salary Cap Hit: The amount of salary cap room that a player takes up. This number is calculated by the average dollar figure of the contract. For example, Markus Naslund signed a two-year, $8 million contract. His cap hit for those two years is $4 million, despite the fact that he earned $5 million in the first year of the contract. Weighted contracts have no effect on the cap hit.

Performance Based Bonuses: Players on entry level contracts, veterans who have played over 400 games, players who sign a 1 year contract and are over 35 years old, or players who have spent 100+ days on the IR are all eligible for performance based bonuses. These bonuses count against the following seasons cap.

Entry Level Deals: Entry level contracts are capped at $925,000 (by 2011). These contracts vary in length. For those aged 18-21, the entry-level contract is for three years, 22-23 is for two years, and 24 are for one year.

• Entry Level Bonuses: Bonuses for entry-level contracts are capped at 10% of the players contract. These bonuses count against the cap. For example, Lauri Korpikoski’s salary in 2008-2009 was roughly $900,000, but his cap hit was over $1 million because of the signing bonus.

Waivers: When a player is waived (sent to the minors), each of the 29 NHL teams can put in a claim for the player. In the case that more than one team puts in a claim for a waived player, the team with the worst record gets the claim. The player is moved to the claiming team for the full (or, if mid-season, pro-rated) salary cap hit. If a player clears waivers, he can be reassigned to the minors, and the salary cap hit is cleared until the player is recalled. Only players with one-way contracts pass through waivers. Players with two-way contracts do not pass through waivers.

Re-Entry Waivers: When a player with a one-way contract clears waivers, and is recalled to the NHL, he must pass through re-entry waivers. Re-entry waivers is similar to regular waivers, however the claiming team can claim the player for 1/2 of the players remaining salary, while the original team picks up the other 1/2. For example, if the Rangers claimed Sean Avery when he was initially waived, they were going to be on the hook for the full $4 million cap hit. They claimed him on re-entry waivers, and thus only are responsible for the $2 million cap hit (Dallas picks up the remaining $2 million).

Over 35 Signings: If a player who, as of June 30 of the upcoming season, is over the age of 35 signs a multi-year deal, the signing team will take a cap hit for each year on the contract, regardless of if the player retires. For example, if Chris Chelios signs a 3-year deal worth $2 million per year, and retires after the first year, the signing team still takes a $2 million cap hit for the remaining years on the contract. However, since Markus Naslund’s 35th birthday was after June 30, he was 34 as of June 30, thus his retirement removes his cap hit.

Restricted Free Agents: A player set to become a restricted free agent will become an unrestricted free agent if his current team does not offer him a contract that includes a minimum 10% raise. This minimum 10% raise is based on the player’s salary, not the cap hit. For example, Nik Zherdev’s cap hit in 2008-2009 was $2.5 million, but he made $3.25 million. At the end of the 2008-2009 season, Nik, set to become an RFA, will need to be tendered an offer of at least $3.55 million (a 10% raise on his salary) by the Rangers or else he will become a UFA. Remember, a player must be tendered an offer to receive draft pick compensation by another team (for signing a RFA).

• RFA Ages: A player remains a restricted free agent until his age 27 season. No player can become an unrestricted free agent until he turns 27.

Buyouts: Buyouts are a more complicated business, as it requires some serious calculations.

A player over 26 can be bought out for 2/3 of his remaining contract worth.

• Note, this is not the salary cap hit, this is the actual dollar amount left on the contract.

A player 26 and under can be bought out for 1/3 of his remaining contract. Note, this is not the salary cap hit, this is the actual dollar amount left on the contract.

The cap hit for the buyout is calculated as follows:

• Calculate the buyout amount (as explained above)
• Spread the buyout amount evenly over twice the remaining years on the contract. This is the cap hit the team will have.

This is fairly complicated wording, so let’s use Wade Redden as an example. As of the end of the 2008-2009 season, Wade has 5 years and $31 million remaining on his contract. The buyout amount is ($31 million * 2/3 = $20.67 million). Twice the remaining years on his contract is (5 years * 2 = 10 years). Now, spread the buyout amount evenly over the years ($20.67/10 = $2.067 million). If the Rangers were to buyout Wade Redden, they would have a cap hit of $2.067 million over the next 10 seasons.

No Trade/Movement Clauses: A player with a no trade clause must first approve the trade, and waive his no trade clause, in order to be traded. A player with a no movement clause also has to approve a trade, but also has the ability to veto an assignment to the AHL. A player with a no trade clause does not have the ability to veto an AHL assignment.

• Limited No Trade Clause: A player with a limited no trade clause can select a number, usually determined at the signing of the contract, of teams that he will or will not accept a trade to. The team must work within these limitations to trade the player.

Class dismissed.

David Shapiro writes for Blue Seat Blogs and can be reached here.