It's OK* to overpay free agents
Three key caveats to contracts with outsized salary-cap hits
The first wave of NHL free agency is over. As is usually the case, the beginning of July yields a new harvest of contractual commitments that seem to defy logic (or at least financial gravity).
The risks of free agency are well documented, as the landscape is littered with the carcasses of contracts that did not live up to their intended objectives -- just look at the multitude of buyouts we witnessed this summer. Yet despite the risks, NHL general managers doled out $411.9 million in salaries to just 63 players on July 5, the first day of the 2013 signing period.
While fans and media might question the collective sanity of a group that seems to annually engage in financial hara-kiri, most NHL GMs fully realize that they are paying a premium in the free-agent market, which is particularly the case if they are shopping as soon as the doors open. The common reflex to a large percentage of free-agent signings is likely, "He got what? He's not worth that!" In most cases, that statement is at least partly true. Most free agents aren't worth what they receive. But they are worth something, and that something is measured against the premium you know you are paying to fill a roster spot by paying in the short term (cash) rather than the long term (trading draft picks/prospects).
An NHL player's compensation can be broken down into essentially three components: performance value (What does he do on the ice?), intangible value (Is he a good teammate? Does he sell tickets?) and dead money (that portion of salary that doesn't yield either performance or intangible value). Ideally, all of the player's value is realized in his on-ice performance. In practice, this rarely happens. But it is not as catastrophic as the early Chicken Little reactions make it out to be.
Managing this dead money risk is critical to year-over-year competitive success, because a team is rarely going to get 100 percent of the performance it's betting on. This is partially why goaltenders have proved to be such risky long-term signings. If a goalie's performance drops off and he loses his starter status, his dead money component balloons, and the underlying asset value plummets faster than shares in RIM.
But the risk is all relative. To demonstrate this, I hereby present the NHL's Theory of Free Agent Relativity, and I will use Brian Campbell's contract to illustrate this theory in action.
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