Ultimately, sports leagues are businesses. No matter what team you root for, the end goal is for them to make money.
They often operate behind the scenes to maintain the financial stability and, overall, the happiness and success of both the owners and the players.
Hockey fans, for the most part, simply see the end product and maybe a bit of salary cap talk. However, there are a lot of intricate elements that make the league run smoothly.
Think of professional sports like any other job. The owners are the employers, while the players and coaches are the employees. The owners have to issue the players' paychecks, and the players are responsible for putting a good product on the ice.
The National Hockey League (NHL) utilizes a system known as escrow, which plays a critical role in the league's salary cap ecosystem.
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What is escrow in the NHL?
In the National Hockey League (NHL), escrow represents a financial arrangement where a portion of a player's salary is withheld and placed into an account controlled by a third party until specific contractual terms are fulfilled.
At its core, escrow in the NHL ensures that the agreed-upon revenue split between players and owners lines up with the percentages set forth in the Collective Bargaining Agreement (CBA).
This is designed to maintain a competitive balance across the league's various markets, which vary widely in size and revenue-generating ability.
Under this system, a portion of the players' salaries is withheld in an escrow account during the season. This escrow money assures that the players' collective share of Hockey-Related Revenues (HRR) does not exceed the predetermined split.
The actual league revenues are calculated after the season ends. If player salaries exceed the agreed percentage of these revenues, the excess is paid back to the owners from the escrow funds. Conversely, if the total salaries fall short of the players' share, the difference is returned to the players from the escrow pool.
Despite its intention to promote financial balance, escrow is a frequent point of contention among players, primarily because it can significantly affect their take-home pay.
The amount held in escrow varies each year, influenced by league revenue fluctuations and CBA adjustments. Therefore, it remains a topical subject during league negotiations and a key factor in player contracts and league salary structure discussions.
The true purpose of escrow in the NHL
The primary purpose of escrow in the NHL is to align the actual player salaries with the league's revenue performance.
Since the salary cap is projected based on forecasted revenues, escrow adjusts for discrepancies between the forecast and actual figures. If revenue exceeds expectations, players receive a refund.
Conversely, if revenues fall short, the held funds make up the difference to the owners. This system is critical to maintaining a 50-50 revenue split between players and league owners, a cornerstone of the league's salary cap system.
The unique situation of escrow during the COVID-19 pandemic
You may have noticed that the NHL salary cap has not increased much in a few years. This is due to the pandemic and the agreement that both players and owners made to make sure the players still got a paycheck despite playing in front of no fans.
The NHL and the NHL Players' Association (NHLPA) agreed to modify the escrow system for the pandemic-impacted seasons.
They established a cap on the escrow percentage to provide players with financial certainty. This cap was higher than usual to account for the decreased revenues but was meant to prevent extreme escrow percentages.
Typically, escrow balances are calculated and settled at the end of each season. However, due to the significant revenue losses during the pandemic, the NHL and NHLPA agreed to an extended schedule for escrow repayment.
This meant that players might have a portion of their salaries withheld for longer than usual, but it also provided a more manageable system for balancing the league's revenue split.
Calculation of escrow amounts
In the NHL, escrow amounts are calculated to maintain a balanced distribution of Hockey Related Revenues (HRR) between players and owners. This system ensures both parties receive a fair share, according to the terms agreed upon in the collective bargaining agreement (CBA).
Factors influencing escrow payments
The primary factors influencing the escrow amounts in the NHL include:
- Total Hockey Related Revenues (HRR): Escrow rates are adjusted based on the revenue projections for the next season, which comprise ticket sales, TV revenue, merchandise sales, and more.
- Players' Salaries and Benefits: Total league-wide player salaries and benefits also play a crucial role in determining the escrow amount establishing what percentage needs to be withheld to balance the HRR splits.
- Economic Conditions: Changes in the economic environment can impact consumer spending, affecting the HRR and, consequently, the escrow calculations.
Escrow percentage determination
The determination of the escrow percentage involves a few key steps:
- Initial Estimations: At the start of the NHL season, an initial escrow percentage is estimated based on the projected HRR and agreed-upon salary cap.
- Mid-Season Adjustments: The escrow rate may be adjusted midpoint of the season if there are significant disparities from the initial HRR predictions.
- Final Calculation: After the end of the season, the final HRR is tallied. If player salaries exceed their 50% share of HRR, the escrow withheld is used to correct the imbalance.
Impact on players
The NHL escrow system directly affects the amount players take home and their ability to plan their finances.
Escrow deductions can significantly alter a player's take-home pay. For instance, if the NHL sets escrow at 17.2 percent, a portion of each player's salary is withheld during the season to ensure the 50/50 revenue split with owners. Players receive less than their contracted salary amounts during the year.
Players must engage in complex financial planning due to fluctuating escrow rates. They need strategies that account for potential deferred payments and changes in expected income.
Escrow can influence future contract negotiations, as players may push for higher gross salaries to counterbalance the impact of escrow withholdings.
League revenues and escrow
The NHL's financial structure hinges on a balanced revenue system, in which escrow plays a critical role in ensuring a fair distribution of league income.
Revenue and escrow relationship
Revenue in the NHL primarily comes from sources like broadcasting rights, merchandise sales, ticket sales, and sponsorships.
The concept of escrow is tightly linked to these revenues. The league's revenue performance directly impacts players' salaries. They contribute a portion of their earnings to an escrow fund, which helps maintain an equitable split of the total hockey-related income between team owners and players.
This measure guarantees that the agreed-upon percentage shares are adhered to each season.
Effect of economic changes
Economic fluctuations directly affect the NHL's escrow system. During robust economic times, when league revenues surpass expectations, the escrow ensures players do not exceed their allotted revenue share; any excess in the fund is returned to the players.
Conversely, during downturns or shortened seasons, players might receive a smaller percentage or potentially no refund from the escrow, highlighting the system's role in financial stability within the league.
Escrow adjustments and disputes
Resolution of escrow disputes
When the generated revenue does not align with projections, the NHL's escrow system can lead to disputes between the league and players. In such cases, the resolution process involves negotiations between the NHL and the NHL Players Association (NHLPA), often guided by the terms set out in the Collective Bargaining Agreement (CBA).
If necessary, disagreements are resolved through a predefined arbitration process, ensuring that players receive fair compensation and team owners protect their financial interests.
Adjustments to the escrow rate occur when the actual league revenues grow above or fall short of expected figures. The primary aim is to maintain a 50-50 revenue split between the owners and the players.
The escrow percentage can be adjusted annually, and sometimes within a season, to reflect the current financial landscape of the NHL. For example, in response to the financial impact of the COVID-19 pandemic during the 2020-21 season and even the next year, which I spoke about earlier on in the article.