October 19 2012 10:35AM
The NHL's recent proposal to end the lockout created a lot of buzz and the hope that we might have NHL hockey sooner rather than later. This optimism was based on the 50/50 split of league revenue, close to what most expect the final outcome to be, and that all contracts would be honored with no rollback in salary from the players' reduced share of hockey-related revenue. Let's take a look at the mechanism the owners' proposal uses to cut the players' share of salary without rolling it back: the "Make Whole" Provision.
The Make-Whole Provision
The wording is confusing, but let's try to flesh out what would happen under the provision. For 2012-2013 and 2013-2014 salaries would represent a 50% share of league revenue. In the extremely likely event that these fall below the 57% of 2011-2012 revenue that current contracts are based on, the difference would be paid out over years 3-6 of the new CBA. That extra money would count against the players' share those years. In short, players under contract now would get paid all the money from those contracts, though some of it will come late, but future salaries would be reduced.
As an example, consider a player on a 6+ year contract that pays $5M each year. Let's assume the 5% growth that the league used in its press release. Because of the shortfall the first year, total player salaries would drop from $1.88B to $1.73B, the player would make $4.6 million in year one. Similarly he would get $4.84M in year 2. He is short $560,000, so to make him whole, he would get paid an extra $140,000 each of the last 4 years of the CBA. He ends up with the same amount of money, but it's backloaded. It's also worth noting that the extra $140,000 he's getting those last four years would count against other player salaries.
There are two important and related points, both of which make this provision unpalatable to the NHLPA:
1. The aggregate effect of the make-whole provision s exactly the same as a rollback.
2. The make-whole provision affects different players differently.
For All Players Combined, the Make-Whole Provision Works Exactly Like a Rollback
If this isn't clear to you, note that the league under this proposal would pay out exactly 50% of hockey-relate revenue each year of the deal. That's what would happen if there was a rollback in salary. The fancy accounting to make the players whole doesn't change the total amount paid overall because the NHL takes the extra money paid out in years 3-6 from the players' share those seasons. What it does do…
How It Impacts Different Players Differently
Because it reduces future salary by the same amount as the increase to players under contract, the provision impacts players differently based on their contract status. To see this, let's take two hypothetical players making $5M a year. One player has a 6-year contract, the other has two seasons up and will be signing a new four-year contract in 2 years, after the 2013-2014 season. The second payer's new salary will depend on how much total player salary is available, once we adjust for the make-whole payments. His deal will be 0.266% of total available player salaries the year he signs the extension, the same percentage his $5M would be if they played one more season under the old CBA.
Because we want to know the impact of the make-whole provision, I'll compare the owners' proposal to freezing current player salaries until 50% of league revenues exceed it, and then the players getting 50% of revenue. I'll also go with the 5% growth that the league is using for their figures.
First let's look at the guy on the long-term deal:
|Season||Make-Whole Salary ($M)||Freeze & 50%|
|Net Present Value||27.048||27.095|
Because we are considering paying at different points in the time, the takeaway figure is the last column. As I wrote in my previous article on the lockout, net present value is a way to compare the overall value of proposals like these where the timing of getting paid different amounts is important. You can see that the long-term contract pays the same amount but there is a small penalty associated with getting paid later. Even adjusting for timing, the value of the contract under the make-whole proposal is over 99.8% of its value if salaries were frozen until league revenue caught up. Any effect is miniscule.
Let's now move to the player whose contract is up after 2013-2014. His situation is a little complicated because he defers salary from 2012-2013 and 2013-2014 which he gets during the 2014-2015 season. His salary, despite being the same percentage of overall player salary, will go down because there is less money actually available - the deferred payments, including his own, count against the salary cap so his team will have to pay him less.
Here are his salaries, net of deferred payments, each season along with the net present value of all this income:
|Season||Make-Whole Salary ($M)||Freeze & 50%|
|Net Present Value||26.851||27.365|
In contrast to the player on the long-term contract, this player will lose $556,000 dollars over the six years. Getting the make-whole money in one season softens the blow, but he'll still lose over half a million in net present value. His hit is more than ten times as large as the player on the long-term deal.
While I think the NHL's offer is certainly progress and things are looking up, having no rollback in salaries is a major sticking point for the union. While the language makes the offer seem like there is no rollback, it is one in all but name - it would impact the NHLPA as a whole the exact same way.
Individually, it would affect some players much more than others. This likely makes it worse than just an across-the-board rollback in the union's eyes. Unless one side gives on this issue, we shouldn't expect much to change.