Salary Cap Fundamentals
The financial aspect of running and managing an organization is dictated by a collectively bargained revenue-sharing program between NHL players and NHL owners. Hockey-related revenue, or HRR, dictates the maximum—or ceiling—and the minimum amount—or floor— teams can spend on NHL Player salaries. While player compensation can vary yearly, the salary cap calculation is based on the contract's average annual value or AAV. This calculation is made by taking the total dollar value of the contract and dividing it by the duration of the contract. A $25 million contract with a duration of 5 years carries a “cap hit” of $5m AAV.
In my previous article on asset classes, I detailed the types of currency exchange in the NHL trade landscape. Fundamentally, the NHL currency exchange is regulated by the hard Salary Cap of the NHL. Trades are regulated by the league and prevent teams from acquiring players with AAVs that surpass the threshold of the cap ceiling. There are mechanisms within the league to allow teams to cross this threshold in specific cases of injury, and some contracts contain bonus provisions calculated at the season’s end. Still, the ceiling is the ceiling, and teams cannot knowingly cross it.
Cap space, the available room beneath the cap ceiling threshold, is simultaneously the most valuable commodity and the most abused component of roster management by NHL front offices. The less cap space a team has to work with, the harder it becomes to make necessary improvements to a roster. The harder it is to add, the more expensive additions become. Cap space has always been at a premium since the league adopted a hard-cap system when NHL owners forced a year-long work stoppage in 2004. Even with salary roll-backs, the NHL saw significant player movement the following season as teams with an outsized financial capacity lost prominent players to teams with lesser financial capacity in an evening of the salary playing field. Teams that could routinely outspend other organizations were now forced to struggle dollar-for-dollar with markets that previously did not have the financial resources to be competitive.
Due to the fluctuating nature of year-to-year performance, a player might one year exceed the relative value of their contract while the following year underperforms. Two players with the same AAV may have significantly different output, or their performance trajectories may be inverted; a player on the way up vs a player on the way down. This relative performance differences-to-cap-hit can be bridged in a currency exchange by adding other asset classes such as picks, prospects, or even other players. However, striking a balance in these valuations can be tricky due to the disparate reality of asset availability among teams.
The NHL has another mechanism available to NHL teams to correct for performance inconsistency: Cap Retention.
Retention
Fielding a competitive roster is about maximizing performance-per-dollar output. The more players on your roster perform above their pay grade, the more competitive your team will be. This is the fundamental advantage enjoyed by the Resonant Wave Theory of roster management: players on entry-level contracts, or ELCs, have their pay restricted regardless of performance output by the nature of their contracts. A competitive team will need these performance outliers to enhance its competitiveness.
Due to the nature of cap mismanagement in the NHL, salary cap retention is a means of gaining performance outliers on non-ELC contracts.
Currently, cap retention is mainly utilized to facilitate trades. Due to years of cap mismanagement colliding with a league that has been reluctant to grow non-traditional revenue, the hot topic of conversation around the league is the difficulty in consummating trades due to the “flat” cap. This is an erroneous justification for ill-conceived contracts signed with the expectation that they will look less harmful or perhaps even reasonable in the future once the salary cap escalates. As a result, numerous teams around the league find themselves in what was once characterized by former Calgary Flames general manager Jay Feaster as “cap jail.” “Cap jail” describes teams unable to make significant roster improvements due to a substantial amount of players underperforming their contract value. When enough teams find themselves in “cap jail,” player movement becomes restricted. Salary retention is utilized in a reactive sense to facilitate trades on expiring contracts, such as the recent trades of Bo Horvat and Vladimir Terasenko, where the acquiring team could not complete the transaction at the total cap-hit price of the existing contract.
Running an organization properly affords another avenue for utilizing cap retention, however. Suppose we acknowledge that the performance-to-cap ratio dictates team success. In that case, cap retention can be used to assemble a roster where players are still being compensated appropriately but where the team they play for is not burdened by the total cost of that performance. This allows a team to improve the overall quality of their roster by retaining a larger pool of talent than the salary cap would otherwise allow for. This is the advantage rarely taken advantage of in the cap era of the league but is slowly being explored by the league’s most well-managed organizations.
By paying another team to absorb a portion of a player's cap hit, a team can achieve a higher performance-to-cap output than would otherwise be possible for an established player on an existing contract. A team willing to pay a trade asset premium can purchase excess performance. Even better, that team can use those cap savings to retain the services of crucial current roster players or maintain cap space for future forecasted prospects at market rates. A team can use those savings to further augment their roster with other acquisitions that would otherwise carry prohibitively high cap hits.
The advantage of rebuilding teams selling sought-after assets is for a relatively small amount of money, they can extract assets of either significant quality or quantity from contending teams looking for an outsized performance advantage to assure their competitiveness. They can double dip on this acquisition by acquiring unwanted salary in the same transaction. This is the basis for a truly win-win scenario for a contender and a rebuilding organization. With cap space at such a premium, these transactions should be happening much more frequently than they currently are.
While cap retention has previously been used almost exclusively as a reactive process to mitigate damaging contracts, the coming trade deadline suggests NHL management may finally evolve to proactive levels of cap retention: multi-year retention of high-value assets at marginal cap hits for contending rosters looking for performance advantages in a competitive cap environment.