Negotiation Leverage and the Massive Hidden Value in ELC/RFA Deals

This article is being co-posted on Maple Leafs Hot Stove as well as on my own site, http://www.originalsixanalytics.com. Find me @OrgSixAnalytics on twitter.

Recently I completed a three-part series on the Wins Above Replacement (WAR) and Goals Above Replacement (GAR) metrics. In it, I summarized how the GAR metric can be used for player evaluation, how it can be used to calculate player value, and how GAR can be used to derive an entire team’s salary cap ‘efficiency’. I’d like to add one last bonus article to the series to touch something I have often mentioned: the huge importance of Entry Level Contracts (ELCs) and Restricted Free Agency (RFA) years in a salary capped league.

In this piece, I will touch on (i) the impact of negotiation leverage on contract discussions, (ii) how to quantify the value of ELC and RFA deals to teams, and (iii) a short review of these things in practice, by looking at Steve Yzerman’s impeccable handling of Jonathan Drouin’s trade request situation. By the end, I will hopefully demonstrate the immense amount of value for teams that ELC/RFA contracts can create – which further establishes the importance of building through the draft, as well as generally acquiring players at the very early stages of their careers.

 

Market Dynamics and Negotiation Leverage

How negotiation leverage impacts transactions (e.g. trades, contract signings) is something I think most people understand intuitively. Whether inside or outside professional sports, in any transaction the buyer wants to minimize the price paid for an asset, and the seller wants to maximize it. The way market dynamics play into this is driven by the options available to both parties. If a seller has a scarce asset, and can get 5-10+ interested potential buyers (e.g. resembling an auction), the seller is in a position of strength, and will likely get an excellent return. This can even hold true with as few as two or three serious buyers. However, if a buyer is somehow able to get into an exclusive, one-on-one negotiation with a seller, that buyer instead holds significant leverage, especially if the seller is ‘forced’ to get rid of the asset.

Although this is true in every-day scenarios (e.g. to get a good price, it is better to look at three retail stores when buying a new TV, not just one), a great example of the market dynamics side is buying a house. Toronto’s housing market is currently quite ‘hot’ – with 5+ buyers bidding on most houses – as a result, almost every single one trades for a premium to its asking price. Like I said –intuitively, I think we all already know these fundamental concepts.

Now, in the case of hockey, there are two primary situations where negotiation leverage becomes important:

  1. Player-Team negotiations
  2. Team-Team negotiations

For what it’s worth, NHLPA-NHL negotiations also take place, essentially being Player-Team talks at the level of the entire league.

In this article I will be focusing on team-player negotiations, in particular on the substantial impact that ELC/RFA constructs have on them. However, for those interested, my last post touched on the team-to-team side briefly, discussing how the strong trade deadline demand for defensemen and weak demand for goalies impacted the Leafs’ yield on Roman Polak and James Reimer, respectively.

How do Entry Level Contracts (ELCs) and Restricted Free Agents (RFA) Work?

Before quantifying the value of the ELC/RFA concepts, I will give a brief summary of how they work, simplifying it into three categories: (a) ‘ELC’ deals, (b) ‘RFA’ deals, or (c) ‘UFA’ deals (Unrestricted Free Agent) – driven by age at signing and years played in the league. However, keep in mind this is a high level summary, as these concepts fill a number of sections in the Collective Bargaining Agreement (CBA), and free agents are actually divided into six distinct categories. For those who want a very detailed walk through of these concepts and the rest CBA, I recommend you check out @JJfromKansas’ great 2013 series Getting to know the CBA’.

 

At a high level, Entry Level Contracts:

  • Apply to players in their first three seasons in the league, with seasons defined different depending on the player’s age
  • Also typically expire when a player turns 25, if that player has not yet reached three seasons
  • Limit players’ base salary to a maximum of $975K, or a cap hit of $3.8M after including possible performance bonuses (regardless of if those bonuses are paid)
  • Cannot include no-trade/no-movement clauses, and must be two-way contracts

Following a players’ ELC, they enter Restricted Free Agency. RFA players:

  • Will be an RFA either until they turn 27, or until they have played 7 professional seasons
  • Are only able to negotiate with the team that holds their exclusive rights
    • Other teams can extend RFAs an ‘offer sheet’, but generally (i) the current team can match it, or (ii) the current team will be compensated by the ‘poaching’ team with draft picks
    • Compensation ranges from a third round pick for players earning $1.1M-$1.6M per year to four first round picks for players making $8.4M+ per year
  • Also prohibit no-trade/no-move clauses during RFA years
  • Last, as long as teams extend RFAs a ‘qualifying’ offer, players have limited leverage in the negotiation, with the exception of invoking (or threatening to invoke) arbitration

Unrestricted Free Agents (UFAs) are just that – the first time a player can ‘test’ his value on the open market, unencumbered by the CBA. For what it is worth, I currently have no strong view on if this system is fair or not – as of right now, these are the rules of the game, so they are what they are.

ELCs/RFA deals are specifically designed to give teams negotiation leverage over players early in their careers – with ELCs putting a direct cap on that player’s salary, and RFA’s implicitly stifling their compensation by forcing them into one-on-one negotiations.

To be clear, just based on the ever-increasing value of draft picks in trades, all GMs already know that these ELC/RFA years are hugely valuable – this is not an innovative or original concept. However, what is less clear is whether many NHL teams understand exactly how much these rights can ultimately be worth to them.

As such, I now want to attempt to answer:

What Are a Players’ Exclusive Negotiating Rights Worth to a Team?

We won’t be able to get an ‘exact’ answer to this question, because it is a very theoretical concept and is entirely dependent on which actual players is being discussed. As a result, I will instead use an illustrative example that shows – for a particular set of players – how much value they contributed to their respective teams over each of their ELC/RFA/initial UFA years in comparison to how much they were paid in that time. The method I will use to determine what a player is ‘worth’ is the exact same as I used in my previous articles, so I encourage you to check those out if the math is unclear.

To start, I selected a sample of elite-level players, to illustrate the extreme end of the spectrum in terms of contribution to their teams. I selected 10 forwards from across the league who have (almost all) reached the UFA portion of their contracts. Here is the sample I looked at:

Table

First, I stacked up all of these players next to each other in terms of their annual salary cap hits (Average Annual Values, or AAV), with data from General Fanager.  Here is the group’s average AAV per player over their first 10 NHL seasons:1 - AAV

(Note: Although players become UFAs after seven years played, all of the players listed were signed to at least a five-year deal when their ELC expired. As a result, teams earned the savings on these players’ contracts up until their 8th NHL seasons, and I have treated their 8th season as a year locked into an ‘RFA’ contract)

Just from this you can already see the huge impact that ELC and RFA years have on a players’ compensation – these guys are the equivalent of slave labour in their first three seasons, when compared to their contributions/value.

Next, in order to derive what these players are worth to their respective teams, I calculated their average annual GAR contributions, as well as what those GAR values should be worth based on Hawerchuck and Eric T’s relationship between WAR/GAR and contract dollars (e.g. AAV FMV =$575K + ($467K * GAR)).2- GAR3 - FMV(Note: For the players who had not yet reached 8-10 seasons of data, I estimated the last couple years of GAR data based on that player’s 3-yr Avg GAR, and the player’s UFA AAV was treated as equal to their FMV – this was only the case for one or two players)

Last – I calculated the amount teams’ saved, on average, in each year of these players’ contracts. In short – this was done by subtracting the average actual AAV (e.g. Chart #1) from the value contributed / FMV of these players to their teams (e.g. Chart #3, above). Here is the result, on both an individual year and a cumulative basis:

4 - Value Created5 - Cumulative Value

Now – I think this tells us a very interesting result: for the contribution made by this type of elite, franchise player, the combination of ELC and RFA years equate to almost $27M in salary cap dollars saved by their teams. Further, the vast majority of this is driven by ELC years – players get only slightly less than FMV in their 4 or 5 RFA seasons. I don’t know about you, but I was a bit blown away by the huge amount of value this can create for teams.

And again – to be clear – because these are 10 of the highest-performing players in the league, this illustrative analysis shows essentially the maximum that ELC/RFA years could be worth, not the league average, nor what ELCs/RFAs will even ‘usually’ be worth. The other end of the spectrum – replacement level players who make the league minimum salary ($575K per year) – there is little to no incremental value in these years, as those players are not commanding premium prices in the first place.

Negotiation Leverage in Practice: Jonathan Drouin vs Tampa Bay Lightning

Finally, I want to bring this all together in a specific example, where Steve Yzerman (GM of Tampa Bay Lightning) demonstrated a clear understanding of his own negotiating position, as well as of the value of ELC/RFA deals in his recent interactions with Jonathan Drouin. For those who don’t know, Drouin is a former 3rd overall pick, still on his entry level deal, who was apparently having issues with Jon Cooper, Tampa’s head coach. As a result, Drouin privately requested a trade at the beginning of the season, and went public with his request in early 2016. In January, Drouin was then sent to Tampa’s AHL affiliate, the Syracuse Crunch, where he eventually chose not report to play, and was subsequently suspended by his team. As the trade deadline approached, Drouin was the subject of many trade discussions – with other teams in the league likely trying to take advantage of Yzerman’s seemingly ‘forced seller’ position, presumably giving him slightly ‘low-ball’ offers  for the young star.

However, it is now clear that Yzerman fully understood his negotiating position and level of control over the situation as it was unfolding. Further, he seems to have had the foresight to avoid setting a precedent that if a player (with zero leverage) were to complain enough, that the team would ultimately cave. Based on the analysis above, I would guess that Yzerman knew very well that he had up to $27M in salary cap efficiency he was going to lose if he dealt Drouin for less than his fair value – so his ask from other teams was rightfully high. As a result, no team stepped up with a good enough offer, and Tampa Bay kept Drouin at the deadline – fully understanding the risks.

Now, with the recent news this past week, it appears the situation has come full circle. Drouin has apparently realized that Yzerman is no push-over, and if he ever wants to play hockey in the NHL again he will have to do so as the Tampa Bay Lightning see fit. Lo and behold, earlier this week Drouin approached Yzerman about being willing to play for the Syracuse Crunch, has reported to the team, and apparently even had conversations about Drouin possibly coming back into the fold for Tampa’s playoff run. Although we knew Yzerman’s trade ask was high, many observers likely thought that the pressure on Yzerman was so great that he would be ‘forced’ to off-load Drouin at below his fair value. Instead, Stevie Y recognized his leverage in the situation, stood his ground, and either will reclaim one of his top prospects, or at least be able to trade him for full value in the future.

Well played, Steve.

PS – Here was my take on the situation back in January, shortly after it was announced that Drouin had refused to play for Tampa’s AHL team, in an effort to force Yzerman’s hand to trade him:

Tweet1

Tweet2

Tweet3

Tweet4

Tweet5

Tweet6

Conclusion

Hopefully this provided an interesting look at how negotiation leverage impacts contract situations, the huge value of ELC and RFA deals to teams, and also a useful example of this playing out in reality. In the end, it should now be clear that there is a huge amount of hidden value in getting a player at the front end of his ELC/RFA years – up to $27M, in fact. Last, I think it is clear that Steve Yzerman has successfully sent a message to his players, and potentially the league, that they are a team with a clear understanding of these two concepts, they are steadfast negotiators, and especially when they find themselves in a position of strength – Tampa Bay is not an organization to that will be pushed around.

 

Advertisements

How to Value Draft Picks vs. Active Players

What is a Draft Pick Worth in a Trade for an Active Player?

This article is being co-posted on Maple Leafs Hot Stove as well as on my own site, http://www.originalsixanalytics.com. Find me @OrgSixAnalytics on twitter.

Many, many writers have touched on the concept of Draft Pick Value, myself included. Those who find it interesting are happy to talk about it for days, and those who don’t tend to steer clear pretty quickly. The one downfall of the work done to date is that almost all of it has focused on what draft picks are worth when traded for – you guessed it – other draft picks. In the spirit of the (now passed) trade deadline, I want to take a quick look at answering the following question:

How can we reasonably compare the value of a draft pick to the value of an active player?

To answer this, I will (i) introduce the concept of ‘absolute’ draft pick value, and (ii) go through an example, looking at the Leafs’ recent trade of Roman Polak and Nick Spaling to San Jose. My goal is not to conclude who ‘won’ the deal (I think that has already been decided), but rather to apply the concepts to a concrete example and give this analysis a bit more of a practical implication.

I want to make one caveat clear before comparing pick value and player value: This — and any other type of ‘valuation’ analysis — will always be an inexact approach and will not tell us the full picture. Teams don’t make decisions on deadline day because of abstract math; they make trades because they want to win, they have a specific spot to fill, and they believe that particular trade is the best way to fill it. The market dynamics of the trade deadline also have a huge impact in how trades go. This year, demand exceeded supply for defensemen, driving up the price of players like Roman Polak. Similarly, no one was really looking for a rental goalie, so James Reimer fetched far less than he is probably worth. As such, keep in mind this type of analysis should always be considered in conjunction with a wide range of other quantitative and qualitative factors.

(Relative) Draft Pick Value

As mentioned, previous work has largely focused on relative draft pick value – that is, what a pick is worth in a deal for other picks. These draft pick value charts often end up quantifying picks/future players in terms of some currency or ’unit’ that is hard to assign meaning to out of context. Relative draft pick value is most useful on the day of the draft, when many pick-for-pick trades are made and we know the exact selection number a pick relates to (as opposed to only knowing the round). However, in order to compare between draft picks and players, we need to compare players on the same metric — one that addresses the concept of absolute draft pick value.

Absolute Draft Pick Value

In his recent piece, Stephen Burtch took another big step forward in this area by laying out a number of simple and clear metrics in a concise table to illustrate some proxies for draft pick value. Here is his table:

burtch

I am a big fan of this table. Not only does Burtch introduce an absolute value metric for players (Expected Pts/GP), but he shows how long it takes for those players to become real contributors (Seasons until 150GP). He also connects it all to the Goals Above Replacement metric – another thing I am a big fan of. Later on in his article, Burtch also essentially splits teams into ‘buyers and sellers’ – a very useful lens through which to view the market dynamics on deadline day (e.g. availability or scarcity of particular assets, driving demand and price).

Although this chart is a great start for absolute pick value, I think we can go one step further. Having analyzed Expected Pts/GP for draft picks myself, there are two things I want to point out. The first, which we’re all aware of, is that it differs significantly by forwards and defensemen (Burtch no doubt recognizes this; he just wasn’t showing that level of detail in his table). Secondly, it has a survivorship bias – that is, over time, only the strongest players remain in the league and continue scoring points, thus driving up the averages over time. Thus, Pts/GP does not appropriately account for the probability that a player stays in the league at all.

Player Lifetime Production

While I recommend using as many value-metrics as possible to establish a well-rounded view, one of my own favourites for absolute pick value is Lifetime Production, calculated as the expected average cumulative points per player (e.g. total career points). This metric implicitly adjusts for players who never make it into the league at all, as the denominator in the equation is total players drafted rather than total games played. See below for two of my previous charts, showing this metric for both forwards and defensemen.

Lifetime Production - F

Lifetime Production - D

(Note: The chart sample is all players drafted between 2000 and 2004, and their subsequent playing histories over each of their first ten seasons in the league).

Although this data doesn’t separate the top three picks overall, who deserve their own echelon, you can still see some clear results:

  • Over their first ten seasons in the league, a top-10 overall pick should be considered to be worth ~170 total points if a defenseman is selected, or ~350 points if a forward is selected.
  • Depending on how soon that player really begins to contribute, (e.g. many players only are NHL regulars for 5-8 of their first ten seasons), top-10 overall defensemen come out as ~20-30 point per season players, and top-10 forwards come out as ~40-60 point per season players.

Now, this metric is also not perfect. It works well when used far in advance of the draft, when it is unclear what overall selection number a pick relates to. However, it can be a pretty high level approach when a team knows it is holding the 33rd overall pick, for example, which could be treated much the same as a late first round pick. Many will also rightfully point out that these are averages with huge distributions in results. In all rounds, there will be many players who will have 500-600+ points over these 10 seasons, and many who will have less than 10. As a result, these averages/expected values will only ever be one piece of the puzzle.

Case Study: TML trade Polak/Spaling for two second round picks

Lastly, I will try to illustrate this concept a little more clearly by looking at the Leafs’ recent trade of Polak and Spaling to San Jose in return for two second round picks. Here are the assets that changed hands in the deal:

Pic 1

Now, Raffi Torres was more of a cap offload by San Jose, who the Leafs have let remain at San Jose’s AHL affiliate (he’s also not playing for the rest of the season). As a result, let’s exclude him from the comparison. For simplicity’s sake, to stack up the remainder of the trade I have assumed TML uses the two picks to select one forward and one defenseman. Further, based on both Burtch’s and my charts above, second round picks only really begin to meaningfully contribute around their fifth season after being drafted. As such, you should consider the ‘lifetime production’ for these picks to be over approximately five or six active NHL seasons.

The table below summarizes the career points we can expect from these picks versus what could be expected from Roman Polak / Nick Spaling over each of their next five seasons.

Lifetime total

In order to try to show this on an apples-to-apples basis, I have assigned Polak/Spaling the value of their cumulative points over their last five seasons. Now, this is not exactly scientific, and should not be treated as a ‘trade-defining’ result. However, the chart does show an interesting finding: based on what can reasonably be expected from these picks over ~10 years after being drafted (which includes adjusting for their likelihood to succeed in the league at all), they will not necessarily be as productive as Polak/Spaling will be over each of their next five seasons, in the aggregate.

However, that is not the full story of course. Polak and Spaling are shown here in a somewhat generous view of what you could expect out of them for the next ~5 seasons. It does not discount their performance at all for declining with age, nor does it consider their moderate cap hits, as 27 and 29 year old players. Given that they are both Unrestricted Free Agents (UFAs) at the end of this year, San Jose may only actually realize the value of ‘one’ of the next five seasons from these two players. The table below adjusts this data to be shown on a per-season basis, rather than in aggregate, simply by dividing the last chart by five expected seasons:

Per season total

Looked at differently, although San Jose got a total of 32 ‘Pts/Season’ worth of production, the Sharks only have certainty that they acquired the tail end of the 2015-16 season (e.g. ~20 games) before these two players could walk away and sign with any team in the league.

At the same time, Toronto ‘only’ acquired 23 Pts/Season, but this will be spread out over five productive years. These will also be the prime years of those players’ careers, where their value is the highest, due to being a low cap hit while on Entry-level/UFA deals; Toronto has the players’ exclusive rights while they develop. Last, as has been touched on in the past, ideally Mark Hunter and company can actually increase the probability of turning these picks into higher-calibre players than average, given his and his team’s strong network and scouting capabilities.

A Note on Time Value

One final note before concluding: It is also worth pointing out that, given these picks are for 2017 and 2018, they are inherently less valuable than a pick for this upcoming draft, and I suspect that is a key reason that San Jose was willing to make this trade. Even rebuilding teams want to rebuild now, not 2-3 years from now.

To illustrate this concept, ask yourself if a second round draft pick in 2022 is worth the same as one in 2016? Standing here in 2016, it is not. The same logic applies to 2017 and 2018 picks, although to a lesser extent. Fortunately for Toronto, the Leafs have so many picks in 2016 that arguably they were looking for picks in later years in the first place. However, this willingness to accept a later date (plus the lack of supply of rental defensemen this year) likely helped the Leafs increase their yield in this trade significantly. For anyone interested, this ‘time value’ concept is directly borrowed from the world of corporate finance, where ‘discounting future cash flows’ (e.g. player production) is the foundation of assigning a value to a business.

Conclusion

To wrap up, I have hopefully heavily caveated that this analysis should not be considered scientific, the best, or even the only way to compare the value of draft picks to active players. What this hopefully does provide us, though, are some useful heuristics (rules of thumb) to keep in mind for future deals, which can be combined with all of the other methods available at our disposal to evaluate transactions. As a result, the next time you see a team toss around two 1st round picks (or equivalent players) for a long-term Phil Kessel-type player, or an short-term rental of an Andrew Ladd-type player, hopefully you walk away thinking about just how many hundreds of future points they are giving up down the road.