THE BOOK--Playing The Percentages In Baseball

Wednesday, September 02, 2009

Are some NHL players really this clueless regarding escrow?

No, I’m not talking about how they got rid of yet another union head.  They’ll be working on their 4th union head in 5 years when they sign their next one.  No, I’m talking about escrow:

“The last time we gave up a lot,” Exelby said. “I think it’s a fair statement that ownership got what it wanted in the last agreement. We definitely have a problem with the escrow issue.”

Here is what Exelby is referring to. When the lockout finally came to its conclusion, the players found themselves annually receiving about 56% of league revenues in their so-called new partnership with the league. Under the escrow system, a percentage of player salaries are withheld until the end of the season when the league tallies its revenues. Because of the recent global economic woes, there were times last season when more than 20% of a player’s salary was withheld.

“We are supposedly sharing the pie with the league, but the players keep paying,” Exelby said. “It’s almost like the players are being held hostage. And it keeps snowballing. The salaries are good, no doubt, but we are losing 10, 15, 20% of our salaries ... There is no end to it.

Wow, that is remarkably clueless.  The players get anywhere from 54% to 57% of the pie.  If the pie shrinks by 20%, the players will get about 20% less in salary.  Hello? 

As I mentioned last year, players have no idea how escrow works.  Suppose you had a world with no escrow. How would the NHL pay its players under the revenue sharing system?  Well, it would be pretty much identical to the way consultants are paid.  This is how it works:
1. I, Joe Schmoe, as a consultant, work for, say, Tango Consulting, at 100$ and hour
2. Tango Consulting contracts with, say, Rocky Roades Inc for 200$ an hour
3. I work at Rocky Roades Inc for one month.
4. Rocky Roades takes up to 90 days to pay Tango Consulting
5. Once Tango Consulting is paid, 50% of the revenue it received is paid out to me, Joe Schmoe

That’s how it would work.

Now, Tango Consulting, being a big business, and not wanting to p-ss off its consultants, won’t actually wait for Rocky Roades Inc to pay them before paying its consultants.  They’ll pay them say within 15 days of completing the work because they know that eventually they can collect from Rocky Roades Inc.  Basically, Tango Consulting borrows money against its credit line to meet its salary obligations.

If Tango Consulting wanted to be even nicer, and this is what most companies do, they simply pay its consultants every two weeks based on billable hours.  So, rather than waiting until they actually are paid by Rocky Roades, or even waiting 15 days, they simply pay their consultants as if they already got paid.  If Tango Consulting ends up not getting the promised revenue, it has no effect on the consultants who were paid already.  There is no givebacks on the consultants’ parts. So, all this works because the company either has a credit line, or has deep profits to dip into.

The NHL however, being in partnership with its players, can’t operate like this.  The players are not promised a 5MM annual salary.  They are promised a 5MM annual salary, contingent on the league generating 2.5 billion dollars.  And if the league only collects 2 billion dollars, then guess what?  EVERYONE’s actual alary is chopped by 20%. 

So, the players have to choose: do they want to get paid until after the revenue is actually collected, meaning that their first paycheck may come early (due to season ticket sales), but later paychecks will come in spurts, and will go up-and-down based on gameday tickets sold?  Or, do they want to take 80% of their expected annual salary in bi-weekly paychecks, and then get the remaining salary (if any) based on revenues collected?  In either case, this “$5MM” player will earn $4MM, because that’s the deal he agreed to: he’ll take a 20% paycut if the league collects 20% less in revenue.

Of course “there’s no end to it”.  That’s exactly the deal.  What was he expecting?  That if the pie shrinks, that the players still get the same total amount of pie?  The only reason to be against revenue sharing is if there are accounting shenanigans in terms of accounting for revenues.  And, to a smaller extent, if you think this prevents teams from trying to maximize revenue because they know that, no matter what, 57% is going to the players.

And these are the guys that fired Paul Kelly as union head?  I suppose Paul Kelly has to take the hit on not being able to educate each player.  Indeed, why not setup an Escrow 101 class for everyone to attend, and make them each write a paper.  And if they don’t pass, they don’t get their escrow money back.  I’ll guarantee you they’ll learn exactly what escrow means after that.