Tuesday, July 30, 2013

Zach Bogosian and Inflation: why his contract is better than it looks

When the news came out yesterday that Zach Bogosian had signed a 7-year, $36m contract with the Winnipeg Jets, it certainly raised some eyebrows. Long contracts might seem sensible for stars like Erik Karlsson and Shea Weber, but Bogosian is, by most accounts, a solid yet unspectacular player. He plays tough minutes, and at just 23 years old, the contract will span his prime years rather than paying for mid-30s decline years.

Obviously, it's pricing in the possibility that he may establish himself as a reliable, top-pairing guy. The $5.14m AAV seems high for a young defenceman - it's higher, for example, than the salaries guys like Ryan McDonagh, Kevin Shattenkirk and Slava Voynov will earn next year. It's also higher than the salaries of a lot of other top-pairing guys around the league including Alex Edler, Nik Kronwall, and more.

I'd say the Jets may have overpaid. They may not have needed to offer quite so much - after all, the long contract protects Bogosian against the risk of a serious or career-ending injury. If he gets multiple concussions, or a broken leg, or simply flops - that $36m is money in the bank.

One saving grace, though, is that the contract price will look better every year thanks to inflation. The 2013-14 salary cap will be $64.3 million, but if the NHL continues to build its revenues, that cap figure is likely to grow by about 5% each year. Consequently, Bogosian's cap hit will represent a smaller portion of the Jets' budget each year. In 2013-13, Bogosian will eat up about 8% of the Jets' cap. By year seven, though, he'll only take 6% of their cap space - equivalent to a $3.84 million dollar salary today.

In effect, giving Bogosian a 7-year deal reverses the cap hits that we would normally expect for a player like him. Many RFA defencemen take cheaper 2-year second contracts (see, for example, PK Subban's $2.875 AAV 2-year deal) knowing that they'll be able to cash in on a bigger deal as an unrestricted free agent afterwards. Bogosian 'reverses' this by taking a bigger effective cap hit at the beginning of his deal (8% of team cap space), but will have a much cheaper cap hit by the end of the deal (6% of team cap space). This arrangement is especially effective for the Jets, who aren't facing a cap crunch for this year, but may find themselves trying to build a high-powered contender once Bogosian is further along in his contract.

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