Wednesday, November 28, 2012

Why Escrow Sucks For Owners, Too

The NHL is clearly obsessed with its 'cost-certainty' plan, whereby a rising tide drowns some boats while some never see water at all.  In fact, that appears to be one of the stumbling blocks between an agreement between the NHL and NHLPA - just how certain is cost-certainty going to be in the face of the lockout?

Cost certainty appears to have been a breakwater for the NHL - yes, NHL players had their salaries cut by 24% across the board.  But what if NHL fans didn't come back at all?  What if most NHL arenas resembled the Nassau Coliseum that season?  The NHL was only the second sports league to cancel its championship game, and Major League Baseball faced serious attendance repercussions when that battle was settled.  The NHL was not willing to bet on the fans coming back.  It needed some way to grab back salaries in case the fans were riled up.

The thresholds were:

HRR of 2.2 Bn and below:  54%
2.2 Bn to 2.4 Bn:  between 55-56%
2.4 Bn to 2.7 Bn:  between 56-57%
2.7 Bn+:  57%

The NHL hit 2.1 Bn its first year, something which it's hard to imagine the NHL believed possible.  They must've thrown these revenue thresholds in as a bone for players thinking they'd never have to pay, but here they are.  Not only did they have to pay 57%, they had to do so for several years.

The trouble with tying these things together in such a grand way is that television contracts don't make up a large percentage of hockey-related revenue in the NHL, and they certainly make up a smaller percentage of revenue than in any of the three other North American team sports.  So individual market growth determines how the collective does, but what if one market is failing?  Its failure gets transmitted to the other 29 teams as a bonus (they suppress HRR, thereby suppressing the salary cap and player salaries), meanwhile its 29 partners' relative success gets transmitted to it via the salary floor, making it impossible to run a profitable team.

But it goes deeper than this - let's take a team like the Islanders that had several players on their team who could have been due bonus money last season, names like John Tavares, Nino Niederreiter, and Jay Pandolfo.  The only players eligible for bonuses in the NHL are old players, young players, or players who've been injured, and the bonus thresholds are set in the CBA - teams can't give out a bonus for scoring 1 goal, for instance.  These bonuses function as dead cap space, mostly - it is often very difficult to reach these incentives, and it's almost a guarantee that Pandolfo and Niederreiter reached none of their objectives.  Each could've been due as much as $2.2 million in bonuses.  Assuming the Islanders were exactly at the cap floor (which they weren't, but let's assume that they were), that was $2.2 million that the Islanders did not have to pay in salary.  Aha - but here's why escrow is stupid - owners have to pay out 57% of hockey-related revenue in a given year.  So if e.g. every team is at the salary floor for some reason, escrow makes up for that shortfall by forcing owners to pay more to each player out of their own pocket until 57% of HRR is reached.  So let's go back to that 2.2 million - the Islanders didn't pay it out.  You know who did?  Every other team in the NHL.  Well, the Islanders too, but they and the 29 other teams effectively split that 2.2 million.  Some years they may not have to pay out any extra money, depending on how the other chips fall, and some years they might've had to pay out the entire 2.2 million, but that's how the system is set up.  And it's profoundly dumb that the other owners pay for the Islanders' loophole manipulation, just as it's stupid that as a result of escrow the players all pay for the top players to have huge front-loaded contracts.  The system is broken - I just can't see the NHL bothering to fix it.  For some reason this is what they think is best for the league, even though the Islanders' manipulation is a symptom that the salary floor is in desperate need of repair.

The league thinks the best fix is to not allow bonuses to count against the cap for teams presently below the salary floor.  Happy lockout, everyone.


  1. This comment has been removed by the author.

  2. Bah, Steve, your comment was not correct and I suspect that's why you deleted it but I wish you could've left it up, because this stuff is complicated, and not only will I definitely misunderstand things, but so will everyone else at one point or another. When I read your comment, I definitely felt like I might've blown it.

  3. Haha yeah I realized I was wrong after I read the actual CBA document.

  4. If anyone is curious, I thought the NHLPA share was maxed out at 57%, i.e. it could be lower than 57% and the escrow system is only in place in case the NHL overpays.

    But looking at CBA document 50.4.A:

    "The dollar amount represented by the Players'
    Share in a League Year (i.e., League-wide Player Compensation) shall equal (i.e., shall
    never exceed nor be less than) the Applicable Percentage of HRR, as calculated pursuant
    to this Article 50."