In this article, I explain how buyouts work and clear up some confusion about the cap hit for buyouts. I'll use the recent buyout of Ottawa Senators forward Jonathan Cheechoo as an example.
The Ottawa Senators bought out the last year of Jonathon Cheechoo's contract this week, as expected. Cheechoo was owed $3.5 million for the coming season.
The buyout will cost the Senators two-thirds of the remaining value of the contract, which is approximately $2.333 million. This amount is spread over two years, meaning that the Senators owe Cheechoo $1.166 million this year and $1.166 million next year.
For players under the age of 25, the buyout is only one-third of the remaining value of the contact, for example, former Ottawa Senator Ray Emery was bought out by the Senators after only the first year of a three year deal that originally paid him an average of $3.167 million a year from 2007-08 to 2009-10. The Senators are only taking a cap hit of $562,500 this year (and next) as a result of buying out Emery's contract.
What are the implications in terms of the cost of Cheechoo's buyout against the Senators' salary cap?
It has been incorrectly reported that the Senators will take a cap hit of $1.166 million for both this season and the next. The actual cap hit is $0.666 million for the 2010-11 season and $1.166 million for the 2011-12 season. Why do the Senators get a $500,000 break this coming season?
The reason isn't simple, but I'll do my best to explain how buyouts work. The main factor is that the cap hit for a contract is the same for every year of the deal regardless of what the player earns that year. Each year the cap hit is equal to the yearly average of the contract.
In Cheechoo's case, the contract he signed was for $2.5 million in 2006-07, $2.5 million in 2007-08, $3 million in 2008-09, $3.5 million in 2009-10, and $3.5 million in 2010-11. The total was $15 million dollars, so the average is $3 million per year. Thus, the cap hit for the team employing Cheechoo is $3 million per year.
Now, when a player is bought out he gets two-thirds of the remaining value of his deal spread out over twice the number of years remaining on the deal. But, this then changes the average value of contract. Because Cheechoo was bought out, $1.166 million less was owed to him in total. The total payout to Cheechoo is $13.833 million.
The teams employing Cheechoo (San Jose from 2006 to 2009, and Ottawa from 2009-2010) had all ready taken a total cap hit of $12 million (e.g. $3 million per season for four seasons). Thus, the remaining cap hit is $1.833 million.
Determining how the remaining cap hit is spread out over the term of the buyout is another complicated formula. For the years that extend past the original duration of the contract (2011-12 in Cheecho's case), the cap hit is the same as the buyout payment, $1.166 million.
For the years that overlap with the duration of the original contract (2010-11), the cap hit is the buyout amount ($1.166 million) minus the difference between what the player would have earned if not bought out ($3.5 million) and the original cap hit for that year ($3 million).
$1.166 million - ($3.5 million - $3 million) = $1.166 million - $0.5 million = $0.666 million.
Thus, the Senators absorb only a cap hit of $0.666 million for the 2010-11 season due to Cheechoo's buyout. Similarly, the Senators' cap hit for buying out Emery's deal was $0.479 million in 2008-09, and $0.230 million in 2009-10.