Escrow has been a dirty word among players for the better part of a decade now, and it’s understandable knowing that they see an extra 10%, 15%, or even 18% shaved off of their every hard earned paycheck. However, it’s a necessary evil for the revenue sharing agreement in cap system to work. As it is right now, the salary cap system is set up to overpay the players from the outset of every season. The salary cap ceiling is set to create a 57.5/42.5 revenue split between the players and league. Escrow exists to redistribute the revenue so that it is split 50/50 at the end of every year, as the NHL and NHLPA agreed upon in the 2013 CBA. So every cap team in this league is an extra little bit of escrow tagged onto the players. There are also a few other well-known causes of escrow, such as the salary cap escalator, LTIR, and cap-advantaged contracts, that are explained here.
There is, however, one unique cause of escrow spiking that I have heard little of. It is something that happened in the two years after the 2013 CBA was signed and that something is also being discussed as a likelihood in the next round of labor negotiations. That something is compliance buyouts. Compliance buyouts are get-out-of-jail-free cards for teams that don’t like one of their contracts. These buyouts still require the teams to pay the player a large percentage of his contracted salary, but there is no cap hit associated with the buyout (unlike regular buyouts).
The problem from an escrow point of view is that there is player salary that is not accounted for in the system that is meant to limit team spending. This meant that a few teams were able to pay a much larger amount of salary to players (current and ex) under the salary cap. The most notorious example would have to be the New York Rangers, who used their compliance buyouts to get out of albatross contracts given to Brad Richards and Wade Redden. These players received just under $5 million in buyout salary combined in 2014-15, during which time the Rangers spent $72.6 million against the cap. The cap ceiling was $69 million that year so they actually had about $8.5m in salaries above the cap between the compliance buyouts, LTIR, and player performance bonuses. And while they were among the worst , they were far from the only team in that situation. In fact, if compliance buyouts are added onto the 2014-15 salary cap figures, 18 of 30 teams exceeded the cap ceiling and 27 of 30 teams exceeded the salary cap midpoint (i.e., the salary cap number above which players will start to send money over to escrow).
Needless to say, the players found themselves giving away a large portion of every paycheck in 2014-15 to escrow. By my estimates using the cap hit data (which is probably an underestimate), the players were paid about $245 million more than what they would have received with a 50/50 split. (This is likely in the right ballpark as the official amount taken from the players in 2012-13 as escrow was $265 million.) Then on top of that is all of the player salary paid out as part of the compliance buyouts: a total of $34,509,125 in 2014-15 alone. That by itself tacks an addition 1.9 percentage points onto escrow.
In 2014-15, league salaries ranged from $14 million (Shea Weber) to $550,000 (league minimum). That 1.9% of escrow represents a total loss of $268,800 for Weber to $10,560 for players on league minimum. All of that money went to the owners to off set salaries paid to the 26 players who were bought out (of whom 17 had new contracts in 2014-15 to augment their buyout salaries). This is a situation that could repeat itself in the next round of CBA negotiations.
In the end, the league and the players need to make some significant changes in 2020 if they want to decrease the effect of escrow on the players. Among those changes are:
- Stop using the cap escalator. It doesn’t create more money for the players; it just raises escrow.
- Re-configure how the salary cap ceiling is calculated. As long as most teams are closer to the ceiling than the floor, legal spending under the CBA will create up to 7.5% of escrow to be paid by the players. The players should lobby to have the cap ceiling set closer to the salary cap midpoint.
- Limit the usage of LTIR so that players can no longer effectively retire while still pulling a salary with no salary cap consequences.
- Say no to compliance buyouts. Compliance buyouts stand to increase escrow by up to 2%.
Fortunately, there is one trend that will help reverse the rise of escrow for the players. As of this season, all of the front-loaded contracts signed pre-2012 that are now illegal have collectively become “cap disadvantaged” contracts. I.e., the collective cap hits of those contracts is now greater than the collective salaries, which creates “dead” cap space. This locks up cap space without salary to back it up. This effect will be significantly boosted if we start seeing players on these contracts retire and create large cap advantage recapture penalties.
Ultimately, the mechanisms in the NHL that create escrow have distributed benefits and concentrated costs, which makes it very hard to lobby for the largest good. However, it would only take a few smart minds in the NHLPA to show that decisions made to benefit players making bottom-6 and bottom-4 money in the league (which is most players) would be best for the most people in the union rather than the current course of making decisions meant to benefit the one or two superstars on each team.