NHL Lockout Negotiations: A Closer Look at the Make-Whole Provision

Jared Lunsford
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%
2012-2013 4.605 5
2013-2014 4.836 5
2014-2015 5.14 5
2015-2016 5.14 5
2016-2017 5.14 5
2017-2018 5.14 5
Total 30 30
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%
2012-2013 4.605 5
2013-2014 4.836 5
2014-2015 5.497 5.077
2015-2016 4.938 5.077
2016-2017 4.938 5.077
2017-2018 4.938 5.077
Total 29.752 30.308
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.

Conclusion

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.

Ceb0384556ae1011ba31a93f6dda085d
Avatar
#1 dl44
October 19 2012, 12:57PM
Trash it!
0
trashes
Props
0
props

You are dead right right about how the whole works as a rollback... but correct me if i'm wrong - are your examples assuming a flat revenue?

- the major pro i see with the 'make whole': : contracts of the players get honored. : and the money comes out of the players' share later in the CBA when the players' share will have expanded under the assumption of growing revenues.

i.e. the players signing in the future may not see any reduction in real dollars on their present perceived value.

At the end of the day, for a true 50-50 split, it should be structured as the owners had laid it out.

But its in the best interest of the players to get as much of the pie as they can, so they hope to have all deferred payments come ON TOP of the 50-50 split.

So that's where we are: who will pay for the deferred value of the contracts?

Sooo close.

maybe they should just agree to split that cost as well. Nice and simple. Bettman should start at, oh i don't know: 43%? Players should be like.. no way!: you pay 57%! etc etc...

Avatar
#2 Eric T.
October 19 2012, 05:12PM
Trash it!
0
trashes
Props
0
props

Thanks for the clear write-up.

It does clearly affect these two guys differently, but the difference doesn't seem all that large. One guy loses 500k and the other one loses 50k out of 27M; it's well under a 2% difference.

So I guess I'm wondering what the range looks like. Is this example chosen because it gives as large a difference between players as you'd reasonably expect, or is it fairly typical.

If the difference between players is never more than 2%, then I'd say the offer being a net rollback overall is a bigger problem for players than the differences between them.

Avatar
#5 Jason
October 22 2012, 10:29PM
Trash it!
0
trashes
Props
0
props

So essentially a guy who makes 5 million a year will at most end up losing 500 thousand over a 6 year period. That same player will lose as much money by simply not playing even a month of this season. This whole losing money is also based on a 5 million dollar salary when in reality most contracts aren't that expensive, so on average a player will probably only lose maybe a 100 thousand dollars. I get that they want to keep all the money they can but that doesn't sound like that bad of a deal. The players are treated exceptionally well by the owners, they fly on chartered planes, stay in 5 star hotels, they have state of the art training facilities and a plethora of staff to meet their every need. On top of everything given to them, they get paid millions of dollars to play the sport they love and they still have the nerve to complain? My other problem with the players is that any revenue increase since the last lockout is almost a direct result of things owners did. Did the players get more skilled or score more goals since the last lockout? No they are the same players with better training and coaching and play under a better set of rules that allows them to shine. Those rules were set in place by owners. The teams are more even and almost every team is competitive, thanks once again to the owners cap system. Finally, events like the winter classic and ASG are helping create more hype for hockey than ever before. Once again it is the owners marketing that has led to more revenue. The owners take all the risk and some get little to no reward for it. Yet the players sit there like a bunch of children crying over a couple hundred thousand dollars from the millions that the NHL has made them! Plain and simple the NHL has made the careers of these players and the players continue to spit in their faces and keep biting the hand that feeds them.

Avatar
#6 GrantB
October 30 2012, 12:31PM
Trash it!
0
trashes
Props
0
props

@Jason

My other problem with the players is that any revenue increase since the last lockout is almost a direct result of things owners did. _____________________________________________

Actually, I think the generally accepted reason for large revenue increase is the increase in value of the Canadian dollar versus the US dollar. The largest revenue streams come from Canadian based teams and the fans that support them.

Comments are closed for this article.