How Escrow is becoming a Growing Concern in the NHL

7 years ago

Back in the spring, discussion among the NHLPA’s members (aka all of the NHL players) had a discussion that created some division inside the union. At the heart of it was a growing discontent with the shrinking of some players’ paychecks so that others could get larger contract offers. The cause of this was one 2012’s dirtiest words in hockey: Escrow. Escrow is a fairly confusing provision in the 2013 Collective Bargaining Agreement (CBA) meant to ensure that hockey-related revenue (HRR) is split between the players and the franchise owners in accordance with the CBA. It is not necessarily something that fans need to know to enjoy the game or even understand the decisions that their team’s management and their favorite players make, but it is a concerning issue for the players and it may pop up once again in the next round of CBA negotiations.

My goal here is to:

explain how escrow works in the confines of the current salary cap system,
give an estimate of escrow for the 2015-16
estimating the effect of the salary cap escalator on escrow in 2015-16,
provide an explanation of how escrow can create a division in the players’ union, and
predict potential changes to the salary cap system in the next round of CBA negotiations.

How Does Escrow Work?

In order to understand what escrow is and how it works, we first need to understand how the salary cap system as a whole works. Below is a flowchart of how the salary cap limits are set for any given year.

The NHL comes up with a projected HRR sometime during the preceding season. This projected HRR ultimately sets the salary cap limits after a few simple steps of calculations. First, the projected HRR is split into two equal shares (which is what the NHL and NHLPA agreed to in the 2013 CBA) with one share going to the owners of the league’s franchises, and the other share going towards all of the players in the league. This players’ share is then divided by the current number of teams in the league (i.e., 30 right now) to figure out how much each team can spend on their players. This number becomes the “Midpoint of the Salary Cap Range.” The salary cap limits (i.e., the floor and ceiling) are then set at ± 15% of this Midpoint. Finally, if either NHL or the NHLPA decides to use something from the CBA called the “cap escalator”, then the salary cap midpoint and limits are increased by that percentage, which is capped at 5%.

You can either go up or down the flow chart. If you go down from the top, you would be multiplying everything by the numbers provided. If you go up it from the bottom (as I will in the next section), then you divide by the numbers provided.

The use of a salary cap range sets up a system where the players can be promised an amount of salary that is not equal to their share. If most teams in the league are hovering at the cap floor, then they will be paid less than they are legally entitled. Likewise, if most teams are reaching for the ceiling, then the players will make more money than they are legally entitled to. In either case, there needs to be a way to make sure the players and owners are getting their 50% shares.

That is the purpose of escrow. Escrow is more or less a bank account held by a third-party. Here, the players put money into escrow when they’re expected to make more than they are entitled to. If the players are paid less than they are entitled to, then the owners pay into escrow. These payments are on-going throughout the season and will also respond to any unexpected deviations in actual HRR from the projected HRR. Ultimately, at the end of the season, escrow dispenses money to the owners and players in order to put both sides at their agreed upon 50% share.

Estimating The Effect of Escrow on Player Salaries in the 2015-16 Season

We know enough information about the 2015-16 season to make an estimate of escrow. There are four things I will use in this estimate:

The salary cap ceiling ($71.4m).
The fact that the NHLPA used a 5% cap escalator.
An assumption that actual HRR closely matched projected HRR.
The collective salary earnings of all NHL players in 2015-16.

As mentioned before, we can work from the bottom up on my flowchart by dividing by the provided numbers to figure out everything else on the chart.

The original salary cap ceiling without the 5% escalator comes out to $68.0m. Then, we can divide that by 115% to find out that the original Midpoint of the Salary Cap Range was $59.1m. Multiplying by the 30 teams gives us a projected players’ share of $1,773.9m. (If you’re curious, this means that total projected HRR for the NHL was $3,547.8m in 2015-16, aka a lot of money.)

I am making an assumption that the actual HRR was very similar to the projected HRR. I make this assumption because as far as I know, the NHL has never released actual HRR numbers. Should an actual amount be announced, I will come back and revise my calculations.

Finally, I calculated the collective salary earnings of all NHL players in 2015-16 from NHL Number’s salary data. It came out to a collective earnings of $2,112.3m prior to escrow and taxes.

So we’re finally at the escrow part. Escrow is basically the percentage of money taken from the players’ paychecks that ensures that 50/50 split between owners and players. It ends up that players lost an estimated 16.0% of their paychecks immediately to escrow in 2015-16.

How The Cap Escalator Made Things Worse

In 2015-16, the cap escalator increased the salary cap ceiling from $68.0m to $71.4m. This allowed teams to take on up to an additional $3.8m in cap hits. Let’s for now assume that cap hits and salaries on a team and league wide basis are similar enough to be interchangeable.

As a result of the cap escalator, 18 teams in the league were able to spend over the “un-escalated” cap ceiling. Collectively, they committed to an extra $55.0m to players. So without the cap escalator, the collective player salary earnings would be down to $2.057.3m. This would drop escrow down to 13.8%. In reality, it likely would have dropped escrow even lower. The cap escalator would have still contributed some amount to increased salary for players signed by the other 12 teams in the league.

I need to start off by saying that this heading here isn’t theoretical. It’s been an ongoing issue for a few years now. In January 2015, Rick Westhead wrote a great report on this topic for TSN:

Pushing the overall salary cap limit higher drives up the amount of money available for potential free agents – bad news for a spartan free agent class this summer that’s headed by Martin St. Louis – but it also leads to higher escrow collections for all players.
Players have become increasingly conflicted about this, several NHL player agents say.
“Players are worried about paying additional escrow,” Ian Pulver, a former NHLPA executive and current player agent said in an interview. “It’s a vicious cycle. Over the course of 10 years, players have voted to increase the cap, to ride with increasing revenue.”
Pulver said it would be a mistake not to trigger the escalator clause.
“Because there are a couple of bumps along the way shouldn’t mean the players shouldn’t continue to increase the cap and force the major players — the NHL, the clubs and the NHLPA – to grow revenues. To vote against the increase of the cap because of a fear of escrow runs counter to the collective good and common sense.”
Last summer offered a glimpse at the angst players are feeling when they voted on whether to include the revenue from the league’s new $5.2 billion contract in this season’s cap.
The players initially voted no, 16-14.

The key is that the benefit that that summer’s free agent signings gained was in part at the expense of players on continuing contracts. Those players lost money so that the free agents could make more.

Let’s consider a hypothetical player making $5m a year from 2014-15 into 2015-16. Without the cap escalator, that player is losing 13.8% to escrow, which effectively drops his salary to $4.31m. But with the cap escalator, escrow rises to 16.0% and his effective salary drops to $4.20m. The escalator has cost this player $110k. While it’s arguably a drop in the bucket to a millionaire, others would tell you that every dollar counts. There is also the principle of the matter. These players were promised a certain amount of money and now they are not receiving it in full.

Now we will look at one of the big names signed in the summer of 2015: Mike Green. He signed onto a deal worth $6m in salary for each of three years. After escrow, his 2015-16 salary drops by 16.0% to $5.04m. So what would have been an equivalent salary at 13.8% escrow? $5.85m. Essentially, as long as the cap escalator allowed Green to make at least an extra $150k, then he has benefited from the cap escalator. And his benefit is matched by his peers on continuing contracts losing a little bit more salary every year to escrow.

This applies to any player signed in the summer 2015. Even the less-talented individuals on small deals can benefit. For example, a player who was given a $625k deal would have an “equivalent un-escalated salary” of $608k. So a raise of more than $17k as a result of the cap escalator is beneficial to that player.

As mentioned previously, the cap escalator allowed for at least an extra $55.0m of extra salary in 2015-16, almost all of which went to benefit the big signings prior to that season. And almost all of that $55.0m came at a cost of guys on continuing contracts. It’s easy to understand why the NHLPA would be increasingly split on this issue over the years. A hundred guys or so each year are taking money from hundreds of their peers.

How This May Be Addressed In The NEXT CBA

The present CBA is legally valid until 2022…unless either the NHL or NHLPA decide to terminate it early as soon as 2019. We may be only three years away from another set of discussions about escrow, the structure of the salary cap system, and various other fun details.

Before moving on to the 2019 CBA discussions, it’s worth noting that the deals that helped trigger the 2012-3 CBA discussions (e.g., Kovalchuk, Luongo, Hossa, etc.) are currently making this escrow issue worse. Across all contracts, there is $85.2m more in collective salary being paid to players than collective cap hits (which I will call “collective cap advantage”). Right now, there are only 19 pre-2013 front-loaded deals still in the league, but those 19 deals contributed $19.9m to the collective cap advantage of the entire league making them the most significant contracts for increasing escrow. However, by 2017-18 those deals will mostly be in their back-diving phase. Together they will be contributing -$2.2m to the collective cap advantage and will thus start to drive escrow down.

I suspect the 2019 CBA will seek to reduce or eliminate the cap escalator. The cap escalator creates an artificial increase to the salary cap limits without actually backing it up with increase HRR. This encourages salary inflation, especially as more and more teams are spending above the midpoint. And ultimately, this inflation only benefits players signing onto new deals while simultaneously reducing the effective salaries of everyone else in the league already under contract. Every year, the NHLPA should be about 80% against the cap escalator if they decide to vote out of personal benefit.

Lastly, I expect the salary cap limits calculations to change. If the league reduces the amount that the ceiling is over the current “Midpoint of the Salary Cap Range”, then escrow will be reduced and salaries on new contracts will be in line with a lower escrow world. I would personally maintain the relative size of the range, which would mean the Midpoint would instead become a “Set Point.” I figure making the limits 80% and 110% of the Set Point would be a step in the right direction. That change would likely drop escrow down by about a third.

Conclusion

Ultimately, the main thing to take away from this topic is that the salary cap system is incredibly complicated. The flexibility of the cap system creates a system where the players could be paid too much money, in which case escrow Is needed to adjust their earnings. And it’s by pushing escrow increasingly higher that players signing newer contracts can make a little extra money at the expense of their fellow players who are committed to older, long-term deals.

This leads to a situation where some amount of in-fighting among the players is beginning as more and more players become dissatisfied with this situation. We should expect to see this contention brought up in the next round of CBA negotiations. But in the end the changes should not have much effect on how any of us enjoy or understand the game. It is mostly a backstage dilemma to us fans.