Have you ever worked for an employer where a percentage of your salary is held in an account to be paid back to your employer if it does not make enough money? Particularly, a job where 20% of your salary is held in such account? It sounds a bit ridiculous, and to be expected, it is a highly contested issue among NHL players. This system is called escrow, which is a financial arrangement where a third party holds and regulates payment of funds required for two parties involved in a given transaction. The NHL and the NBA use an escrow system, while the NFL and the MLB do not. The NBA uses a flat 10% escrow rate and players appear to be content with it. However, escrow rates in the NHL change year over year and are often higher than 10%. As a result, escrow is almost always the primary contention during Collective Bargaining Agreement (“CBA”) negotiations.
The current CBA is based on a 50-50 split between the NHL and the players. The split is based on the total amount of Hockey Related Revenue (“HRR”) and players’ salaries. HRR accounts for operating revenue including: concessions, merchandise, ticket sales, parking, and TV revenue. Accountants use a forecasted HRR to determine what the salary cap will be for the coming season. Following the season, actual HRR is determined and if the players’ salaries are more than the 50-50 split under the CBA, the escrow account is used to even it out. Under this system, when players’ salaries exceed HRR, money in the escrow account is paid back to the teams until the parties reach the agreed upon 50-50 split. Whatever is left in the escrow account after the split is reached is returned to the players. Signing bonuses and player performance bonuses are excluded from escrow. It has never worked out that players are the ones owed money back from the owners.
Traditionally, players have had anywhere from 4% to 16% of their salaries withheld and have only seen refunds of between 1% to 10%. However, due to the COVID-19 pandemic, and the lack of a traditional season, escrow levels have risen to around 20%.
The table above shows the amounts deduced for escrow, as well as the refunds after actual revenues and salaries were reconciled. The salary lost accounts for the total amount withheld for escrow, minus the amount that was refunded. For example, in 2010-11, a total of 12.4% of players’ salaries was withheld, and 10% was refunded, resulting in a total salary loss of 2.4%. One notable change occurred during the 2012-13 season, where the amount withheld increased from 8.5% to 16.3%. This increase came as a result of the 2012 lockout, and the new (current) CBA, where the players’ share of HRR was reduced from 57% to 50%. In order to reduce players’ salaries without altering the face value of the existing contracts, a larger escrow percentage had to be deducted from the players’ salaries.
In 2019-20, the escrow withheld was 10%. However, COVID-19 led to a stoppage of the season, and raised concerns over whether the season would be finished and whether 2020-21 would be a normal season. During the 2019-20 season stoppage, the players began to incur significant amounts of debt to the owners when HRR flatlined with players still being paid, giving players more than the 50% of HRR they were allotted under the CBA. Revenue projections were off by about $1 billion during the 2019-20 season, and down $2.5-$3 billion during 2020-21, where the NHL played a shortened season of 56 games primarily with no fans or a small percentage of them.
In the midst of COVID-19 concerns, the NHL and the NHL Players’ Association ratified a four-year extension of the CBA through the 2025-26 season. To help recoup the debt owed to the owners, the new CBA set escrow levels at 20% during the 2020-21 season. Further, the CBA called for reducing the escrow level to 17.2% during the 2021-22 season, 10% during the next season, and 6% for the following three seasons.
To illustrate how escrow works in practice, here is a hypothetical example with a player who has a salary of $1 million. The current escrow rate in the NHL is 17.2%. Therefore, the player would make $828,000 of his $1 million salary, and the remaining $172,000 would be put into the escrow account. If the total HRR for the season ends up being $2 billion and total players’ salaries is $3 billion, $500,000 would be come out of escrow to achieve the 50-50 split. Finally, if the entire escrow amount is not needed to balance out the HRR and the players’ salaries, the remaining balance would be returned to the players.
Escrow is a confusing concept, and it is universally hated by NHL players. Players lose a meaningful percentage of their salary to an account which is used to pay back money to owners when salaries are greater than revenue. Essentially, players have to share the burden of the success or failure of owners’ business decisions.
Even before the pandemic, which caused escrow rates to rise, players still opposed escrow. When asked about what the biggest issues were in CBA negotiations, Chicago Blackhawks forward Jonathan Toews said, “A. escrow and B. escrow.” Also, former New Jersey Devils goalie Corey Schneider stated, “I don’t know if we’re going to eliminate (the escrow). Obviously, we’ll figure that part out. But at least some way to mitigate it or control it better for us just to know what to expect.” A slightly more comical opposition of escrow occurred recently with Boston Bruins forward Brad Marchand. After a recent loss to the Carolina Hurricanes, Marchand tweeted in response, “You’re still the reason we pay 20% in escrow.” Marchand is paid $6.125 million per year, meaning his current escrow total is over $1 million. Wouldn’t you be vocally upset too if you had to pay over $1 million in escrow with a low probability of having it refunded?