Monday, October 11, 2021

Making Dollars and Sense of Aleksander Barkov's New Contract

Last Friday, Aleksander Barkov put pen to paper on a contract that tied him to the only team in the NHL he's ever played for eight additional years. To fans, Barkov's deal means the Panthers have an 8-year commitment to Barkov that carries a 10 million dollar average annual value against the NHL's salary cap. Fans need not think about the deal beyond those numbers and the contract's trade protection: a no-movement clause in the first 6 years, and a 16-team no trade clause in the final two. 

To Barkov and his agent Todd Diamond, those numbers are just the tip of the iceberg. Underneath those numbers, Barkov and Diamond maneuvered in negotiations to ensure they maximized the specifics of this new contract. 

Pierre Lebrun of TSN was the first to disclose terms of Barkov's contract. What becomes immediately apparent is the huge signing bonus; 90% of the money owed to Barkov over the 8 years of the deal will be paid in bonuses. The contract is also front-loaded, with Barkov being paid more than the average annual value of the deal in years 1-4. In years 6-8, he will receive less than the $10 million average annual value. 

Front Loaded Contracts

In the 2020 return-to-play memorandum of understanding (MOU), new terms were established for contracts deemed as "front-loaded", one of which stating:

"under no circumstances may the stated Player Salary and Bonuses in any League Year of a Front-Loaded SPC be less than sixty (60) percent of the highest stated Player Salary and Bonuses in a League Year of that same Front-Loaded SPC."

When Diamond and Barkov decided they wanted a front-loaded 8 year deal, they would need to ensure the lowest amount Barkov would receive in a season was only 40% less than the highest amount he received in a season. Barkov's contract takes full advantage of all wiggle room granted under this new stipulation, as the $7.2 million he will receive in years 7-8 of this deal is exactly 60% of the $12 million he will receive in years 1-3. The MOU also restricts any year-to-year changes in the deal to 25% of the first year salary or less, so the contract needs to incrementally slide down to $7.2 million. 

Why would Barkov choose a front-loaded contract? There are certainly valid reasons to defer salary in the current NHL environment, but a dollar today is still worth more than a dollar will be even just one year later. Nerdwallet's inflation calculator suggests that a $12 million lump sum Barkov would be paid in 2022 would barely be worth more than $10 million in 2029, when the final season of Barkov's deal begins. While restricted free-agents are back-loading their deals and deferring their largest payments until the final years of those deals, they gain the additional leverage of a larger amount in the qualifying offer; this leverage is irrelevant to Barkov, who is an unrestricted free agent. 

Signing Bonuses & Taxation

It's already easy to understand why receiving payments in signing bonus, paid directly to players on the first day of a new league year (usually July 1), is preferable to receiving the same amount over the course of the year. But Barkov has additional enticement to place as much money as possible into signing bonuses. 

Athletes' salaries are taxed according to the locations in which they perform their work. This means that their income is only taxed at the rates used in the places they actually reside 50% of the time - because in the other 50% of the time, the players are "working" in a completely different area. This is commonly referred to as a "jock tax"

Jock taxes apply to NHL player salaries, but do not apply to any bonuses. As everyone should know by now, Florida does not charge its residents a state income tax. Barkov's ability to receive the vast majority of his salary in signing bonus allows him to protect millions of dollars from additional taxation. Capfriendly estimates that Barkov needs to pay a 40.79% tax rate on any salary he earns in a given season, but only 39.09% on any signing bonuses he receives. Over the course of the deal, Barkov's decision to receive his money in signing bonuses will save him between $1 and 1.5 million - in the first four years of the deal (the years with known escrow percentages), Barkov will save just under $800,000 by keeping $44.6 million of his earnings within signing bonuses. 


Anyone who follows the NHL closely has probably heard the term "escrow" quite a bit. It's not something that people refer to much in everyday life, so no one could be blamed for not knowing what it is. I'd best explain escrow as a "fairness fund". The NHL's most recent CBA dictates that 50% of all hockey related revenue ("HRR") from NHL operations will be given to the players via their salaries. Thus, if the league's salary structure is such that players are making more than 50% of what the league is generating in HRR, the league can withhold a certain percentage of all players' salaries and bonuses until HRR reaches the necessary amount. Once HRR reaches the requisite amounts and raises further, the league raises the salary cap maximum to allow players greater earning potential.

The amount of player salary that will be collected in escrow is clearly outlined in the 2020 MOU. In the past season escrow was at an obscene 20%, and this season it could be as high as 18%. This lead a number of high profile free agents to defer payments until the middle years of their new deals, avoiding losing large amounts of salary to these high percentages of escrow, which diminish in subsequent years. 

Escrow in the first season of Barkov's new contract (2022-23) will still be set at a relatively high 10%. But in the three subsequent years, escrow drops to 6%. While Barkov takes an early hit by losing $1.2 million to escrow in year 1 of his deal, the drop in escrow allows Barkov to cancel those losses out by receiving his payments as early as possible, taking advantage of the greater value that money has in the early years of the deal (prior to inflation in the later years). 

Barkov's true take-home income

After accounting for escrow and taxes, Barkov is estimated to take home approximately $6.5 million to $6.9 million in the first four years of his deal, and earn a total near $26.9 million over those years. Escrow figures are not known for the subsequent 4 years, but Barkov should earn at least another $20 million in that time, making the total take home of the contract somewhere between $45 million and $50 million.

Using Capfriendly's estimated figures, Barkov will have the second highest approximate take-home NHL salary in each of the first three years of his deal, with a different player taking top spot (Tyler Seguin, Alex Pietrangelo, Brayden Point) each of those years. These players notably are not carrying any of the league's top AAVs; all reside in a United State without a state income tax. Like these players, Barkov might not have an AAV at the same level as the league's top paid players, but can take advantage of low tax rates to take home more money than nearly any other player in the NHL. 

No comments:

Post a Comment