NHL lockout: breaking down a new CBA proposal

Updated: October 19, 2012 at 4:03 pm by Eric T.

Signing a contract
Gary Bettman has aged badly since he signed his first CBA
By New York World-Telegram and the Sun Newspaper Photograph Collection staff photographer

Yesterday there was a flurry of CBA proposals made by the NHLPA. Today, one came from another source: Twitter user @67sound. It’s an interesting proposal — unlike the overwhelming majority of the fan/media proposals, it actually works to deliver what the players and owners say they need. So I want to break down how it works.

The basic stances of the two sides have been made clear. The owners want a 50/50 split of hockey-related revenue (HRR). The players are open to a 50/50 split but do not want a rollback (or the equivalent increase in escrow withholdings) of their existing contracts, which add up to more than 50%. The owners say the drop to 50/50 needs to be effective immediately to save certain struggling franchises.

What the new proposal suggests is that the cap, floor, and escrow calculations be based on a 50/50 split, but that teams be permitted to spend more than that if they choose. Teams could spend up to the current $70.2M, but the excess over the 50/50 split would come out of their own share of the revenues rather than affecting what other owners and players get.

Let’s go through some numbers to illustrate how that works.

The soft cap system

The NHL’s proposal of a 50/50 split estimated that the cap would be $59M. That means that they estimate that having player salary and bonuses total $1.53B would mean that their share (including benefits) was 50% of HRR. So if the player salaries add up to more than $1.53B (it’s currently $1.76-1.82B depending how many bonuses get hit), under the league’s proposal each player would give back ~13-15% of their salary via escrow to reduce their total to $1.53B.

This proposal suggests setting a soft cap at $59M and a hard cap at $70.2M, and if a team decides it wants to spend over the soft cap, the excess will come out of their share instead of the players’s share, which would mean that it is removed from the escrow withholding calculation. So using the current salaries, it would look something like this (assuming half of performance bonuses end up getting paid):

Mechanics of the new proposal

So escrow would withold from each salary the amount required to reduce the total amount below the red line from $56.3M per team to $51M per team. Here is how the calculation of escrow witholdings under this proposal compares to the NHL’s flat 50/50 proposal:

Amount withheld under each proposal

This is how we calculate how much money each team receives, to achieve the desired goal of having expenditures over $59M come from the individual owner’s pocket instead of the collective owners’ pool. Obviously, it can’t be how we calculate the withholdings from each individual — if Buffalo ($75M payroll) and Toronto ($59M) stripped the same $5.6M from their players, the percentage in Toronto would be much larger and a player with a $3M contract there would find himself taking home less money than his $3M counterpart on the Sabres. Instead, we add the total money withheld ($160M) and work out that each player’s salary would be reduced by 9% (or less if there is appreciable revenue growth).

So the players don’t reach their goal of exactly preserving current the contracted salary, but doing so would actually mean giving them an effective raise, since escrow has always reduced their contracts by a bit. We don’t have the 2011-12 figures yet, but in the three previous years escrow withholding reduced their take-home pay by an average of 8.2%. So giving back 9% this year is consistent with what they should have expected when they signed the contracts.

The unequal payout to teams of the withheld money results in a bit of a redistribution. Under this scheme, the Islanders’ player costs are being reduced by about 10% (they get back $4M on about $42M payroll), while the Sabres’ player costs are being reduced by only 7% ($5.6M back on $75M payroll). This is in keeping with the players’ goal of shared sacrifice, having the wealthy teams pitch in a little more in revenue sharing rather than demand that the players bear all the burden of supporting the poorer teams.

Does this deal work?

Here’s how it looks from each party’s perspective:

The large-market teams are accepting increased costs over the NHL proposal, but in return they gain a competitive advantage that they have shown (through their decision to take on those high-salary players) they value more than the cost reduction.

The small-market teams are also getting slightly increased costs over the NHL proposal, but not by much. This might be acceptable, but it was actually not what @67sound had intended; he was thinking that their costs would match the NHL proposal. In private conversation he suggested a more sloped distribution of the withholdings distribution akin to the NBA luxury tax, with the teams that spend above the $59M limit receiving none of the withholdings and their share being used to increase payments to teams in smaller markets. This is a detail that could be negotiated within the framework of this approach.

The players are taking a bit of a reduction in salary, but nothing beyond what they should have expected when they signed their contracts. Since their current salaries total quite a bit more than 50% (thanks in part to the trend in recent years toward front-loaded contracts), maintaining their current pay without escrow seems unlikely; it is hard to see them getting much more money than this.

Each party gets most of their primary desires. That’s not an easy thing to achieve, no matter how many people say they have a simple solution. The thresholds might be adjusted a bit during the negotiation process, but this generally seems like a decent framework for negotiation.