QUANTUM BLOG

New Contract Structures Could Provide Future Financial Challenges for Players

October 10, 2015

With all the hopes, and dreams that accompany the beginning of a new NHL season let me for a moment bring to your attention a growing trend around the league. I’ve come across a few articles concerning recently-signed long-term contracts, most notably an article by Chris Johnston of SportsNet, which discusses the growing trend of NHL long-term contracts to pay out significant amounts of their annual salarys by means of signing bonuses, as opposed to base salary. This growing trend in salary structure represents a response, as Johnston points out, to the uncertain future of the NHL’s collective bargaining agreement, and will continue to concern the minds of agents, managers and players until that level of uncertainty has been addressed. This article will explain how these new structured contracts attempt to financially protect players, however, I believe that these new contracts also present a new challenge for hockey players in how they manage their money.

 

The growing trend among long-term NHL contracts, that extend beyond the year 2020-2021, is to have massive signing bonuses with minimal base salaries during the 2020-2021 and 2022-2023 seasons. An example of this is the 8 year $66 million dollar contract signed by Jakub Voracek this summer, which pays a mere $2,250,000 in 2020-2021 and $1,250,000 in 2022-2023 in base salary compared to his 2021-2022 season base salary of $7,500,000. The reason for the minimal base salaries in these two years is the uncertainty generated by the NHL or NHLPA’s ability to opt out of (terminate) the current collective bargaining agreement for the 2020-2021 season, while the agreement is set to expire in 2023. Fears of a looming lock-out have led NHL players, and their agents, to negotiate smaller base salaries for the above two seasons in question, and have instead negotiated large, and more importantly guaranteed, bonuses, which essentially is one large cheque per year. These bonus payments, $4,000,000 and $5,000,000, respectively for Voracek, are guaranteed to the players regardless of any potential work stoppage, and as such financially protect the player from any hardships that a lock-out could potentially inflict upon them. Another more recent example of this salary structure is Brent Seabrook’s new contract with the Chicago Blackhawks, in which he only earns $1,000,000 in base salary for each of the 2020-2021 and 2022-2023 seasons. These contracts reflect a growing trend around the league, and represent the player’s efforts to protect themselves against a future lock-out.

 

Other contracts, such as, the contract signed by Ryan O’Reilly of the Buffalo Sabres have a salary structure with a minimal base salary, and large signing bonuses throughout the entire contract. O’Reilly is set to earn a mere $1,000,000 per season in base salary with front-loaded signing bonuses throughout the entire contract. The reason for this, according to Lyle Richardson, is to make buying-out the contract impractical as Buffalo would still have to pay out his full bonuses, thus entitling the player to almost all of his potential earnings. In addition, as O’Reilly’s contract includes the 2020-2021 and 2022-2023 season, the large bonuses protect him from potential lost earnings should the NHL experience another lock-out. An interesting implication of these new contracts will be, if star NHL players decide to play in Europe during an NHL work stopage, despite still earning the majority of an NHL salary. In fact, Seabrook and O’Reilly have the potential to out-earn their annual NHL salary should they sign a contract elsewhere during an NHL lock-out, provided they signed a new contract in excess of $1,000,000,

 

While these new salary structures aim to protect players like Jakub Voracek and Brent Seabrook, they have the potential, if taken to the extreme such as Ryan O’Reilly’s contract, to place NHL players in complex financial situations they are unable to address themselves. Having a contract that is structured to pay a player millions of dollars once annually places a player in a position where he effectively ‘wins the lottery’ once per year. Dealing with such large annual bonuses requires serious financial acumen, and with NHL careers rarely going beyond forty, the imperative to save early is all the more critical. To help players manage their money the NHL, NHLPA, and NHL Alumni Association collectively fund the NHL Breakaway Program which works with the Ted Rodgers School of Business to design programs to help educate retired players. However, the consensus seems to be that this is not enough to protect players; and I am inclined to agree. Drew Hawkins, Managing Director and Head of Global Sports and Entertainment at Morgan Stanley, argues that wealth management needs to be taught to players before they have earned significant money, and that education after retirement is too late, as by then, often the potential for any significant future earnings is limited. Hawkins advises aggressive saving for young athletes as the best course of action for their financial future. The need to address wealth management among players who are playing in the CHL is, in my opinion, most critical, as the majority who pursue a professional hockey career will have no post-secondary education, and their education package will be terminated by them signing a professional contract. As such, their opportunities to formally educate themselves properly on wealth management are limited both during and after their career. Providing CHL, and other amateur, players on route to a career in professional hockey, with basic education in wealth management is a critical step in dealing with instances of financial instability among active and retired professional hockey players.

 

In conclusion it is my opinion that, the growing trend of contracts favouring large bonuses has the potential to put players in a position where one financial miscalculation will have a player waiting up to twelve months before their next significant paycheque. This has the potential to put players, with very little formal financial education, in a position where one mistake could put their financial future in jeopardy. Mr. Hawkins is right, education needs to happen earlier, and while the Breakaway Program is a good start, addressing this issue with players after retirement is effectively treating the symptom, as opposed to dealing with the cause of this issue. If players are educated at a younger age they will be more effectively equipped to handle the new challenges that this change in salary structure will present them, as well as hopefully increase the amount of hockey players who can comfortably retire on the earnings of their professional playing career.

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