Performance bonuses could be a big salary cap problem

The New York Rangers are facing a potential salary cap issue that will affect their future contracts

It doesn’t take an MBA to figure out the NHL salary cap structure.  The league sets a cap on salaries and teams like the New York Rangers have to fit under the cap.   However, there is one variable that most fans are unaware of that will affect how all contracts are negotiated for this season.  And when it comes to the Blueshirts, they have the biggest problem of any team in the NHL.

The problem is related to performance bonuses.   Performance bonuses are bonuses based on hitting performance targets.  They get paid out as players hit those targets and only  some players are eligible for them.

Eligibility is strict.  Only 35 and older players on one-year contracts,  veterans coming off a long term stay on injured reserve, and players on Entry Level Contracts (ELC’s) can get a performance bonus.  That’s the Rangers’ problem, all of those ELC’s.

Performance bonuses are a way to get around the low salaries paid to prospects when they sign an ELC.  Under league rules, the most a rookie can sign for is $925,000 (salary and signing bonus).  However, a  team can set targets for a performance bonus that will boost their payday.

Look at Connor McDavid.  In 2015 he signed his ELC that resulted in a $925k cap hit.  But he actually made an additional $2.85 million in performance bonuses each year.  The question is how that affects the salary cap and that’s where the Rangers could have an issue.

The Rangers and the performance bonus

Practically every team in the NHL has performance bonuses built into their salary structure. The only teams that don’t are Tampa, Winnipeg and Detroit.  15 teams have performance bonuses that total under $1 million.  The remaining 13 teams could pay out in excess of a million next season and guess who is at the top of the performance bonus chart?  The New York Rangers.

The Blueshirts have a potential performance bonus hit of $7,212,500.  Not only is that the most in the NHL, it is almost double the next highest team. Vancouver and Chicago are the only other teams in the NHL to have performance bonus potential payouts of over $4 million.

The reason is that the team built performance bonus targets into most of their ELC’s.  Igor Shesterkin has the biggest potential pay day, with $2.85 million in performance bonuses.  Kaapo Kakko could earn an additional $2.65 million if he hits all of his targets.   Adam Fox can earn an additional $850k, the same as Vitali Kravtsov and Lias Andersson.  Ryan Lindgren, Julien Gauthier and Filip Chytil all have performance bonuses of several hundred thousand dollars.    Even recent NCAA signees have them with Morgan Barron leading the pack at $850k.

All told, it adds up to more than $7.2 million.

What are potential bonus targets?

The Collective Bargaining Agreement (CBA) lays out the criteria for performance bonuses. It is what you would expect.  Targets include ice time, goals, assists, points, plus-minus rating and points per game.  Add in blocked shots for defensemen.   For goalies the criteria are save percentage and goals against average as well as ice time.

There are also league wide honors included in the performance bonus structure. If a player on an ELC contends for a league award or All-Star honors he can get more money.   If it had been in their contracts, Kakko and Fox might have missed out on some performance bonus money when they didn’t finish in the top three voting for the Calder Trophy.  The maximum performance bonus for winning the Calder is $212k. A third place finish in the voting could have been worth $100k.

Teams don’t reveal the bonus targets for their players.  If you want to see what they were for Connor McDavid and how many he achieved, check this out.

Why it is a problem

Here’s the issue. If performance bonuses are paid out, they are added to a team’s salary cap number.  If a team goes over the cap as a result, the difference is added to the salary cap the next season.   With a flat salary cap, that is a big problem.

Next season,12 NHL teams are losing money they can spend towards the cap because they couldn’t cover performance bonuses this year.   Boston has $1.9 million in overages, reducing their salary cap next season to under $80 million.  That’s an issue when they have to try to resign Torrey Krug.

The Dallas Stars may be fighting for a Stanley Cup, but next season they are due a $2.9 million hit to their cap total due to overages.  Vancouver, Detroit and Carolina all have overages of over $1 million.

Carolina thought they had over $9 million in cap space, but overages dropped that number to $7.8 million and they have to try to re-sign UFA’s Joel Edmundson,  Sami Vatanen, Trevor van Riemsdyk and RFA’s Warren Foegele and Haydn Fleury.  Good luck.

The Rangers situation

Performance bonuses didn’t hurt the team this season because they finished the season with enough cap space to cover them.  Not only that, but the players with the biggest bonuses, Kakko and Shesterkin, probably didn’t hit their targets.  Next season could be a different story.

Igor Shesterkin is ready to take over as the number one goalie and if he is everything he showed in his rookie season, he’s going to make all of his bonus money.  If Kakko rebounds with a good sophomore effort, he could make a lot more money.

And that’s why performance bonus money is a problem in 2021-22.  If all of the baby Rangers accomplish what we hope that they will, they could earn close to that $7 million number in 2020-21.  With the flat cap, the Rangers are expected to spend to their cap ceiling when they re-sign all of their RFA’s and fill out the roster.  That means the performance bonus overage going into 2021-22 could be millions and if the cap remains at $81.5 million as expected, it could really affect the team’s ability to spend.

Sure, take Marc Staal, Brendan Smith and Henrik Lundqvist off the books in 2021-22.  That’s a healthy chunk of change that Jeff Gorton will have at his disposal.  But he will also be facing new contracts needed for Igor Shesterkin, Pavel Buchnevich, Filip Chytil, Brett Howden, Julien Gauthier, Ryan Lindgren, Lias Andersson and Libor Hajek.   It will go fast.

Another wrinkle

Oh, one more thing.  You can be sure that when the Rangers draft Alexis Lafreniere in October and he signs his ELC, there will be performance bonuses built in and that will drive up the Rangers’ number.  Looking at recent first overall picks, Jack Hughes, Rasmus Dahlin, Auston Matthews, Aaron Ekblad and Connor McDavid all had the maximum $2.85 million in performance bonuses built into their ELC’s.

If so, that means that the Rangers could have over $10 million in performance bonuses that could hit their bottom line.  That’s an issues that could affect them next season.   According to league rules, a team can exceed the salary cap with performance bonuses by 7.5% of the total salary cap.  With the cap set at $81.5 million, that means the Rangers can pay out a maximum of $6,112,500 in performance bonuses if they spend to the $81.5 million number.   If their performance bonus payout exceeds that number they will have to shed salary by the end of the season to make it up and they would still take a big hit (over $6 million)  the next season.

Okay, maybe you do need an MBA to figure all of this out.  At any rate, while having all of these young players on ELC’s is a huge benefit in a flat cap situation, the performance bonus issue is one that needs to be watched very closely.   While we all want Kakko, Shesterkin and Lafreniere to have fabulous seasons, be careful what you wish for.  It could be very painful in the very near future.