Wednesday, March 07, 2007

A funny thing happened on my way to the bank to cash my pay cheque

As we all know, the CBA established a fixed relationship between player salaries and league-wide hockey related revenues, or HRR. Right now that relationship is 54%.

Ensuring that salaries collectively come in right at 54% requires reconciliation. The lower and upper limits on team salary caps (currently $28 and $44 million) are set based on pre-season estimates of HRR, and an escrow account withholds part of the players' salaries to aid in the reconciliation. At season's end, two things need to be brought into alignment: the league's actual HRR is calculated and multiplied by 54% to determine what player compensation should have been, and then the player salaries for the preceding season need to be raised or lowered across the board so that they match 54%.

Under this system, it's entirely possible for owners to sign players to contracts that collectively exceed 54% of HRR, in which case, the salaries are rolled-back at the end of year. And guess what: if the estimates of revenue for the current season are accurate, that's exactly what's happened.

Using Irish Blue's projected final cap numbers for each team, it's estimated that the cap hit for player contracts will total $1.258 billion, or an average of $41.9 million per team.

But if the pre-season estimates of HRR are accurate, teams will only be allowed to spend $1.08 billion on player salaries, or $36 million per team.

How to reconcile the two? Simple: player salaries would be rolled-back by 14.1%. For Ryan Smyth junkies, that means a contract with a paper salary of $5.5 million would result in a pay cheque for $4.725 million.

Oilers payroll below average
The reconciliation also helps put the Oilers player spending in perspective. Right now they're projected to finish the year at $41.9 million in cap salaries. That figure creates the illusion that they're spending close to the cap. In fact, their player compensation is below league average.

Factor in the adjustment, and what they'd actually pay would be $35 million, or roughly $1 million below the league-average team budget of $36 million. Raise or lower league revenues to change the reconciliation, and this relationship doesn't change -- the Oilers' share of player costs remains less than 1/30th of the pot. As Tyler always reminds us, it's a fixed pot, and raising one player's salary simply moves money between players, it doesn't change the total amount the owners' pay.

I always need to qualify these commentaries by restating my view that I don't think higher compensation necessarily equals higher performance. But when the team is in the top 25% for revenues, below league-average for player compensation, and out of the playoffs, you have to think that the fans who provided this spending power deserve more. I'd like to see both better investments by management, and a team that uses its higher than average revenues to deliver above-average player compensation.


At 1:30 PM, Blogger Matt said...

Good to see you chiming in, Avi. I think you do have one thing wrong here, though: I'm 90+% certain that escrow is not returned directly (proportionally) to the paying teams. The formula for distributing escrow money back to the teams includes Team X's revenues and whether Team X's payroll is above or below the midpoint.

The important point, which I'm glad you made, is a team's nominal payroll is not at all the Final Word on "what they're spending", especially when (say) a friendly journalist compares the payroll number to gate receipts, e.g.

At 1:44 PM, Blogger Avi Schaumberg said...

You're right about the escrow point. I also left out the relatively minor impact of benefits on the CBA calculations. Neither are material to the larger point.

At 1:46 PM, Anonymous speeds said...

I wrote something kind of similar on my old blog about a year and a half ago, and it was derailed by what matt mentions in the comments here, that escrow isn't directly returned. Here's the link, if anyone's interested:

At 1:47 PM, Anonymous speeds said...

At 1:50 PM, Anonymous speeds said...

Link to old blog

sorry all, not good at this linking stuff.

At 7:06 PM, Blogger Avi Schaumberg said...

What happens to the escrow funds? This is covered under 50.11(d), “Procedures in the event of an overage.”

They’re paid out in three parts. First, escrow dollars owed to the ten highest-revenue teams are used to fund up to 1/3 of the league’s redistribution scheme. In addition, another 21% of the redistribution scheme monies come from the ten highest-revenue clubs from their regular-season revenues. How much money will be required to fund the redistribution scheme this year is unclear, as is the net impact on the Oilers. The more effective the low revenue teams have been at bringing revenue closer to the mean, the less is paid out in redistribution.

Next, the funds are distributed to any club that has a salary less than the midpoint of league payroll. Guess what? If a team is below the league midpoint, they get topped-up to the $36 million mark, or less is the top-up would cause them to exceed the 54% relationship between salaries and revenue.

Then finally, the remaining funds are divided equally between the 30 clubs.

This is muddy enough that it looks on the surface like the Oilers would be net losers, but I find it hard to be sure.


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