Are payment deferrals the new big thing in NHL contracts? What execs, agents say

5 November 2024Last Update :
Are payment deferrals the new big thing in NHL contracts? What execs, agents say

When Jake McCabe signed a five-year extension with the Toronto Maple Leafs last week, he became the third NHL player in a matter of months to deploy a little-used mechanism in the league’s collective bargaining agreement by deferring two salary payments beyond the length of the contract.

Structuring the deal in that manner carried benefit for both player and team, with McCabe feeling he squeezed a few more take-home dollars out of the arrangement and the Maple Leafs marginally reducing the cap hit they’ll be charged with for having him on the roster.

Given those mutually advantageous rewards, and the recent uptick in deferred salary contracts being registered, you might think we’re on the verge of a new trend that will be copied and repeated across the league.

An overwhelming number of NHL general managers, agents and league executives are skeptical of that, though.

Even one of the agents responsible for negotiating McCabe’s new contract doesn’t believe the recent wave of deals signed by his client and Carolina Hurricanes players Jaccob Slavin and Seth Jarvis marks the start of anything resembling a new craze.

“I still think it’s going to be a very niche thing and it only works if it’s very specific files,” agent Scott Bartlett of Bartlett Hockey told The Athletic. “I don’t know that it’s usually in the player’s best interests.”

The ability to defer compensation in NHL contracts has been permitted by the league since before the salary cap was instituted almost two decades ago. It just never became a commonly used practice.

As one GM pointed out: “This isn’t new, but rarely ever does a player want to wait on his cash.”

The Arizona Coyotes deployed the maneuver on Shane Doan’s final contract in July 2016 but for different reasons than we’re seeing it pop up today. By pushing back $2.5 million in signing-bonus and performance-bonus payments, a cash-strapped Coyotes ownership group bought itself an extra couple of years to make Doan whole for the 2016-17 season.

In turn, Doan continued to cash checks well after he hung up his skates and began transitioning to a career in management.

Credit the Hurricanes for finding a new application for the practice: In a higher interest rate environment like we have now, they identified the opportunity to use deferred compensation as a tool to effectively give players more money at the same cap hit while potentially unlocking tax benefits in the process (more on the mechanics of that below).

The Hurricanes signed Slavin to a $51.69 million, eight-year extension on July 1 that included a $4.55 million payment deferred until 2033, and then signed Jarvis to a $63.2 million, eight-year deal on Aug. 31 featuring $15.67 million in payments deferred until 2032.

Last Monday, the Leafs signed McCabe to a $23.5 million, five-year extension that will see $5.5 million deferred until 2031.

Understanding the pros and cons of those contract structures hinges on the concept underpinning the “Time Value of Money,” which states that money available now is worth more than the same amount in the future due to its potential earning capacity. This principle recognizes that the value of money decreases over time due to inflation, plus the opportunity cost of not being able to invest that money today and start earning interest on it.

To account for that fact, the NHL calculates the present value of deferred salary using the Secured Overnight Financing Rate (SOFR) one-year interest rate plus 1.25 percent to discount what it was worth at the time of deferral. The present-value salary is then used when calculating a player’s cap hit.

In McCabe’s case, the Leafs were able to reduce his cap charge from $4.7 million to $4.51 million with the deferrals. Because Jarvis deferred more money for a longer period of time, Carolina lowered his cap hit from $7.9 million to $7.4 million using the maneuver.

The benefits of structuring deals like this are obvious from a team perspective — added cap flexibility plus less upfront financial exposure for owners who can use the extra time to earn interest on money earmarked for deferred payments well down the road — but they’re not as obvious for players.

Generally speaking, players prefer to secure as much up-front money as possible in their contracts so they can start putting it to work sooner with investments. Think about it from your own perspective: Would you want to wait six or seven years to be paid for work completed today? And if you invested the money now, how much could it grow in that span?

What’s made this a viable consideration, though, is an uptick in interest rates. Previously, when rates hovered around 1 percent, there wasn’t enough of a premium built in for an NHL player to even consider deferring compensation. But the contracts signed by Slavin, Jarvis and McCabe each guaranteed an annual return on deferred money above 5 percent, and that return is fully guaranteed — meaning there’s no risk of nonpayment, no investment risk and no tax assessed until the payment is made.

They’re fully locked in and protected no matter what happens in the financial markets.

In a summer when the Hurricanes faced contract negotiations with a number of key players, the deferred compensation deals with Jarvis and Slavin helped bridge the gap in negotiations while protecting their cap sheet.

“We’re a competitive team that’s trying to put together the best roster we can, and doing that means we have to be careful with our contracts and efficient with our spending,” Hurricanes general manager Eric Tulsky told The Athletic. “We’re talking about some players who had some great years for us and deserved to be well-compensated for that, and we were trying to find a way to get them the money they deserved while still managing the cap space in a way that worked for us and made it so that we could continue to put a good team together around them.”

For McCabe and the Leafs, the deferred compensation helped break a stalemate. The sides were stuck in their respective financial positions for some time before it opened a path to get them across the finish line.

McCabe’s specific circumstances made it a viable option: It’s almost certainly the last NHL contract of consequence he’ll sign since it takes him to age 36, so there’s some added appeal to getting paid into potential retirement. He’s also an American who won’t be living in Canada full-time when the $5.5 million deferred payment comes due on Jan. 1, 2031 — which means it’ll likely be taxed at a lower rate than if it was paid out while he was playing for the Maple Leafs.

So, clearly there can be some benefits. The players who signed deferred-compensation deals in recent months are each valuable members of their teams and weren’t forced against their will to do so.

Why then the skepticism about the possibility of a flood of players following their lead?

For starters, a number of agents who spoke with The Athletic are completely against the idea of pushing back payments because of the “Time Value of Money.” The entire notion is dead on arrival for those in that camp because they don’t think the tradeoff is even worth exploring.

There’s also the prevailing thought that it only really makes sense for those like Slavin and McCabe, who are signing contracts that likely take them to retirement. What we haven’t seen in the NHL is a bona fide superstar in his prime deferring salary the way Shohei Ohtani did when he signed a free-agent deal with the Los Angeles Dodgers last December — choosing to take payments totaling $680 million after his $700 million, 10-year deal expires and he’s no longer paying high California state taxes.

There’s no sense that’s going to change, either.

“From our stance as an agency, it’s a hard ‘no’ on the elite younger players and it’s a hard ‘no’ on the top free agents,” Bartlett said. “We don’t think it’s going to make sense for the broader population.”

The other threat to the practice is an existential one. Multiple ownership, management and agency sources told The Athletic they expect the NHL and NHLPA to eliminate the ability to defer compensation when they go through the next round of CBA negotiations in 2026. Neither side is believed to be likely to fight for it to stay as it is.

In September, deputy commissioner Bill Daly said that there’s some “fear” the maneuver creates circumstances where there’s cap circumvention.

“It throws out of whack some of the other checks and balances we have in the CBA, which forces interpretations in terms of how we allow it and what’s permissible and what’s not permissible,” Daly said. “The original deferred-comp rules were developed in a non-cap world as opposed to in the cap world, so they kind of were inherited, and so they probably need adjustment on some basis going forward.”

What that means in the here and now is there’s a limited guaranteed window for enterprising teams and agents to exploit the mechanism.

While deferred-compensation deals are clearly having their moment in the NHL — there are whispers about more of them being explored right now — the overwhelming sentiment in the industry is that they’re bound to remain the outlier rather than the rule.

(Top photo of Seth Jarvis high-fiving Jaccob Slavin: Josh Lavallee / Getty Images)