Monday, June 29, 2009

How the NHL Salary Cap Went Up

This question has befuddled me for a while so I decided to do some research into it. As NHL fans might know, the league set its salary cap last week at $100,000 higher (at $56.8 million per team) for the 2009-10 season than it was for the previous year. This means that every year since the cap came into creation, its upper limit has gone up.
Because of The Great Recession, NHL revenues were down (ticket and suite sales, sponsorships, licensing, etc.) in 2008-09 as compared to 2007-08. With revenues down, one would expect the cap also to go down, correct? Not so fast, my friend, as Lee Corso would say.
It seems that every year, the NHL Players Association has the right to invoke a 5 percent bump in the cap. How is this possible, I wondered?
So I set out to find the legal verbiage that gives the PA this right. I had to locate my dusty copy of the NHL's Collective Bargaining Agreement, a trusty spiral-bound copy of which I obtained at the 2006 draft in Vancouver (along with a seminar for us low-rent hockey scribes run by Messrs. Bill Daly and Ted Saskin).
It took a few minutes to hunt down the applicable passage and a few more to translate it from the legalese, but I believe this to be the relevant portion:

Article 50 Team Payroll Range System, Section 50.5 (b) Lower Limit and Upper Limit (i) explains the formula for setting the per-team cap and says that it "shall be adjusted upward by a factor of five (5) percent in each League Year... until League-wide Actual [Hockey Related Revenue] equals or exceeds $2.1 billion, at which point the five (5) percent growth factor shall continue unless or until either party to this Agreement proposes a different growth factor based on actual revenue experience and/or projections, in which case the parties shall discuss and agree upon a new factor." [The italics are mine.]

There it is, basically in the fine print of the CBA, my reading of this section (borne out by what has happened in practice) shows that the league gave the players association the right to increase the cap by 5 percent every year until the CBA expires.
So if the players had not invoked this so-called "escalator clause" for 2009-10 the cap would have fallen by $2.84 million per team to $53.96 million. It doesn't seem like much, but as one agent pointed out to me during the lockout, you have to multiply the difference by all 30 teams. Do that and you have an extra $85.2 million in player salaries next season. That equates to roughly 179 extra players making the league minimum of $475,000 (or 7.8 full team rosters' worth) or another 7.5 players capable of making the league-maximum salary of $11.36 million. It's sort of like the NHLPA's equivalent of President Obama's economic stimulus plan -- flip the switch and print more cash.
Wouldn't it seem, then, like a no-brainer for the players to vote every year to invoke the 5 percent increase? Again, not so fast.
Because the CBA guarantees teams, in the famous words of Commissioner Gary Bettman, "cost certainty," the owners (and the players) always get their percentage of hockey related revenue. This is where the "escrow account," which the players dread, comes in.
The owners have the right to retain a percentage of players' salaries up to 20 percent until the exact amount of revenue and player salaries are finalized at the end of the season to make sure that each gets the exact percentage it is due. So, in theory, a player who signs a contract for $1 million might gross only $800,000. (It also works in the flip direction: if hockey-related revenue exceeds projections, a player could earn more than the contract he has signed.)
Larry Brooks of the New York Post, who understands the machinations of the CBA probably as well as any hockey writer, wrote about this subject on Sunday, June 28.
He reported that the escrow for 2008-09 was 15.9 percent and used the example of the Washington Capitals' Alexander Ovechkin, who was to be paid $9 million but, because of the escrow, grossed $1.431 million less.
Brooks reported that the union's vote on upping the cap 5 percent was close and then opined that players who voted against the escalator clause "were short-sighted and selfish, for it always is important to have the cap as high as possible and the most money possible in the system."
Let's examine that statement for a minute. If you're a high-end player like impending free agents Jay Bouwmeester or Marian Hossa, you may very well command a top salary of $8 or $9 million. Even if you have 20 percent of it withheld -- the escrow will surely increase since the cap has gone up artificially because of the escalator clause -- you still gross $6.4 or $7.2 million. Not bad.
But what if you're Colin Stuart of the Atlanta Thrashers, making the league minimum? On your contract of $475,000, you're looking at grossing perhaps $380,000 instead of $400,000. Do you want to vote, in essence, to lose $20,000 in pay so the top-end free agents can have the theoretical right to make the maximum salary of $11.36 million instead of $10.79 million?
Remember, there's probably a lot more guys making the league minimum than there are Ovechkins, Lecavaliers, Heatleys, Bouwmeesters and Hossas. And the average length of a career of a guy making the league minimum is a lot shorter than the highest-paid players. The players at the bottom end of the salary structure need to make as much as they can before they're back in the AHL, ECHL or lower-paying European leagues.

3 comments:

  1. Very interesting how this seems like the rich getting richer and the poor getting screwed over!

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  2. Very good point about potential conflicts within the NHLPA as to the escalator clause.

    As I understand it, the escalator clause is intended to mimic annual revenue growth--but in 2009-2010 NHL revenue is expected to actually decline. I think there could be some real bitterness within the NHLPA if players lose the full 20% amount from their paychecks. I can't wait to see how the Rangers and Flyer and Flames adjust to a lower cap ceiling in 2010.

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