As NHL general managers meet in Florida, there is a lot of NHL news circulating. From the possibility of more video analysis, to the need to cut guards to improve player safety, to the playoff format that NHL commissioner Gary Bettman says would be perfectly acceptable, there is almost too much news to hear.
One topic that keeps coming up for teams, players and fans is the magnitude of the salary cap changes expected from year to year. Since September, the news has been fluctuating astronomical projections too far the most realistic with a ton of certainty etched into the statements.
If you’ve been following the news, you’ve probably heard the numerous reports that the NHL’s salary cap is set to increase by only $1 million next season. News that hasn’t exactly thrilled anyone.
If you’re a casual fan, you probably thought, “Oh, that totally makes sense,” and then secretly Googled what “escrow” means in terms of the NHL salary cap. That may have left you a little confused, as it was for me when I first came across the topic.
Long story short, it’s complicated and has more to do with the business of the NHL than the simple question of “how much money does this player make.”
We thought it would be helpful to explain, as simply as possible, what sequestration is, how it is used, and how it causes this salary cap depression we are seeing in the news.
What is Escrow in the NHL?
The Collective Bargaining Agreement (CBA) is the contractual agreement between the NHL (which represents the owners) and the NHLPA (which represents the players) to outline how all “employment” arrangements will operate over a given period of time.
The current collective bargaining agreement, finalized during the pandemic, is in effect through 2026. Under the collective bargaining agreement, players and owners agreed to share hockey-related revenues (HRR) equally for each NHL season that runs from July 1 to June 30, essentially the hockey fiscal year.
HRR influences the increase in the league’s salary cap each season. If the league makes a lot of money, the salary cap can increase. If the league doesn’t make a lot of money, it won’t increase.
Of course, no deal works perfectly if there is always a perfect 50/50 split, because one side may feel like it is contributing, or actually contributing, more to the overall benefit of the league.
This is why a sequestration was established.
Think of escrow as a tax that is applied to all player paychecks throughout the year. All of that money is then held in a fund until the end of the season. If the HRR is greater than the money paid to the players, then the money held in escrow is returned to those players at the end of the season. But, if the players’ salaries end up costing more than the league makes, the money held in escrow is used to achieve a 50/50 split.
Essentially, if the league does well, the players get their escrowed money back. If the league doesn’t do well, the escrowed money is then used to pay off the owners, since they would be losing money.
It is a possibility for both parties.
If this seems a little unfair to players, it’s easy to think about it in terms of your own current job. Would it be easier to keep a portion of your salary and redistribute it at the end of the year, or would you rather wait and see how your company performs and then potentially have to write them a check if things don’t go well?
The players chose the first option.
Escrow 101: Escrow is a preemptive tax on player salaries held to ensure players and owners get a 50/50 split of the HRR
What have been the trends in escrow?
By 2010, when the salary cap had been in place for a few seasons, the NHL had already hit a jackpot when it came to predicting the league’s financial health. The salary cap was constantly being revised upwards, players were getting nearly all of their money back, and owners were happy.
Then in 2012-13 the lockout happened and the salary cap went from $64.3 million to $60 million. Unfortunately, for a few years the league continued to project revenue growth and the salary cap continued to increase.
The HRR ultimately did not increase as much as originally expected, and as a result, the amount of money deposited to players began to decrease.
The result was that no one was happy. Players were earning less, owners were paying more, and the league was not growing as much as expected.
Then, just as things were starting to improve, the COVID-19 pandemic hit. The recurring theme was: No one was happy.
As of the 2019-20 season, the league and teams were making virtually no money due to empty stadiums and a declining interest in the sport. During this time, players were still under contract to make money and the split between HRR and the escrow was therefore drastic.
The owners continued to pay the players, even though they were making little profit, and as a result, not all of the money collected during the year was returned to the players.
Since the start of the pandemic, players have not seen a single cent of funds returned. A sensitive point that is being impacted today.
Escrow 101:HRR is down, players aren’t getting their escrowed payments, no one is happy
What does this mean for the 2023-24 NHL salary cap?
Since the owners have paid the bill over the past few seasons, there is still a significant debt to be repaid. The escrow is still being used to cover this amount.
When Gary Bettman announced earlier this season that the debt could be repaid earlier than expected, the HRR and salary cap would increase and therefore players could then start to recoup some of their escrow starting next year.
Unfortunately, these projections appear to be wrong again and as a result the debt still has to be paid and the salary cap will only increase slightly.
Escrow 101: The debt is not yet repaid by escrow, therefore, the salary cap cannot increase
How to solve the sequestration problem?
First, the league is hoping that high-revenue teams will make the playoffs because that will bring them more money, allowing the league to stabilize dues payments. If that happens, or if further discussion between new NHLPA executive director Marty Walsh and Bettman results in something a little more fruitful, the salary cap could increase even more if those numbers look better at the end of this season.
Everyone hopes that this is the case.
Escrow 101:Pray that the league’s highest-earning franchises do well in the playoffs.
Escrow Summary
Let’s recap everything noted above:
- Players and owners get 50/50 split of HRR
- Escrow is a tax on players to ensure that the 50/50 split can take place
- If the league does well, the players get that money back. If the league doesn’t do well, the escrow system is used to pay the owners back.
- HRR isn’t doing as well, so players continue to pay off debt to owners using an escrow account, leading to salary cap difficulties
Hopefully the league, players and owners will all be happy at the end of the season.
If you want a full breakdown of the numbers, we highly recommend reading these articles to get more information:
