Dollars and Sense: Youth Development and the Risks of Labor

By David A. Rainer


Ziggy Palffy has had his stick pulled on before. It is as common of an occurrence in hockey as line changes and crashing the net. But on one particular night, Palffy was not going to let go of his stick and he would pay the ultimate price to keep it. For the Los Angeles Kings, the play would bring them to a watershed in their season, and in their philosophy for building the franchise. The play would push the organization into a struggle for playoff survival that only their prospect depth could provide them with a fighting chance.


With about a minute left in overtime in a January game against Anaheim, Palffy skated across the ice heading for a line change. An opposing
player grabbed Palffy’s stick and gave it a tug. The combination of his momentum, the odd angle of his arm, and the jerking motion of the tug, Palffy’s arm suffered a serious dislocation that would require season ending surgery to repair.


As Palffy walked down the corridor to the dressing room, the Los Angeles Kings’ season turned. With numerous stars comprising roughly half of the payroll sitting on the injured reserve, the Kings would need to find a new way to win with the on-ice equivalent of a $25 million payroll. The change would not come in the form of new on-ice tactics, but in the way resources of the organization are allocated and how players are sought and found under the existing conditions of the Collective Bargaining Agreement. This was something Dave Taylor, General Manager of the Los Angeles Kings, had prepared the organization for years in advance. At the direction of the Roski ownership group, Taylor instilled a philosophy of prospect scouting and development as a means of countering the loss of veteran players due to injury or free agency.

A Risk to Labor
The ability to absorb risk increases in proportion to a firm’s resources is a basic principle of economics. The more available resources a firm has, the more likely it is willing to accept risky investments in pursuit of the higher profit percentage. Financial institutions, in times of abundant available cash, are often willing to make increasingly risky investments and lower interest rates to obtain a return on their capital. The NHL is no exception — those franchises with a high amount of resources are more willing to accept higher risks. For the purposes of this article,
the risk to labor in the form of injuries (“casualty rate”) will be focused
on.


“Casualty rate” is a term often used in baseball to describe the rate at which players become injured given a certain timeframe. For hockey, the casualty rate is often measured in man-games lost to injury and varies as new technology and equipment are introduced. No franchise is foolish enough to believe that it will escape injuries altogether and are prepared to absorb a certain degree of risk to its players in the form of injuries. But how much risk a franchise is able to absorb and how many injuries the team in fact suffers is often the “make or break” point for any season from a financial standpoint.


A game injury to a player does not absolve the franchise from its obligation to pay his salary and the higher an injured player’s salary is, the higher the financial burden to the franchise. In illustration, an injured player making $2 million per season is less of a burden and less costly to replace than a player making $7 million per season. As player salaries around the league continue to outperform the increase in revenues, the financial risk that the casualty rate poses becomes more severe. Invariably, some franchises will encounter a season where their casualty rate is excessively high. The wealthier franchises have the means to absorb this risk. The rest must find alternatives to survive and it can often be found in the form of a robust farm system and youth development.


The trend in professional hockey is that it has become too economically risky for an organization with limited resources to field a team of veteran players. Veteran players often demand higher salaries and can be an increased injury risk. To stay afloat in today’s market, an organization must look to the development of prospects as the essential means of staying competitive. The influx of money from the creation of expansion teams and the discrepancy in resources between teams of varying market sizes has contributed a great deal to the exponential rise in player salaries over the last 10 years. The top tier markets have set the pace for the cost of the top players and the reverberations can be felt all the way down the scale. A team’s payroll has become the major expense of an organization. As a result, organizations have began to keep a much closer eye on the expenses of the endeavor and either instituted tighter budgets or sold the organization outright to someone with deeper pockets.

Incentives from the Collective Bargaining Agreement
Included in the Collective Bargaining Agreement are various downward pressures on certain player contracts that create financial incentives to develop talent from the entry draft (an in-depth analysis of the incentives in the Collective Bargaining will soon follow in Part II and III of this four part article). To name a few, the creation of the entry level salary cap places the maximum base salary for a player on an entry level contract at approximately $1 million per season (not including bonuses) for one to three seasons. Draft pick compensation for unsigned first round picks gives the organization another option, and consequently some leverage at the bargaining table, on whether or not to sign their top picks. Restricted free agent status effectively gives the organization a right of first refusal or draft pick compensation for the loss of restricted players. These incentives that lower salary amounts by placing barriers on the demand for the player’s services allow general managers to field talented teams while staying within their budget.


On a macro level, these incentives create a downward pressure on the labor market for the service of these players. The pressure is in the form of limited demand and added bargaining power in favor of the organization. As a result, a player’s actual on-ice performance is undervalued in the labor market and the organization receives the benefit of the difference, or “windfall”. In illustration, a player who scores 40 goals in a season, or registers 80 points in a season, might receive seven or eight million dollars a season in salary on the open market. But if a player still on an entry-level contract, or in his restricted free agent years, scores 40 goals or registers eighty points, he will likely receive only a fraction of his open market value. This is tantamount to an organization receiving an $8 million player for a fraction of the cost. One need look no further than Andrew Raycroft and the great and unexpected value he added to the Boston Bruins this past season by performing well above the value of his contract.

Importance of Developing Youth
A “windfall” is the difference in value received from the player in the form of on-ice production and the expense paid for the player in the form of his salary. It is with this windfall that an organization can maintain a low payroll and still field a productive team. The better the performance of the player under a capped entry-level contract, the larger of a windfall the organization receives. And the more often an organization can reproduce this windfall of value on the team, the better an organization is equipped to one, absorb the risks occasioned by injury, and two, remain competitive with a relatively low payroll.


The essential first step in obtaining this windfall is drafting and developing prospects. Should a team find itself beset by injuries, it must look to its farm system for replacement players. If the organization has drafted and developed well, it can draw from this resource to either fill in prospects for those players lost or trade for the needed replacement players. If the organization does not have a well stocked farm system, the organization’s last alternative may be to either purchase replacement players on the trade market — that is, acquire high priced talent from teams looking only to off-load the expensive contract from their payroll and accept far below market value in return, a very expensive alternative — or use whatever labor is available and just hope for the best. As such, a team that has excelled at developing prospects becomes more capable of absorbing the financial risk of injury.


When injuries hit the Los Angeles Kings, the unofficial end of the season was announced by fans across the southern California area. Up until that faithful night, fans of the Los Angeles Kings had felt that as long as Ziggy Palffy was in the line-up, the team had a great chance for success. But with the loss of the franchise player, hopes became bleak – for everyone except Dave Taylor. The organization knew that the farm system had taken tremendous strides in the last few years and the NHL roster was just beginning to feel the benefits in the form of Alexander Frolov. If the team was to continue its success, they would need to put their prospect depth to the test.


Over the course of the season, Tim Gleason, Scott Barney, Mike Cammalleri, Tomas Zizka, Noah Clarke and Denis Grebeshkov would make contributions of varying magnitude. Martin Strbak, Sergei Anshakov, and Jared Aulin would be traded to acquire low-cost veteran talent. Taken in conjunction with Andy Murray’s high effort and blue-collar system, the team would not miss a beat without their superstar until the final three weeks of the season. The organization had found an effective means of overcoming their devastating injuries and staying competitive – build from within.


The average age of the players on the opening night roster for the Kings was 28.2 (not including Jason Allison and Adam Deadmarsh). The average age over the duration of the season was 27.1 and the average age at the season finale was 26.3 for an overall reduction of nearly two years. The team gradually got younger while staying within a budget and remaining competitive. This is attributed to the utilization of low cost prospects to fill the void left by the record number of man-games lost to injury for the Kings.


Similarly, an organization which is located in a small market can stay competitive by drafting and developing prospects. To get the benefit of the windfall of value, the player must be highly productive while under an entry-level or restricted free agent contract. For the most part, an organization only obtains these players through their own drafting and developing. The better an organization drafts and develops, the more highly productive players on low-salary contracts the team will have and the lower the payroll will be without reducing the level of talent. For every dollar saved by this technique, another dollar is freed to possibly spend on the available non-restricted free agent talent.


In effect, the contract restrictions on young players subsidize the organization’s ability to sign non-restricted players, creating a mix of productive youth and experience while still remaining within a budget. This technique has allowed teams on the brink of financial disaster to thrive and remain competitive while others have found a way to win the Cup and keep on winning by retaining their players.


This is no more apparent than when looking at the last three Stanley Cup winners prior to Tampa Bay. Below are the total number of man-games played for the particular team by draftees of that team during their championship year, their league rank in parenthesis, the league average, and the difference.

YearTeamMan-games by
draftees (NHL Rank)
League Ave.Difference
2003-04Tampa Bay364 (28)598-234
2002-03New Jersey950 (1)550+400
2001-02Detroit691 (9)540+151
2000-01Colorado876 (2)557+319


With the exception of newly crowned Tampa Bay, the Stanley Cup winner has been at or near the top in total man-games played by its own draftees. Although developing and playing an organization’s own draftees does not ensure victory, it sometimes can lead to the ultimate prize. This basic model of building the framework of the team with draftees and supplementing the roster through trades, made viable by the successes of New Jersey and Colorado, is the same model many NHL franchises are now looking to emulate. Of course, player drafting and development is only one route of success and certainly not the only. Tampa Bay has found a different model for success.


But when you look at the numbers from 2003-04, Tampa Bay might be the exception that proves the rule. When looking at the six teams that had the most man-games played by their own draftees, all six made the playoffs and five of the six finished the regular season with over 100 points.

TeamMan-games
by draftees (NHL Rank)
DifferenceReg. Season Pts
New Jersey1012 (1)+414100
San Jose909 (2)+311104
Ottawa811 (3)+213102
Vancouver792 (4)+194101
Montreal774 (5)+17693
Colorado760 (6)+162100


And the top 10 teams in man-games played by their own draftees had an average regular season point total of 93 and an average payroll of $41.2 million (payroll as reported by ESPN.com). The same averages for the bottom
10 teams were 84 and $42.3 million respectively. As this shows, the teams with the higher percentage of their own draftees on their roster had a higher winning percentage with a slightly lower payroll. Additionally, two teams that were very successful during the regular season but were in the bottom
10 in man-games played by their own draftees (Toronto and Philadelphia) had the sixth and seventh highest payrolls in the league.


Similarly, when looking strictly at the 16 teams that made the playoffs, seven were in the top
10 in man-games played by their own draftees (44 percent), five were in the middle ten
(31 percent) and four were in the bottom ten (25 percent). Below are the other ten teams that made the playoffs in addition to those referenced above.

TeamMan-games
by draftees (NHL Rank)
Difference
Boston724 (8)+126
Nashville647 (12)+49
Dallas640 (14)+42
Detroit636 (15)+38
Calgary578 (17)-20
St. Louis492 (20)-106
Toronto440 (23)-158
Philadelphia436 (24)-162
Tampa Bay364 (28)-234
NY Islanders231 (30)-367


Prospect drafting and youth development is not the only means to success, but for organizations that do not have a vast source of wealth at their disposal, it can be the best means of staying competitive in today’s National Hockey League. The ability to trade top prospects for proven veteran players provides the organization with the flexibility to absorb a greater amount of risk to the roster due to injury than a team without a deep farm system. Also, the CBA incentives that keep entry-level players’ salaries low provides the organization with a ready source of cheap and productive talent that can be used to maintain a small payroll or subsidize the signing of expense veteran talent. Irrespective of the course of action an organization pursues, the development of drafted prospects is the essential base for most winning teams. Any time a team trades away draft picks or limits itself in the development of its prospects, it runs the risk of drying up the well that waters the success of the entire franchise. Kings’ General Manager Dave Taylor understands this lesson well and set the organization on a course that even the mid-season loss of Ziggy Palffy could not derail.

Copyright 2004 Hockey’s Future. Do not duplicate without written permission of the editorial staff.