In the world of sports the business aspect offers as much drama as the playing side. In the NHL one of the biggest talking points among players is escrow. Player’s hate it, but the NHL thinks it is a necessity.
What is escrow in the NHL? Escrow is where a certain percentage of money is held off the player’s paychecks and held (in escrow) until the league knows what the full revenue is for the total year. The players will then receive either all or a portion of the escrow back at the end of the year depending on actual NHL revenues.
I wish I could remember who said this but a commentator who was discussing how to make the all-star game more interesting said that the winner of the game should get all the money in escrow – then you would have the most intense game in hockey history!Embed from Getty Images
Let’s take a deeper look at this complex process in more detail.
Why does the NHL use escrow?
To answer this question we need to look back in time to the 2004-05 lockout.
From the owners perspective the lockout was all about cost-certainty. Or, in other words, how can we limit the salary of the players.
Up to that point in NHL history there had been no salary cap. Teams could spend us much on their NHL roster as they wanted. And, agents and players were doing an excellent job at extracting top dollar from the teams.
This created two problems: the NHL was becoming lopsided and owners were losing money.
There were a handful of teams – such as Detroit, New York Rangers, and Colorado – large market teams that could outspend the rest of the NHL and had the ability to start stacking their teams with high-priced free agents. This was creating a league of have and have nots with an unbalanced system.
As well, owners were complaining about losing money, and having to lose money simply to complete in the NHL.
The lockout was all about negotiating a salary cap so the amount of money a team would be able to spend on players was a limited number. This is what owners said would give them cost certainty and be able to manage the finances of the team properly.
Salary Cap and Escrow
The owners ‘won’ the lockout and got the salary cap they wanted.
But the main question is how do you determine what to set the salary cap each year?
Well, the NHL and NHLPA (the NNL players association) negotiated a formula called Hockey Related Revenue.
Hockey Related Revenue and Escrow
Embed from Getty Images
Hockey Related Revenue is an agreed upon set of revenue sources that the league generates money with each year. For instance, this includes tv revenue, tickets, concessions, and merchandise sales.
The NHL and NHLPA add all of this up and this counts for the total Hockey Related Revenue. The NHL and NHLPA then split the revenue 50/50 with each other to come up with how much the players get for their salaries – the other 50% goes to the day-to-day operations of the business (with a little profit left over for the owners).
Here is quick example to make sure that everything is sticking:
- Let’s say that the NHL brought in $5 billion dollars in revenue
- Hockey Related Revenue is split 50/50 between players and owners
- So, the players will get 2.5 Billion dollars of that for salaries
- There are 31 teams
- So 2.5 billion/31 = 80.6 million team for a salary cap. (which is about what the salary cap is at right now)
Note: there is also a salary cap floor, which indicates that each team must spend a certain amount on salaries. It was $60.2 million in 2019-2020.
So, where does escrow fit into the salary cap?
Now, here is where escrow comes in. The NHL will always set the salary cap for the upcoming year in the spring. This is about 16 months before it will actually know how much money it will actually bring in.
So when they set the cap it is an estimate.
The one common thing about financial models and predictions is that they are always wrong. There is no way that the NHL can accurately predict that it will bring in $5 billion dollars one year from now – here is a look at the actual yearly NHL revenues.
So, what if they are wrong in their predictions. What if the NHL makes less? No owner is really worried about if they make more, because, remember the NHL lockout was all about cost certainty – making sure they don’t lose money. Well, this is where the concept of escrow works with the salary cap.
How does escrow work?
The NHL will hold a certain percentage of a players cheque and keep it in escrow until all of the revenue for the season is counted. If the NHL makes the predicted revenue for the year then the players will get the full escrow back. If the NHL makes less than predicted revenue then the players will only get a portion of their salary back.
The NHL takes it off beforehand, because nobody is going to write a cheque back to their company after they got paid.
How much escrow do the NHL players pay?
- At least 10% in each of the last 10 years
- In the 2018-19 season, escrow payments to the league averaged out to be 9.5 percent of a player’s salary.
You can see why the players hate escrow so much. They have negotiated contracts for a certain dollar amount, and that is what they are expecting to get.
You would be frustrated too if your company took a portion of your paycheck each time and you had to wait until the end of the year to see if you would get your actual negotiated salary.
There are two other issues that add to the large escrow towards the players.
1) The escrow is calculated by finding the mid-point of the salary cap between the floor and ceiling.
In other words, the NHL will set the league revenues of 50/50 between the salary cap ceiling and salary cap floor.
So if the salary cap is at $80 million and the floor is at $60, they would be expecting the average NHL team to have a total team salary of $70 million. In reality, the majority of teams would be above $70 million with many right under the $80 million mark.
This is already a marker that the players are getting more than 50% of revenues and the revenues will need to exceed the predicted amount for them to get back their full escrow.
2) The other issues is the escalator
The NHL players also have a clause in the bargaining agreeement that let’s them use an ‘escalator’ to raise the cap up to 5% each year.
The players can use this escalator to bump the salary cap up 5% from what the NHL sets it at. In the eyes of the players, this allows teams to sign free agents to higher and more lucrative contracts.
The players do not have to use the escalator, and they have been using a smaller percentage in recent years.
However, a higher escalator will simply mean a higher escrow amount as the league cannot be as confident that they will earn enough revenue to cover the extra percentage the escalator raises the cap.
Escrow in the new CBA
During the COVID pandemic the NHL and NHLPA have negotiated a new Collective Bargaining Agreement (“CBA”). As part of this new CBA the two sides negotiated a cap on the amount of escrow in each of the next 6 seasons.
This is advantageous for both sides as it gives the owners cost certainty and for the players sets a basement on the amount of money they can lose. This is good for both sides as overall revenues are sure to go down due to the pandemic. The NHL will be fighting to regain the the mark of $5 billion in yearly revenues.
Here is the Escrow Cap for the next six years:
Escrow is used as a tool for cost certainty for the owners. The players get a portion of their contract withheld on each paycheque – never knowing if they will ever get it back until the off-season.
Often these escrow payments take a huge chunk off of their negotiated salaries.
I think it is positive that the escrow amount has been given a fixed basement for the next six seasons. This will give the players and the owners a good path to move forward.
But, the players will still hate it!