Last week the NHL announced its projection that next season’s NHL salary cap would be between $84 million and $88.2 million. However, that depended upon negotiations with the National Hockey League’s Players Association (NHLPA). Last season the NHLPA set last season’s cap inflator at only one percent; however, it could have set that same inflator at five percent and, by doing so, put more money into the pockets of their membership – players on NHL teams.
Why would the NHLPA act to take money from the hands of its members and, in a way, deflate the salaries of NHL players on every team? The answer is that the NHL’s Collective Bargaining Agreement (CBA) calls for the owners and the players to split hockey-related revenue (HRR) 50/50.
Until HRR has been figured out after every season, both the owners and the players put money into a pot (a slush fund of sorts) in case one of the two sides – the owners on one side and the players on the other side – suffers a shortfall money is pulled from that slush fund to make up the difference.
The money that’s put into that giant slush fund is called escrow; and, for players, it comes in regular payments from their salaries.
Many regular Canadians don’t know what escrow is, and that makes sense. Why would we? Most of us get paid weekly or monthly and what we earn – well, minus what we pay Canada Revenue – is what we more or less get. But for NHL players the “more or less get” part means that, when escrow payments are applied to their salaries, it means that sometimes they get significantly less than the face value of their contracts – in fact, 12.5 percent less.
I’m not here to side with either the players or the owners, both live in a financial stratosphere I simply cannot comprehend – even if I do have a Ph.D. I believe NHL hockey players earn fantastic amounts of money and that owners also are wealthy beyond my understanding.
I’m no different than Joe Fan anywhere else in Canada. Although I understand the frustration NHL players have with the system in place, I also believe it’s a necessary system.
The Impact of the Current NHL CBA
In January 2013, the players and the owners negotiated the current CBA after a four-month lockout. When they did, the HRR (again, hockey-related revenue) was split 50-50. However, the final numbers on that revenue take time to calculate and players are mandated to deposit parts of their salaries into a fund that makes up the potential difference in the final calculations of HRR.
During the season, part of each player’s salary is put into a bank account. That amount is adjusted four times during the year based on the NHL’s projected revenue. When the season is over, total HRR is calculated. If the league does not make its 43 percent share, it draws money from that escrow account to make up the difference.
Those escrow payments are the way the league ensures teams don’t have to pay for any profit shortfalls. No one on either side would be happy if one side or the other made all the money and the other side lost all the money. And, the NHL is nothing if it is not a financial partnership – the NHL needs the players and the players need the NHL to earn money. That’s why escrow exists.
If the HRR falls towards the owners, the players get all the money they put into the “slush fund” back and half the profit overage owners have put into that fund. However, if the owners have lost money, that money is made up by taking part or all the money players have deposited into that “slush fund.” This is calculated after each season and monies are distributed accordingly.
Why NHL Players Hate Escrow
To review, escrow is the amount of extra pay withheld from each NHL player’s paycheque to help ensure that HRR is split 50-50 between players and owners. Escrow serves a critical function in the current system because it takes quite some time to fully count the HRR.
Many NHL players simply hate the concept of escrow. For example, Chicago Blackhawks center Jonathan Toews has stated his frustration with a process he believes penalizes players.
Specifically, Toews admits: “I’m no financial expert. All I see is that I’ve signed a contract and to me, it’s not exactly being honored. So I don’t care what business you’re in – to me, that’s kind of ridiculous.” [By the way, Toews makes $9.8 million this season. He has a cap hit of $10.5 million but that was front-loaded so he gets less money each year of his contract.]
In one way, although Toews still makes enough money not to worry much about the necessities of life, he does have a point. Since the current CBA took effect in 2013, NHL players have had an average of 12.5 percent of their pay deducted and not refunded annually. In other words, players have received 87.5 percent of the salary printed on their contracts.
That players do not receive escrow refunds is new, and it wasn’t always that way. In fact, players used to get their escrow back. However, the rising salary cap has led to higher player contracts. HRR has failed to keep up with those larger contracts. Thus, players lose about 12.5 percent of their annual salaries because, in essence, they are paid too much.
As a result, players think escrow is the dirtiest word in hockey, and it’s been that way throughout the life of the 2013 CBA.
When the 2013 CBA was enacted, the 50/50 split was based on the assumption that most teams would spend below the midpoint between the salary cap and the salary floor (the minimum teams are allowed to spend on their players). However, in truth, most teams spend more than the midpoint and in fact bump right up to the upper limit of the allowed team salary cap. That “excess” spending creates a system where owners keep losing money and must dip into the escrow account to replace the money they’ve lost every summer.
Will Issues with Escrow Go Away?
The issues with the escrow won’t go away soon, probably never. That’s because neither side can be trusted to act in ways that benefit everyone. That’s the business of hockey. Players, which is their right under the CBA, can hold out their services as a negotiation ploy trying to force their team to capitulate to their salary demands – a process that increases their own earnings and pushes teams to right into the upper limit of the salary cap. Owners would do the same – that is, they would use every advantage they could to increase their own revenue.
Probably the genius of the CBA is that it is based on the reality that each side will act in his/their own best self-interests. Will that change? As the saying goes “Not gonna happen.” As a result, players will seek higher salaries that push their teams to the brink of the salary cap and then complain about escrow. Teams will try to maximize their own profits at the expense of their players.
And the remainder of us regular Canadians will remember what our fathers used to warn us “You can’t have it both ways.” I for one don’t think about this when Connor McDavid is bearing down on David Rittich during a tense moment in the Battle of Alberta. That’s when hockey becomes only a sport and not a business.
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