The deal that ended the last NHL lockout contained key provisions on how the league would spend its money. A hard salary cap restricted the amount owners could pay their teams. Meanwhile, another section guaranteed that hockey-related revenue would be split between the league and its athletes according to a fixed percentage – last season, players were allotted 57 per cent and the owners 43.
These two provisions don’t always square. First off, the salary cap is calculated using last season’s revenues and an inflation adjustment, which might be out of step with the league’s actual take for the current season. Second, teams do not spend uniform amounts on salaries. When you add up their expenditures, they might collectively pay more or less than the 57 per cent players are due.
So, how do you make sure each side gets the correct percentage at the end of the day? With an escrow system.
Throughout the season, part of each player’s salary is set aside in a bank account. That portion is adjusted four times during the year, based on the league’s projected revenue. When the season is over, total revenue is calculated. If the league has ended up with less than its 43 per cent share, it will take as much money from that account as it needs to make up the difference.
Bruno Delorme, a sports marketing professor at McGill University, said the escrow is a way for the league to ensure teams aren’t left on the hook for shortfalls.
“I think it was a safeguard for the league, because it has some problems anticipating its revenues,” he said. “It probably had higher growth expectations for some of the western U.S. teams, higher expectations from Columbus and Florida.”
It can work the other way: If the league pulls in more than expected, players get a share of the windfall, recouping all the escrow money plus some extra pay from the owners.
The NBA also uses an escrow system, but it works slightly differently: Rather than paying in all season, NBA players have a fixed percentage of their salaries set aside only once projected pay exceeds the revenue share the players are supposed to receive.
“The purpose is the same but the format is different,” said Andrew Zimbalist, an economist at Smith College in Massachusetts. “The escrow is simply a system of adjusting.”
The NFL, which also has revenue sharing provisions, does not use an escrow system because its cap system is stricter, with fewer loopholes than other major leagues, Zimbalist said. Major League Baseball, meanwhile, does not employ a cap.