Have you even used a calculator, jock?

20161118_125241

There has been quite a lot of talk over the last couple of days about how unhappy NHL players are with the escrow hit they take on every paycheque.

Unfortunately, when you have a collective bargaining agreement that specifies how hockey related revenues are to be split between owners and players, an escrow account is a necessary evil. Because the players’ share is paid out under the provisions of 700 or so individual player contracts throughout the season, there needs to be a mechanism to reconcile those payments with the total share following completion of the season, when all hockey related revenues have been accounted for.

Without an escrow process with which to hold back  a percentage of these payments throughout the year, the league would need to physically collect repayments from each individual player in any year where the total payments to players exceeded 50% of the hockey related revenues. This would be an extremely messy situation, and even more contentious than the current process.

But the players aren’t complaining about the process itself, at least I don’t think they are. Their main concern has to do with the escrow percentage, which has been in the 15% range since the last lockout:

escrow

(via @GavinManagement)

There are two very important things to take away from this chart. First, the amounts withheld in escrow are much higher since the 2012-13 lockout. And second, unlike the period following the 2004-05 lockout when players were refunded a significant portion of the escrow withheld during the season, the amounts returned to players from the escrow account in recent years have been quite small in comparison.

So there is more being withheld and less of that being refunded. No wonder players are upset. That’s a tough pill to swallow every two weeks when you get your contract payment.

But here’s the thing: there’s no way around it. This problem is structural. It is the result of a number of factors:

  1. There’s a fixed 50/50 revenue split between owners and players.
  2. Players were receiving about 57% of revenues under the previous CBA.
  3. There was no phase in period to get from 57% to 50%, or, alternatively, a ~13% across-the-board reduction in nominal contract values (50/57 = 87%).

That means that right from the start, escrow was guaranteed to be at least 13% until such a time as revenues caught up with the existing salaries. And this is the important part: the only way revenues can catch up to salaries is if revenues grow faster than salaries.

In practice, that means that revenues have to grow faster than the increase in the salary cap, since the two are tied together.

However, if you hold back the salary cap by limiting being conservative in  your estimates for hockey related revenues, you increase escrow.

I took a crack at reconstructing the salary cap and escrow amounts for the current year in the table below.

 ($ millions)

2016-17 Estimate

Conservative Estimate
Hockey related revenues        $4,010               $3,900
Player’s share          2,005                  1,950
Benefits             100                     100
Salaries          1,905                  1,850
Salary Cap            73.0                    70.9
Salary Floor            54.0                    52.4
Base salaries          2,212                  2,212
Bonuses (50% pay out)                36                        36
Total Payroll          2,248                  2,248
Escrow 15.2% 17.7%

You can see that if we forecast HRR at $4.01 billion, we get a $73 million cap and $54 million floor, which is what we currently see in the NHL. So I’m comfortable with that as the estimate that the NHL and NHLPA have agreed on for this year. That means the players’ share is just over $2 billion, and if we take off about $100 million for the player benefits fund, that leaves just over $1.9 billion to go to player salaries this year.

I then added up all the payrolls for each team from CapFriendly to come up with the sum total of NHL actual cash salaries for the current year. I arbitrarily assumed that half of the performance bonuses would get paid out, and added this to the total. That gives us total player costs of $2.248 billion, which is $343 million more than they should be getting if the revenues come in as planned.

And that’s where escrow comes in. If you take 15.2% off the top, you bring total player salaries down to just over $1.9 billion, which is where they are supposed to be in accordance with the CBA. This estimate compares well with the actual 15.5% escrow being withheld to start the season, so we’re on the right track with the calculations.

The second column illustrates what would happen if the NHL and NHLPA agreed on a lower estimate of hockey related revenues. In this case escrow would jump more than 2 percentage points higher. The lower estimate for HRR would also result in a salary cap that was $2 million lower than what we have for the current season.

So you can see why players are always pushing to escalate the revenue estimate every year. It has a direct impact on the amount they see coming off their paycheques every two weeks. And it increases the salary cap. Win-win, right?

But here’s the thing: the actual percentage being withheld in escrow is irrelevant. At the end of the year, the revenues will be the revenues and the players will get 50% of them. So while it might feel better to have a lower escrow percentage over the course of the year, it’s going to get reconciled to actual revenues following the season.

Why does this matter? Because by trying to make themselves feel better throughout the season, the players are creating more cap room. And while that escrow percentage is irrelevant, the salary cap is not. If there’s one thing we know about NHL GMs, it’s that if you give them more money to spend, they’re going to spend it. Especially if it’s fake money, that doesn’t really exist and is going to get clawed back through escrow.

The real issue here is that creating more cap room just makes the escrow problem worse. Every additional dollar that goes to player salaries over and above any increase in revenues is going to push escrow higher. And that’s exactly what has happened since the lockout. The nominal value of player contracts (plus the benefits fun) is currently at 58.5% of hockey releated revenues. That’s why escrow is now over 15%.

So how does the NHLPA address this?

Well, they can try to negotiate a higher share of HRR when the current CBA expires. Or they can suppress salary growth so that increasing revenues start whittling away at that structural imbalance. This is fine if you have a long-term contract, but not if you’re just coming into the league or about to hit free agency. And that’s always been the tension within the Player’s Association.

They could also just adjust the face-value of every player contract by 15%. This would instantly bring the player share down to 50% of hockey related revenues. Sure, nobody wants to take a 15% paycut, but at least this would be a one-time incident. Ripping the band-aid off.

The fact is, that 15% is coming off one way or another. So if it really bothers you to see it that deduction every two weeks, just reduce the contract value and reset your salary expectations. The result is the same. And it’s going to get reconciled at the end of the year in exactly the same way. In fact, there might even be some years where you get a bonus cheque because hockey related revenues were higher than estimated. Psychologically, that’s probably the easier way to go.

What they can’t do is put a cap on escrow. Thinking you can shows a gross misunderstanding of basic math.

 

3 thoughts on “Have you even used a calculator, jock?

  1. I don’t think that players agree to the 5% because they think it’ll help with Escrow. I think they are well aware it doesn’t, but agree to it for two reasons. 1) Unity, which has been pointed to a lot. 2) A renegotiated number would probably make no difference. Before adjusting for the fall of the CAD last year, HRR grew by about 6%. That would make it hard to argue a projection of much lower than 5%

    I think the two things that have really been the driving issues are:

    1) is a willingness for more and unexpected teams to spend to the cap. I think this is why the 15% midpoint adjuster to calculate the cap is what the NHLPA is going to go after

    2) Front loaded contracts. Actual salaries this year is ~$64M more than what the cap hit is. That’s not massive, but it’s certainly not insignificant. Would be about 3% of the total payroll figure you used.

    To that second point, if the CBA is in fact extended because of the Olympics, there is a real opportunity cost to avoid Escrow in 2020/2021. Right now Salaries are $94M less than cap hits in that year.

  2. Yes it all gets reconciled at season end, but reducing the escrow amount (and thus increasing the value of the paycheques players get during the season) puts more money in their pockets now that can be spent before inflation or saved and the interest banked. Money now is more valuable than money later. It’s likely a small effect in the long run but it’s probably a real one.

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