On Friday July 6th, Edmonton Oilers General Manager Kevin Lowe tendered a 7-year, $50 million contract offer to Thomas Vanek of the Buffalo Sabres, a type of contract known to those in hockey as an “RFA Offer Sheet.” To fully explain the ramifications of this to those ignorant of the NHL’s business methods is something I will undertake in a moment, but for now, understand that if Thomas Vanek were to play in the NHL next fall, he was the property of the Buffalo Sabres for as long as they held his rights.
As of Friday morning Thomas Vanek was not under contract to play for Buffalo and, if he so chose, could go play in any other league that did not have an agreement with the NHL which would inhibit his doing so, the Russian Super League for example. But, as per the rules of the current Collective Bargaining Agreement (CBA) between the NHL and the NHL Players Association, if he chose to remain in the NHL then the Buffalo Sabres would have leverage over the 29 other teams in the league.
His status on Friday was that of a Group II Restricted Free Agent without Arbitration Rights. And, before I go any further, I believe it’s necessary to explain how he got to this point, which will illuminate some of the rules which bear on this moment in NHL history.
Thomas Vanek was drafted 5th overall by the Sabres in the 2003 NHL Entry Draft. That act by the Sabres meant that they had the exclusive negotiating rights to him for two years. If the two parties could not reach an agreement then Mr. Vanek would re-enter the draft in 2005 for any other team to choose him. If he was not drafted then, he would be completely unfettered in which team he could play for.
The Sabres and Vanek did, indeed, agree on a 3-year contract in 2004. After spending another year at the University of Minnesota where he’d scored the NCAA Championship clinching goal 2 months before being drafted by the Sabres at the HSBC Arena in Buffalo, Vanek spent the next year with the Rochester Americans of the AHL, tearing that league up. The past two seasons he’s been a member of the Buffalo Sabres, scoring 68 goals in the process and becoming one of the premier offensive forces in the NHL, seemingly fulfilling the promise he showed in junior hockey. In this observer’s opinion he’s an improved version of Jaromir Jagr playing on the left wing at 6’2,” 222 lbs.
Entry-level contracts, like the one Vanek just completed, have a maximum length of 3 years under both the previous and current CBA. During that contract Vanek made $942,000 while playing for Buffalo, and a whole lot less for the year he spent in Rochester.
So, here he is, playing on one of the best teams in the NHL, leading them in goal-scoring (43) while playing significantly fewer minutes per game than any other player so prolific (just under 17 minutes/game), selected to the 2nd team All-Star unit by the hockey intelligencia, and, heading into the Free Agent signing period, which opened on July 1st at noon, one of the most coveted players on the market, along with a couple of his teammates (Chris Drury and Daniel Briere, both of whom signed with different teams).
But, if the Sabres had his rights, then how was he available for Lowe to sign him to a contract?
After a player fulfills his entry-level contract he is then in the category Vanek was, Group II RFA w/o arbitration rights, and as such could be tendered an offer from any team in the league which the Sabres would have the right to match, thereby signing him to that contract and retaining the player. If they declined to match the offer they would be awarded compensatory draft picks from the Oilers based on the value of the contract signed, in this case 4 first-round picks.
That is exactly what transpired Friday morning. The Oilers entered into an agreement with Vanek to a 7-year, $50 million contract and the Sabres decided to match the offer and forego the draft pick compensation. Considering the quality of the Oilers situation right now, they would have been fairly high picks for at least the next two years (and supposedly deep, talent-rich drafts they are).
Alright, now that you have the background and understand the situation, now let’s look at what is wrong with that arrangement. There’s so much… where to begin?
First, let me state, that as an Austrian and free marketeer all of this seems terribly complicated. But, given that the internal economics of a sports league create capital allocation problems that fall under the purview of games theory and the NHL exists in the imperfect legislative landscape that is the United States and Canada at both the national and local levels, it is understandable that some framework to normalize capital amongst the 30 franchises is needed to maximize the NHL seemingly at the expense of some of its members. Given that the revenues of the league are growing at an astonishing rate even without a television contract in the US that generates any, I’d say some of what has been implemented is working.
As well, the problems in this CBA relative to that described above should be the subject of a completely different article or series thereof. For this one, I simply want to point out how to fix Restricted Free Agency and make it more free-market in its approach.
For all of the complications and variables that are bearing on the situation that played itself out last week, the fix, in my mind, is a very simple one.
Given that the NHL has a varied geographic and economic background it makes sense that one of the ways in which teams of more limited resources (and, more importantly resource potential) can remain competitive is to retain the rights to the players they draft and develop for far longer than they could afford to pay them in an freer marketplace, thereby granting themselves a huge discount for their younger players and, in their minds, maximizing their return on investment. This is the thinking that went into the whole RFA process.
It is safe to say, though, that market forces have been systematically breaking that system down in all sports over the past 40 years, and hockey, in particular, over the past 15 or so. Even this latest CBA, which was widely perceived as a home run for management insofar as they got most of their demands for ‘cost certainty,’ there were serious concessions to the NHLPA in terms of the length and strength of Restricted Free Agency.
One of them was the lowering of the compensation packages to be paid in the event of signing away a player via the Group II Offer Sheet provision. Contracts up to $2.3 million dollars in value would yield only a 2nd round pick in compensation. Whereas for top-end players the cost dropped from five first-round picks to four. Couple this with a salary cap the system could turn predatory very quickly. Believe me, I’ve envisioned many a doomsday scenario concerning the Sabres collection of young and relatively inexpensive talent…. not a $50 million one, mind you, but others most especially.
The problem though, is that the team having their player signed away is in no position to have a say in the compensation received, and this is where the market imbalance created by Restricted Free Agency perpetuates itself. The NHL and the NHLPA, two organizations with much different agendas than the parties involved in the transaction, have set the terms of the transaction to the point of assigning an arbitrary value to the worth of a player and the contract he is supposedly due.
But, as we all know, there is absolutely no way to predict what anyone will value these things at the moment a transaction is possible. Moreover, it follows that an offer sheet will only be made when a player is worth far more than the compensation stipulated in the CBA to the team making the offer. That team will use that arbitrage as leverage to take a player from one team after the other team has spent the resources and time to develop that player into the one he is when the contract is offered.
Conversely, the team whose player is being signed away has to accept either the contract offer made by another team or a set of future assets of unknown quality, forsaking any immediate goals. No option exists to trade present assets for present assets.
This is the fulcrum of the problem and the solution, as always, lies in creating opportunity for both sides to have their specific needs met in the most voluntary manner possible. Therefore, a more effective solution to this situation is for the following process to be implemented:
- Team A enters into an agreement with Player from Team B for his employment.
- Teams A and B then enter into negotiations for a potential compensation package for the player in question, if they agree then Team B decides to either accept or match the contract offer. This period lasts 7 days, which is the current length of time a team has to decide to match or take compensation.
- At the end of 7 days, if no agreement is reached the NHL appoints an arbitrator to use the two packages on the table to craft a compromise which Team B can then either accept or match the initial contract offer.
Ultimately, the Group II system should be changed to be a system where the team which holds the player’s rights can be forced to assess the real worth of the player in the marketplace while at the same time preserving the capital expended by them to develop that player. As well, it should help the capital stock of the NHL find the teams where it is most needed. In the case of Thomas Vanek, a model small-market franchise who realizes they have to be exceptionally prudent with their home-grown talent to even survive in the league, no less thrive like they have in recent years, spent the time and resources helping mould him into an elite player was preyed upon by an incompetent smaller-market franchise, the Edmonton Oilers, who don’t value their draft picks because they can never seem to pick or develop them into great players.
And, given that the NHL is not a free market, it’s imperative that they must. The NHL is a corporation with 30 divisions who are not only dependent upon one another for revenue (with no opposition, there are no games to be played) but compete internally amongst themselves in a nigh-perpetual manner. For the NHL to be successful and expand its reach into new markets all of the markets they have must remain competitive in the long run. A team that is competent at drafting and developing talent may not be any good at assessing its value, which might be an adequate description of the Buffalo Sabres.
So, while Restricted Free Agency may be a bad mechanism to reward teams for their capital investment, the Group II Offer Sheet system only compounds the problem by not letting the teams reap the full reward of their investment. And, while the proposed change to the system is not perfect, by any stretch, it is superior to the one currently in place, especially within the context of the salary cap and the rest of the current CBA.
And, if this system was in place, Kevin Lowe’s offer sheet might not have been quite so outlandish, feeling the need to make it so big that Regier would not match it, along with the compensation staying the same. Conversely, Darcy Regier and the Sabres might have taken more than 20 seconds to decide to match the contract offer, if only out of principle and the desire to stand by the other players he has under contract. As well, he might not have been so angry at Lowe for not doing what Lowe should have been doing well before that he reached the crisis moment of offering Vanek that contract, namely being a GM actually making good decisions to improve his hockey club. Frankly, this might have been the best decision he’s made since the Oilers lost to Carolina in Game 7 of the 2006 Cup Finals and he allowed Chris Pronger to renege on the contract he signed the previous summer. Vanek is 5 times the player than that which exists currently on the Oilers.
The RFA system has now essentially, for top-end talent of which there is precious little, made them Unrestricted Free Agents at the end of their entry level contract, as early as 21 and as late as 23 years of age. The Pittsburgh Penguins are learning that with 20-year-old Sidney Crosby, who is already the best player in the league and a “generational” talent, and have already locked him up for the next 5 years at an average salary of just under $9 million per year. If they hadn't done that, ask anyone in hockey, and there isn’t one of us who wouldn’t gladly trade 4 first-rounders for him. Because, on average, it takes about 300 first-round picks to uncover one Sidney Crosby.
Ta,
July 11, 2007
