Editor’s Note- It didn’t grab the headlines for very long (which is how CBA negotiations work best) but about a week ago, the NHLPA announced that they have declined to open the NHL’s Collective Bargaining Agreement. Great news for hockey fans because it means we get at least a couple more Donald Fehr free years. In the meantime, Matthew has put together a breakdown of one of the key issues in the CBA and a proposed solution. When the lockout is avoided in a coup;e years, we’ll know who to thank.
WRITTEN BY- Matthew Rutledge-Taylor
Issues
Escrow
According to the CBA the players and owners share hockey related revenues 50/50. The owners get 50% and the players get 50%. However, the total of all players contracts for a given year routinely exceeds 50% of actual revenue due to several factors. One, league revenue can only be estimated, so no-one knows what 50% of league revenue will be in advance of contracts being signed. Two, the salary cap system sets upper spending limits well above the average payroll that would result in a 50/50 split. To ensure that players and owners maintain a 50/50 split, some of players’ salary is withheld throughout the year as escrow. The amount must be large enough to ensure that player receive less than 50% of league revenue by year’s end. Owners then refund a portion of the escrow to bring the players back up to 50%. The remainder is kept by the owners, thus resulting the 50/50 split.
While the NHLPA does not necessarily disagree with the 50/50 split, the players dislike receiving less than what they are entitled to in each pay cheque. They also do not like earning less than the amount specified in their contracts, in the case of the owners retaining some of the escrow. In the 2014-2015 season, players paid 15% of their salary into escrow, but were refunded only 2.05%, thus lost 12.95% of their salary.
Let’s look at an example. Colin White will start a new six-year $28.5 million dollar deal this year. He will earn $4 million dollars in salary (with no bonuses, which we will talk about later) his first year. At a rate of 15% he will pay $600 thousand dollars into escrow. If he receives only 2% back ($80 thousand), he will have lost $520 thousand dollars of the salary he signed for.
Bonuses
It has become more and more common for highly paid players to receive more of their compensation in salary bonuses, typically paid out on July 1st of each year. There is no limit to the proportion of a player’s compensation that can be paid out in bonuses, provided the player’s base salary is at least the league minimum.
Players like bonus money for several important reasons:
- They receive some of their compensation at the beginning of the season rather than having to wait for it to be gradually dolled out over the course of the season.
- Bonuses are lockout proof. If a lockout occurs, it typically starts after July 1st bonuses are paid for the year of the lockout. This results in some players receiving a large proportion of their compensation despite not playing. This reduces the players’ motivation to settle the dispute.
- Bonuses are not affected by escrow. Escrow is only garnished from salary. Therefore, a player who receives more of his compensation in bonuses versus salary will end up refunding less of his total compensation to his employer (at the expense of players without bonuses).
Again, let’s look at an example. Mitch Marner will start a new six-year $65.358 million dollar deal this year. He will earn $700 thousand dollars in salary in his first year. However, he has already been paid a $15.3 million dollar signing bonus. At a rate of 15% he will pay $105 thousand dollars into escrow. If he receives only 2% back ($2.1 thousand), he will have lost $102.9 thousand dollars of the salary he signed for. Amazingly, he loses about a fifth of what Colin White loses to escrow.
Owners dislike bonuses for the opposite reasons that the players that the players like them:
- They must come up with cash at the beginning the season to pay player bonuses before they have received any revenue for the year.
- In the case of a lockout they must pay players not to play for them.
- My guess is that owners are relatively ambivalent about how escrow affects individual players.
Summary
- Players do not like escrow because under the current system they receive less compensation than their contracts specify.
- Owners dislike bonuses because it results in lump sum player compensation that must be paid before the owners have generated any revenue (for the year in question).
Solution
If the league revenue exceeded players compensation by over 100% (i.e., league revenue was equal to over 200% of players’ total promised compensation), the league would need to top up the players compensation to bring it up to 50%. Players would receive all their escrow payments back, plus an additional amount. If league revenues were guaranteed to exceed players total contract values times two, escrow could be eliminated entirely.
Since players would receive top-ups based only on salary, this would reverse the appeal of salary bonuses with respect to escrow. The bonus amount would not be topped up, only the base salary amount would be. This would provide a disincentive to receiving bonus money.
Implementation
One way to ensure that league revenues exceed players total contract values times two is to stop increasing the salary cap. If it was left at $83.5 million dollars per team every year, while league revenue gradually increases year-by-year, it will eventually be the case that total contracts will become less than half of total revenue.
For example, let’s say that league hockey related revenue is projected to be $4.40 billion in 2019-20. I’m going to ignore the complex formula that goes into defining hockey related revenue. Additionally, I’m ignoring the cap escalator and other details that aren’t necessary for this example.
The players share of $4.40 billion is $2.20 billion. This results in an average of $70.9 million per team. The upper limit to the cap is 15% higher than this, which is where we get $81.5 million. However, teams are projected to spend an average of $77 million each on player compensation. This totals $2.39 billion dollars. Without escrow, the players would take home around 54% of league revenue. Therefore, the league could implement a 10% escrow, making the year end compensation paid out $2.15 billion. The owners would then refund 50 million dollars to bring total compensation up to $2.20 billion. This would result in players taking home 92% of their contracted compensation.
What happens if league revenue rises to $5 billion dollars, while teams still pay an average of 77 million in compensation to their players? Well, 50% of that $5 billion is 2.5 billion. If players ended the season compensated only $2.39 billion they would be owed an additional 110 million dollars, which equals a 4.7% top up.
How would this affect Marner and White? If still use their year one compensation values as a comparison, Marner would get a $33 thousand-dollar top up of his $700 thousand-dollar salary. White would get a $184 thousand-dollar top up of his $4 million-dollar salary. In this case receiving your compensation as base salary and not in bonuses is a financial advantage.
Conclusion
Keeping players contracted salaries below their share of league revenue results in year end compensation top ups; Thus, players get more money than they are contracted to receive, not less.
If this is ensured on a yearly basis, escrow can be eliminated completely.
Players would get proportionally larger top ups if their compensation comes as base salary rather than as bonuses.
An incentive to receive salary instead of bonuses would help balance the forms of compensation players might prefer, as opposed to bonuses being superior in every respect according to the current system.; Therefore, owner would likely have to pay out fewer bonuses.
