PEAK PERFORMANCE AND CONTRACT INEFFICIENCY IN THE NATIONAL HOCKEY LEAGUE A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Scott Winkler April 2013 PEAK PERFORMANCE AND CONTRACT INEFFICIENCY IN THE NATIONAL HOCKEY LEAGUE Scott Winkler April 2013 Economics Abstract The purpose of this study is to determine what age National Hockey League (NHL) players have their best seasons and how this relates to their contract earnings. The hypothesis is that NHL players have their peak performance at age 27, which indicates that long-term contracts that exceed this age create inefficiency. The study will examine player productivity by taking 30 NHL players and evaluating their performance in the years leading up to age 27 as well as years that follow. Performance measures include average point production and the highest average ice-time per game. The study will also use two OLS (Ordinary Least Squares) regressions where the dependent variables are average time on ice per game and capital hit, both good indicators of how valuable a player is to his team, as well as several statistical independent variables such as points, games played and most importantly age. By gaining knowledge of peak performance, NHL organizations could better manage their teams by limiting long-term contracts to players and as a result lessen the inefficiency that exists in the market. KEYWORDS: (National Hockey League, Performance, Age) TABLE OF CONTENTS ABSTRACT 1 Introduction………………………………………...…………………………… 1 2 Literature Review……………………..………………………………………… 5 3 Theory……………..……………………..……………………...……………… 11 4 Data and Methodology…………………………..……………………………… 17 4.1 Data Collection……………………………………………………………… 18 4.2 Dependent and Independent Variables……………………………………… 18 5 Results and Analysis……………………………………………….…………… 25 6 Conclusion……………………………………………………………………… 44 6.1 Limitations………………………………………………………..………… 46 6.2 Future Study…………………………..…………………….………………. 46 7 References…………………………………………...…………………………. 48 LIST OF TABLES 1 Salaries in the National Hockey League…………………….……..…… 2 2 Independent Variables and Expected Signs …………………...…….…. 19 3 Data for Alexander Ovechkin..…………………………………...…….. 23 4 Contract Amounts for Alexander Ovechkin...………………………….. 23 5 Ovechkin - Summary Statistics.………………………………………... 24 6 Summary Statistics……………………………………………………... 26 7 Regression Model Results: Average Ice-Time Per Game...…………..... 29 8 Correlation Matrix..…………………………………………………….. 32 9 Regression Model Results Without Omitted and Insignificant Variables: Average Ice-Time Per Game……………………………….. 34 10 Regression Model results: Capital Hit………..………………………… 36 11 Players Examined With Mean Age of Highest Average Ice-time Per Game and Highest Point Production……………………………….. 38 12 Age of Lowest Cap Hit Per Point and Lowest Cap Hit Per Minute of Ice-Time…………………………………………………….. 40 13 Case of Highest Cap Hit Per Point Mike Komisarek – Summary Statistics……..………………………………………..……... 42 14 Case of Highest Cap Hit Per Average Minute of Ice-Time Tomas Vanek – Summary Statistics….………………………..……….. 43 Introduction The National Hockey League (NHL) is considered one of the major sports in North America, and its popularity is continuously growing. Since its start the NHL has grown from a game played by moonlighting workers to a vast money-making industry including 30 teams, multi-million dollar players, national media coverage, arenas, and immeasurable fan support. In the 21st century, especially, these aspects of the NHL have escalated to new heights as superstars, bigger paychecks, and larger arenas are becoming the norm of the league. To manage a league of this magnitude, regulations were established to assure competitive balance within the different teams. Through the Collective Bargaining Agreement (CBA), an agreement settled between the NHL and the players union, rules regarding the salary cap were put in place. The salary cap is a set amount of money a team is allowed to use on its players each year, and under no circumstances can a team exceed this limit. Even though there is a salary cap, certain players in the league do still make substantial salary earnings. As the financial upside to the game increases, players are realizing the opportunity that lies ahead and have made hockey a full-time job with no off-season, all in hopes of obtaining a financial boost through the next big contract. In the NHL, if a player has performed well over several years and is viewed as a superstar in the league, he is likely to sign a lucrative deal once his contract expires. To get a better understanding of how the value of these contracts has increased over the last couple of decades, one need only look at the top 10 NHL salaries from 1991 and compare them to the top 10 salaries of 2013, as depicted on the following page. 1 Table 1 Salaries in the National Hockey League Top 10 NHL Salaries of 1991 Top 10 NHL Salaries of 2013 No. Player Salary No. Player Salary Amount Amount 1 Ron Hextall $3,500,000 1 Shea Weber $14,000,000 2 Wayne Gretzky $3,000,000 2 Brad Richards $12,000,000 3 Mario Lemieux $2,200,000 3 Ryan Suter $12,000,000 4 Brett Hull $1,600,000 4 Zach Parise $12,000,000 5 Patrick Roy $1,400,000 5 Tyler Myers $12,000,000 6 Scott Stevens $1,300,000 6 Ilya Kovalchuck $11,000,000 7 Ray Bourque $1,250,000 7 Vincent Lecavalier $10,000,000 8 Denis Savard $1,250,000 8 Evgeni Malkin $9,000,000 9 Chris Chelios $1,200,000 9 Alex Ovechkin $9,000,000 10 Paul Coffey $1,100,000 10 Eric Staal $8,500,000 SOURCE: NHL numbers.com NHL Numbers explained, http:/www.nhl numbers.com /March 5, 2013 2 These numbers make it easy to see that the NHL has evolved from a simple sport played for pleasure to a complicated business played for money. In addition, the impact of contracts is no longer limited to the value of the deal but the length as well. Long-term contracts are becoming more common in the NHL; however the negative side to this is that they are slowly creating an inefficient market. The problem with these long-term contracts is that they are guaranteed, meaning a player will receive every penny of his contract for as many years as the contract has been agreed upon regardless of how many games he plays or how he performs in these games. Deals extending ten years in length, some even up to fifteen years, are appearing all over the league for different teams, and the question now becomes, if these players are under long-term contracts, will they perform to the value of the deal ten years in the future or even five? During the 2011-2012 NHL season the age of players in the league ranged from 18 years to 41 years. Although the game of hockey seems to be played by players of different ages, and it is clear that older players have value to their respective teams, there must be a certain age in the careers of NHL superstars where they are likely to peak and deliver their best performance. If this age point can be identified, this would make it easier to diminish the inefficiency that exists in the league reducing these lengthy deals. This study can be important to General Managers in the league due to the salary cap. The salary cap gives GMs limited money to work with when acquiring and signing individual players to best fit the mold of a championship team. If a superstar on the team underperforms, he is essentially taking money away from the team and therefore limits the team’s ability to put forth the best product possible. Brent Cullen Estes exemplifies 3 the importance of using the team’s money efficiently as it relates to Major League Baseball: Given the current landscape of baseball’s labor market, it is especially important for team owners and executives to be able to determine, with some degree of certainty, a player’s performance value. With skyrocketing player salaries and the ever-diminishing realization of competitive balance, the success of an organization hinges on its ability to make correct personnel decisions in terms of signing and resigning players. (Estes, 2006) If GMs had knowledge of the age at which players are likely to have their best season, they would run less of a risk of over committing and overpaying for a specific player. Secondly, this study becomes important to the owners of the various NHL teams. Despite the salary cap, most teams operate on costs under the cap limit. This is especially true during the rough economic times such as the one we are currently experiencing. Owners are losing large amounts of money in the business world, limiting their opportunity to invest more capital in their respective teams. Even though owners might be limiting their assets to teams, they still wish to put the best possible roster on the ice in hope of winning games. The NHL is a business, and more wins generally means more interest from the fans and more earnings for the owners as well. Thirdly, this study is important for the fans. The fans are responsible for the development of the NHL through ticket sales, buying merchandise, and watching games on TV. Although the fans do not possess the power to sign players or determine contract values they deserve to be a part of the best hockey possible. Again, this will only be possible if the market becomes less inefficient through long-term contracts. To diminish the inefficiency that is taking place in the NHL through long-term contracts the study proposes that NHL players have their best season at the age of 27. If this proves true, it suggests that NHL teams do not benefit, and end up losing money, as 4 well as an opportunity to sign other players, by signing elite players to extensive deals.