Performance Bonuses

Obviously the current season’s lack of high-level on-ice success for the Calgary Flames has dominated the headlines as of late, but one other aspect has flown under the radar. So let’s talk about the salary cap and performance bonuses, folks.

We’ve written a bit about the upcoming new contracts for Sean Monahan and Johnny Gaudreau, but the implication of their high level of play on this season’s (and next season’s) salary cap hasn’t really been explored.

In short? I’m a little bit worried for a few reasons.

This season, the NHL’s cap is $71.4 million US.

Next season, the expectation is that the cap won’t go up very much – if at all. The reason for that is the rough patch the Canadian and American economies have taken. The low world oil price has hammered Canada and the dollar in particular, and it’s unlikely that the NHL will push the cap up too much – even with NHL revenues being really strong – because a ton of the league’s revenues come from Canada and bumping the cap up too much would put the Canadian teams at a competitive disadvantage.

For the purposes of our discussion, let’s presume the cap doesn’t move at all. But bear in mind the possibility that the low dollar and low oil prices might actually drag the cap down.

The NHLPA decides in the summer, typically prior to the draft, whether or not to use their salary cap escalator: a tool they have at their disposal to bump the cap by up to 5%. But if the cap goes up and revenues aren’t insanely strong, that likely results in an increase in the escrow paid by players (e.g., the league holds onto a percentage of their paycheques until the season is over to ensure the 50/50 revenue split is actually 50/50). If you’re a player, it’s a trade-off between having more contract money for the players… and potentially having a larger portion of everyone’s money withheld until the year’s over.

The theory is that the cap will go down a bit unless the NHLPA decides to use the escalator, at which point the cap would be roughly flat from this season’s.

One of the unique aspect of entry-level NHL contracts – as opposed to “regular” contracts – is the inclusion of performance bonuses. Essentially, it’s a way of “market correcting” for the production of younger players. You don’t know how much they’ll produce, so you can incentivize their contracts to compensate for them carrying your team. And they only count against the cap if you hit them, so there’s very little downside.

Well, unless you’re Calgary, and your most prolific point producers are all on entry-level deals.

Because you never know if you’ll need to actually spend money on the performance bonuses, NHL teams are allowed to go over the cap during the season by what’s known as the “bonus cushion” – up to 7.5% of the overall cap – as long as what pushes you over the top is expected bonuses. If you’re over the cap by actual bonuses (or at all), it comes off next season’s salary cap.

The challenge for the Flames is this: they have a lot of veteran guys making a lot of money, and their cheapest/youngest players all have performance bonuses tied to their deals. And shocker, these guys happen to be driving the team’s offense.

Four current Flames have performance bonuses:

Now, we don’t know what the performance bonuses are, but they’re usually tied to things like goals, points or games played. Based on their performances this year, I think it’s safe to assume that Gaudreau, Bennett and Monahan hit most (or all) of their bonuses.

So that’s an expected bonus hit of about $5 million between those three players.

Right now, the Flames have a pro-rated cap hit – including allowances for how long players have spent in the minors or elsewhere – of about $73.448 million, according to our sister site NHL Numbers. So they’re projected to be over the cap by about $2 million, which they’re allowed to do because what’s pushing them over the top is their performance bonuses.

But unless some serious coin is taken out of the team at the trade deadline, the Flames will probably be over the cap by a couple million dollars – which will come out of next year’s cap.

For the sake of argument, let’s just presume two things: Johnny Gaudreau’s cap hit will be around $6 million and Sean Monahan’s will be about $5 million. (Those are wild stabs, but I don’t think a combined $11 million cap hit between them is unrealistic.)

Here’s next year:

If you add everything up, the Flames would have about $58.3 million already committed. And they still need to re-up or otherwise acquire two goalies, a defenseman and five forwards, and they only have $13.1 million to do it.

These calculations ignore two distinct possibilities: that the salary cap might actually go down by up to $4 million and that the Flames might burn off a couple million dollars on performance bonuses from this season.

The issue for the Flames heading into the trade deadline and the summer are this: we’re not sure yet what the cap projection is for next season, and a lot of it depends on how the NHLPA membership is feeling about escrow at any given time.

Just one more thing to keep an eye on as we tumble head-long towards the NHL’s trade deadline on February 29.