Thatcher Demko and ELC Performance Bonuses

Demko

Last week, the Vancouver Canucks signed top goaltending prospect Thatcher Demko to an Entry Level NHL Contract. Given all the angst from fans following Demko’s announcement that he’d be taking a few weeks to make a decision, I’m sure that most Canuck fans would have zero issues with the organization throwing buckets of money at the San Diego born netminder.

One of the common criticisms about the current management group is their perceived tendency to overpay players. The good news is that it’s extraordinarily difficult to overpay players on Entry Level deals, as there are strict limitations on how much a player can make when they sign their first Standard Player Contract.

One way a young player can vastly increase their compensation is through performance bonuses, and Demko’s potential bonuses are mighty high. So how do these bonuses work, and could they ever cause salary cap problems for the Canucks?

First things first, let’s look at the deal that Demko signed with the Canucks:

Demko - General Fanager

(Source: General Fanager)

Demko is getting paid in a variety of ways. He’s getting a base salary of $925,000, a signing bonus of $92,500 and performance bonuses that begin at $1,350,000, then increase by half a million dollars in the contract’s second year and another one million dollars in the contract’s final year. The entirety of the contract is worth $8,825,000 over a three year period which an average annual value of $2,941,667 with performance bonuses and $925,000 without them.

So how did Demko and his agent do? Did they take the Canucks to the cleaners? Did ol’ Jim Benning get robbed on an entry level deal?

Actually, everything here seems pretty damn fair.

Let’s take a look at how Demko’s compensation works according to the rules of the NHL’s Collective Bargaining Agreement.

Duration of Contract

The length of the contract is predetermined based on his age. Thatcher’s birthday is December 8th, 1995, making him 20 years old. He’s also considered to be 20 as per the rules of Article 9, set out in Section 9.2:

9.2 - Age of Players

As a side note, I recently flubbed this rule in an article on Tryamkin’s contract, stating that age-20 and above are determined by calendar year rather than  September 15th from one year to the next. I quoted the age determination clause from Article 8, which regards the NHL entry draft, rather than Article 9, which regards signing of SPCs. Ironically in the same paragraph I was talking about how easy it is to get things in the CBA mixed up. Whoops.

This particular section of the CBA considers Demko to be 20, and 20-year olds get three year entry level contracts, as per Section 9.2(b).

9.2(b) - Duration of ELC

Maximum Entry Level Compensation

The maximum allowable salary for a player signing their first NHL contract is set out in Article 9, section 9.3(a) of the CBA. Players who were drafted between 2011 and 2022 have a salary limit of $925,000.

9.3(a) - Maximum ELC Compensation

As Demko was draft in 2014 (Second round, 36th overall), this is his limit, and so as you can tell, he received the maximum allowable salary.

Is it at all unreasonable that Demko received the maximum amount? Of course not. Putting aside the fact that he was the best goaltender in the NCAA this season, it’s fairly routine to hand out max ELC’s to non-first round picks.

Since April 1st, 2015, there have been 247 Entry Level Contracts signed by NHL teams. 26 per cent of those contracts have been $925,000 deals. They range from top prospects like Kyle Connor (signed April 11, 2016), mid-round picks like Devon Toews (signed April 15, 2016) or college free agents like Troy Stecher (signed April 13, 2016) and Brandon Tanev (signed March 30, 2016). In fact, just a month ago the Philadelphia Flyers signed NCAA free agent goaltender Alex Lyon to a max salary ELC.

Beyond the fact that max ELCs are pretty standard, Demko projects more like a high first round pick rather than the second round pick that he was. If you recall, Demko was actually projected to go in the first round and fell to the Canucks at 36th. On top of that, he’s one of the best goaltending prospects in the game, with the only competition for the top spot being Washington’s 2015 first round selection Ilya Samsonov.

All Those Bonuses

Signing Bonus

It’s pretty much standard for players signing Entry Level deals to receive a signing bonus. The CBA sets out maximum signing bonuses in Article 9, Section 9.3(b), which limits the signing bonus to 10 per cent of the annual salary of the contract.

9.3(b) - Signing Bonuses

Demko received the maximum allowed signing bonus and will get $92,500 at the start of each year of his ELC. He would have gotten the bonus immediately, but for the fact that his contract was signed following the Canucks final regular season game and they did not qualify for the playoffs, in accordance with Section 9.3(e).

This bonus doesn’t affect the cap hit of his contract however – signing bonuses are including within a player’s annual salary, so that $92,500 will actually be subtracted from his $925,000 salary, with the remainder being dispersed throughout the season.

Games Played Bonus

Sometimes players are given bonuses based on the amount of games they get into. For example, Chicago rookie Artemi Panarin’s entry level contract provided him with a games played bonus of $25,000 after five games and a further $200,000 after ten games played.

The regulations for games played bonuses are laid out in Article 9, Section 9.7(a) of the CBA. Like signing bonuses, games played bonuses come out of a player’s annual salary. In Panarin’s case, the first year of his contract was worth $700,000. After $225,000 in games played bonuses, he received $925,000 in salary in his first year – the maximum allowable amount.

Because Demko’s salary is listed as $925,000 in all three seasons, it’s unlikely that he has a games played bonus clause in his contract, given that he wouldn’t be allowed to receive any salary on top of the $925,000 he’s already getting. The exception would be if there were potential errors in the breakdown of the salary on General Fanager and CapFriendly.

Performance Bonuses

This is the meat and potatoes of Demko’s potential compensation. If Demko were to achieve every possible bonus in his contract, he would more than triple his salary. $2,941,667 might seem like a lot to pay a 23-year old goalie at this point, but for one, it’s pretty unlikely that that happens, and two, if it does happen, you’d all be doing cartwheels.

That’s because performance bonuses are laid out in a pretty rigid manner in Exhibit 5 of the CBA. So any of you haters that thought ol’ bumbling Jim Benning was gonna give Demko a $2 million bonus for tying his shoes can stick it. Let’s dive deeper.

Performance bonuses come in two varieties: Individual “A” Bonuses and Individual “B” Bonuses. There are a few differences between the two, such as maximum level of compensation, but the main difference is in their descriptions. Individual “A” Bonuses are based solely on individual statistics and occasionally statistics relative to one’s team. Individual “B” Bonuses on the other hand are based on performance relative to the league. “A” bonuses are paid by the club, while “B” bonuses can be paid by both the club and the league in general, though only the club negotiated bonuses will count against the salary cap.

Individual A Bonuses

In terms of compensation, the maximum a player can receive for “A” bonuses in a single year of a contract is $850,000. “A” bonuses are payable for a variety of categories, with each category having a maximum of $212,500. “A” bonuses as they pertain to goaltenders are outlined in Exhibit 5, Section 1(c), with the minimum thresholds as follows:

  • Minutes played (1,800)

  • GAA (greater than the median average of all goaltenders with at least 25 games played)

  • Save percentage (greater than the median average of all goaltenders with at least 25 games played)

  • Wins (20 as the goaltender of record)

  • Shutouts (greater than the median average of all goaltenders with at least 25 games played)

  • End-of-season NHL All-Rookie team

  • NHL All-Star Game selection

  • NHL All-Star Game MVP

Teams are allowed to negotiate multiple levels of payable bonuses, as long as the lowest level meets the minimum threshold and the combined total does not exceed $212,500 for a single category. For instance, a team can assign a bonus of $100,000 for achieving 20 wins and a further $112,500 for reaching 25 wins (totaling $212,500) but they may not assign $212,500 for each 20 and 25 win marks.

While General Fanager has detailed bonus information for certain players, the parameters of Demko’s bonuses are vague – we only know that he has “A” bonuses of $850,000 in each year of his contract. The most likely scenario is that he is eligible for four different categories each worth $212,500, probably four of the five statistical categories.

Moving on to Individual “B” bonuses, this variety is worth more money to the player, but the bonuses are more difficult to achieve – they require the player to be among the best in the league at his position. The NHL will pay out specific bonuses to players who place in the top ten of certain statistical categories (minimum 42 games played) or are in the top three-to-five of voting for league awards. Each of these payments is listed in Exhibit 5, Section 2(a) and (b). These do not count against a player’s cap hit.

Individual B Bonuses

The team itself has the ability to negotiate further bonuses with the player that fall into the same categories. These include finishing in the top five in voting for the Hart, Vezina, Norris, Selke, or Richard Trophies, finishing in the top three in voting for the Lady Byng or Calder Trophies, winning the Jennings or Conn Smythe Trophies, being named to the First-Team or Second-Team All-Stars, or finishing in the league’s top ten in goals, assists, points, points per game, goals against average, save percentage, or wins as the goaltender of record. The maximum aggregate amount payable for any of these accomplishments is $2,000,000 per season, while the team can assign whatever value they want to each achievement.

Again, when it comes to Thatcher Demko, we don’t know the exact parameters. We only know that he is eligible for $500,000 in “B” bonuses in his first year, $1,000,000 in his second year and $2,000,000 in his third year. It’s likely that much of these bonus amounts are accounted for by top ten statistical achievements, as well as bonuses for placement in Calder and possibly Vezina Trophy voting.

What this all boils down to is this: If Demko hits all his bonuses, you’ve got a 23-year old goaltender who is top ten in the league in a variety of statistical categories and is probably placing high in voting for the Calder and Vezina trophies – and you’ve got him for under $3,000,000 per year. I’d consider that some pretty damn good value, although I’d be nervous about what his next contract will look like at that point. Regardless, you’d have a star on your hands.

In spite of this seemingly large number (at least in terms of an entry level deal), it still could have been higher. Demko could have received the maximum $2,000,000 in “B” bonuses for each year instead of gradually working up to it in the third year of his deal. The absolute maximum average annual value of an entry level contract is actually $3,775,000 – like the one the Edmonton Oilers gave to Justin Schultz in 2011. Yikes.

Performances Bonuses and the Salary Cap

One last order of business when it comes to the CBA. What happens if a team is capped out, including a couple of entry level deals, and suddenly has to pay millions of dollars in performance bonuses as players hit thresholds near the end of the season? Don’t worry, there’s a clause for that.

50.5(h)(ii) - Bonus Cushion

Section 50.5(h)(ii) defines the Performance Bonus Cushion. Just like when a capped out team dips into LTIR, teams are allowed to exceed the salary cap by a certain amount of performance bonus money. Specifically, the performance bonus cushion is 7.5 per cent of the upper limit. For example, in the current season, the salary cap upper limit is $72.4 million, 7.5 per cent of which is $5.43 million. A team is allowed to exceed the 2015-16 salary cap upper limit by $5.43 million in performance bonuses.

At the most, Demko’s bonuses would account for $2.85 million during the 2018-19 season, and that’s assuming he’s one of the best goalies in the league in his third professional campaign. That still leaves $2.58 million on the bonus cushion. Perhaps some more money is taken up by performance bonuses on a contract of a player drafted in the top six at the upcoming draft, like Auston Matthews or Patrik Laine. Even then, it’s pretty unlikely that players are going to hit all their bonuses. The Edmonton Oilers had Connor McDavid, Leon Draisaitl, and Darnell Nurse (all top seven picks with high performance bonuses) play more than the requisite amount of games this year, and they still didn’t come close to filling the cushion.

The bonus cushion does come with one unfortunate catch: the amount of the overage rolls over to the following season. This is the situation that the Chicago Blackhawks found themselves in this season when Artemi Panarin piled up points at the end of the year. With Panarin hitting all of his bonuses, the cap strapped Blackhawks, while safe this season thanks to the cushion, will see their salary cap reduced relative to the rest of the league in 2016-17 by the amount of the overage, as per Section 50.5(h)(iii).

50.5(h)(iii) - Overage Rollover

This isn’t the first time the Hawks have been bitten by the cushion either. Performance bonuses payable to Jonathan Toews and Patrick Kane after they won the Stanley Cup in 2010 reduced the Blackhawks’ upper limit the following season by more than $4 million, which is a large part of why they had to dump a chunk of their core including Kris Versteeg, Andrew Ladd, and Dustin Byfuglien.

Still, it’s not like the Blackhawks are complaining about how productive Artemi Panarin – and they’re certainly not complaining about all of their Cups. The situation would be the same for the Canucks and Thatcher Demko in a few years time if he happened to hit all of his bonuses, and the Canucks went on a run with some elite players on entry level contracts. Nobody cares about cap penalties if championships are within reach. And if they aren’t in reach, chances are you’ll have plenty of other things to complain about besides the cost of your entry level players.