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Ilya Kovalchuk and the NHL's Salary Cap Loophole

By July 20, 2010

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Update, July 21: The NHL has rejected the Kovalchuk contract "on the grounds that it circumvents of the NHL salary cap."

A reader writes:

The Devils have officially lost it. 17 years for Kovalchuk? They're paying him until he's 44 years old. How many goals will he be scoring then? Most. Insane. Contract. Ever.
- Lonnie, St. Paul, Minnesota

That opinion of Ilya Kovalchuk's monster contract with the New Jersey Devils is echoed in countless messages and comments posted since the news broke on Monday.

As Lonnie points out, Kovalchuk will be into middle age when the 17-year deal finally expires. His days as hockey's most productive scorer will be long over.

But assuming he keeps scoring for another 8-to-10 years - he's the only player to top 40 goals in each of the last six seasons - the deal works brilliantly for both parties.

It's all thanks to the machinations of the NHL salary cap:

  • Calculating Ilya's Cap Hit. The contract pays $102 million over 17 years. A quick division (102 by 17) reveals a total of $6 million per season against the Devils' salary cap. That's how cap numbers are figured: it's the average annual value of a contract.
  • How Ilya Gets his Money. Check the breakdown of the numbers and you'll see that most of the cash is paid out in the first half of the contract. By the time Kovalchuk turns 35, his pay begins a steady and swift decline. Remember, this has no bearing on his salary cap number.
  • An Escape Clause for the Devils. If Ilya retires, the contract and the cap hit disappear. Poof. If the team wants to buy out his contract because he's old and useless, the buyout will be very cheap in salary cap terms, because the late years of the contract are at rock-bottom salary.
  • An Escape Clause for Ilya. On paper, he owes the Devils six seasons at less than $1 million per if he plays into his late thirties and early forties. But having already collected the bulk of his $102 million, he could choose to retire to his Mediterranean villa or Aspen ski chalet and skip the bargain years.
  • So Everyone Wins. Ilya gets the fat paycheck he wanted, averaging $10 million per year for the next eight years. But when you add the late, low-paying years into the overall value, he counts just $6 million per year against the Devils' salary cap.

It's a loophole, and not a small one.

By adding very cheap years to the end of a contract - with the unspoken understanding that the player could be gone by then - a team can minimize its cap hit while the superstar maximizes his pay.

Canucks' goalie Roberto Luongo and Blackhawks' scorer Marian Hossa have signed similar deals.

You can't blame a well-heeled team for taking advantage of every possible loophole.

But this nudge-nudge-wink-wink numbers game has the look and feel of a dirty trick, wouldn't you say?

Dirk Hoag at On the Forecheck has a good assessment of the not-so-healthy implications of what he calls "sham contracts."

See also:
The NHL Salary Cap Explained
2010 NHL Free Agents and Signings

(Photo: Bruce Bennett/Getty Images)


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