When the NHL players make their first counterproposal to the owners they will likely want changes to the escrow system along with greater revenue sharing among the teams.
Neither of those items were on the agenda Wednesday in New York when the owners and the NHL Players' Association finished labour negotiations for the week. They spent the day in small groups discussing pensions, benefits, and health and safety issues.
Escrow became a nasty word among the players about three years after they agreed to it as part of accepting a collective agreement with a salary cap tied to revenue in the summer of 2005. They didn't think much about it at first but after the 2008-09 season, with the global economic recession in full swing, there was a nasty bite to their salaries when the NHL's revenue sagged – essentially a 13-per-cent pay cut in the off-season.
The owners kept almost all of the players' escrow money in the fall of 2009 – $207-million (all currency U.S.) – and divvied it up among themselves. You can imagine how that went over with the players.
Before we get to just how that money went from the players' pockets to the owners', the escrow system needs to be explained. In the current agreement, the players agreed to take a certain percentage of the NHL's hockey-related revenue (HRR). It was 57 per cent in 2011-12, which the owners want to slash to 43 per cent in the next deal.
Since the actual HRR is not known until a couple of months after the season when all of the ticket money, broadcast money, merchandise sales and every other form of revenue is tallied, neither is the players' share. So the NHL and the NHLPA estimate the coming season's revenue and then the union comes up with a percentage to deduct from the players' pay cheques.
The percentage is adjusted several times during the season as revenue is monitored and the money goes into an escrow account. Once the final HRR is known, if the money paid out to the players by the owners was more than their share then the difference comes out of the escrow account. If there is anything left, the players each get a cheque in the fall.
Generally, the NHLPA likes to set the escrow deduction on the high side. The final number is the result of haggling between the league and the union, but it's usually a bit high because it's much easier to take money out of an escrow account than it is to chase 730 players around asking for cheques.
In 2008-09, the players got a first-hand look at how the system can bite them.
A memo from NHL commissioner Gary Bettman to the governors itemized just how the players' money in the escrow fund was split up. It was the second time since the system was implemented in 2005 the players did not get 100 per cent of their salaries (they lost 2.5 per cent in 2006-07), but it was the first major haircut with 12.9 per cent coming off their compensation.
Despite the recession, the NHL saw its revenue grow 0.6 per cent from the previous season to $2.6-billion in 2008-09. The Canadian dollar was worth just 85 cents U.S. at the time, which was a drag on revenue, but the killer was a 15-per-cent increase in payrolls.
The NHLPA anticipated trouble that season, so an average of 18 per cent was deducted from the players' pay cheques. This produced $287-million for the escrow account.
Remember, that money was all taken from the players.
The players' share of HRR was 56.74 per cent in 2008-09, which entitled them to $1.49-billion of the NHL's $2.6-billion in revenue. But thanks to the 15-per-cent increase in player salaries handed out by the owners and general managers, $1.7-billion was actually paid out.
That meant the players were overpaid by a little more than $207-million (this is the actual figure, as the above numbers were rounded off). Thus the owners were allowed to dip into the $287-million the players paid into the escrow account.
First, as Bettman recounted in the memo, almost $80-million was refunded to the players. Then came the owners' turn.
One third of the league's revenue-sharing commitment – $48.7-million – was paid out first. That is the money the rich teams give to their poor relations, money the NHLPA would like to see greatly increased in the next collective agreement.
Then a little more than $28-million was paid to "top-up" some teams whose revenues were on the low side. This money allowed their payrolls to hit the midpoint between the salary cap and the floor.
Finally, the balance of about $130-million was split between all 30 teams, which worked out to about $4.3-million per team. Neither this money nor the $28-million is part of the owners' revenue sharing.
The cuts were not as deep in subsequent seasons but they still hurt. In 2009-10, the players lost 9.4 per cent of their contracted salaries and bonuses. The loss dropped to 2.3 per cent in 2010-11 but only after a nasty fight between the union and the owners that saw the players successfully get $20-million added to the revenue pot from public subsidies and other money received by the Phoenix Coyotes, Nashville Predators and Washington Capitals. The 2011-12 numbers are not in yet.
Not bad if you're an owner, not so hot if you're a player looking for a nice escrow cheque in the fall.
As Bettman noted with obvious satisfaction in his 2009 memo, once the numbers were in and the escrow was paid, the average team payroll was $47-million. That, the commissioner pointed out, compared well with 2002-03. In those days, the owners were just starting to complain loudly about rising player salaries and the need for "cost certainty" as they called a salary cap.
In 2002-03, the average payroll was $47.2-million. But league revenue was just under $2-billion, while in 2008-09 those $47-million payrolls were paid out of total NHL revenue of $2.6-billion.
So a lot more than the players' $207-million in escrow money flowed into the owners' bank accounts that summer.