[NoOne]

i would say that's something you should have set in stone before it happens. make a rule for future contracts limiting back-loaded contracts to X% of the previous years' average.

forget about the $1.2mill figure. it looks worse than it actually is. for a better understanding of what he accomplished you'd have to compare an accepted original contract offer at the same point in time as the back-loaded contract to see what the gm actually avoided during the years before the option year. the 1.2mill value wasn't neccessary to accomplish this feat.

in reality he saved a little bit each year and the total will be far less than 1.2million. ~50-100k each year? does that constitute a severe punishment? that's upto your league. on top of that you should be comparing what is saved to a contract with an "acceptable" back-loaded amount, which would be an even smaller yearly difference.

the game does actually limit the effect of back-loading. so, he could have used far less money in that final option year to acheive the same results. since it would 'look' better, it may not have ruffled any feathers, possibly. if it was possible, then he really did nothing wrong.

so, if you are only seeing 1.2million and not the whole picture, it will seem more egregious than reality. the use of that figure is more about a lack of experience in what the game allows you to get away with when back-loading contracts.

i bet this is not the only back-loaded contract with option(s) in your league. it would be unfair to single one player out without due diligence into all other teams' contracts. at what point is it shady? an extra 100k in the final option year? +500k? seems like a grey area to me that should be decided upon first before levying punishments retroactively.

another thought to consider is that it's very possible that even if your league had a set rule about acceptable back-loading amounts, he still could have obtained a similar contract for the player. punishment without this information seems a bit unfair to me.

he may have done nothing wrong except use an exorbitant value that was not required for the results he acheived. at that point you are merely punishing someone for typing a large number that did nothing out of the ordinary.
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edit: regard to cap hits from releasing players... you can still use option years to avoid cap penalties. i don't think loaded option years are as "shiny" to the player in regard to signing contracts, but they do still help. it will definitely limit how many years they can back-load.