Wednesday, September 29, 2010

Part 2 In A Series of Comparing CBAs: Show Me The Money - A Primer On Revenue Sharing in the NHL, MLB, NFL & NBA

by Graydon Ebert & Eric Macramalla

Professional sports is big business and everybody wants to get paid. So it’s not surprising that a big issue when leagues negotiate with the players is how to split up a league’s billion dollar pile of cash. We’ve seen it in the NHL and MLB - and we’re about to see it again in the NFL and NBA.

This is where the concept of revenue sharing comes into play.

In Part 2 of our series of comparing the collective bargaining agreements (CBA) of the four major sports, we look at each CBA to determine how they have agreed to share revenue.

As a side note, my parents didn’t use a revenue sharing model. Instead of giving my 2 brothers and I an allowance, they used the revenue sharing model “Go get a job and stop asking for lunch money”. To even things out, we just took out a second mortgage on their home. Didn’t go over too well, particularly when we defaulted. That was not a good day. In a completely unrelated note, Bruno was way too tough on Michael Bolton on Dancing With The Stars. Needed to get that off my chest.

What Is Revenue Sharing?

Revenue sharing refers to how a league divides its revenue between the teams and the players.

In three of the four big leagues, the NFL, NBA and NHL, revenue is shared with players using a “percentage-based” or “partnership” model. The model has this name because (a) the players are guaranteed a percentage of the league’s total revenues, which in turn (b) creates a partnership between the league and the players because the players have an interest in growing the game since more revenue means more money for players.

What’s Shared vs. Not Shared

So how does this model work? First, the league revenues that are shared with the players are define under the respective CBAs. In the NFL, NBA and NHL, most revenue, such as ticket, concessions, broadcast and merchandise revenue, are included in shared revenue.

However, some revenue in these leagues is not shared with the players. For example, expansion fees are not shared (so now you see why leagues love to expand). As well, disciplinary fees aren’t shared, and the NFL excludes cheerleader revenue from shared revenue.

The players are then guaranteed compensation equaling a negotiated percentage of shared revenue. Typically, this compensation amount does not include certain payments. In the NFL, compensation includes everything of value a player gets in his contract, but doesn’t include any benefits, like meal allowance, group insurance or Tom Brady’s auto insurance. In the NHL compensation includes salary and bonuses, any deferred compensation and buyouts, but doesn’t include benefits. In the NBA, benefits are considered compensation.

How Much Exactly?

The final step is to determine the percentage of shared revenue that the players get. Each league determines the percentage differently.

NFL: Players are guaranteed 50% of shared revenue. Note: this guarantee is only in a capped year. This year the players are not guaranteed a percentage of revenue.

NBA: Players are guaranteed 57% of shared revenue.

NHL: In 2005-2006, the players were guaranteed 54% of shared revenue. In each addition season, the players are guaranteed a certain percentage based on the value of shared revenue. The value of shared revenue in 2009-2010 was slightly more than $2.7 billion.

Value of Shared Revenue                      Player’s Guaranteed Percentage

Less than $2.2 billion                                         54%
Between $2.2 and $2.4 billion                             55%
Between $2.4 and $2.7 billion                             56%
More than $2.7 billion                                         57%

More Money Please & Escrow

What happens if player compensation doesn’t equal the percentage of shared revenue at the end of the year? The leagues have a way to make sure players get paid what they are owed. In the NBA, if the players aren’t paid enough, the league will pay the union the difference, and it is up to the union to divide it up. In the NFL, the league pays the shortfall directly to the players.

NHL Escrow

The NHL uses an escrow system. What is the NHL escrow system?

Players pay a percentage of their salaries from each paycheck to an escrow fund. This money is intended to cover any potential shortfalls in projected league revenue.

For example, if the NHL thinks it's going to make $2 billion in revenue, the salary cap will be based on that number. BUT if the league only ends up making $1.7 billion, there’s a $300 million shortfall. If there’s a shortfall, then the NHL takes the money from the escrow fund to make up the difference. However, if the league makes $2 billion, the players would get this money back.

In the early salary cap years, the league was growing so this money ended up being returned to the players, but with the economy being what it is, there's a chance the players may lose a chunk of their salaries.

The escrow payment has been set as high as 25% - that was in 2009. That meant that a quarter of each player's salary was held in escrow in case the money was needed to help offset shortcomings in the league's projected revenue.

NBA Escrow

The NBA also uses an escrow system to ensure that players aren’t paid too much. However their escrow payment is set at a much lower rate, 8% for 2010-11. The NBA and NFL also make adjustments to future salary cap calculations to account for the players being paid too much in the previous year. If the players were paid over a certain percentage of shared revenue in the previous year, the league will lower the next year’s salary cap by that amount.

MLB: Different Approach

Unlike the other three leagues, Major League Baseball does not have this type of revenue sharing. MLB does have revenue sharing among teams. The rich teams make payments to the poor teams to attempt to even the playing field. However, some have complained that too bad many of the poor teams pocket these payments rather than spending it on players. One might think that if player compensation is not tied to revenue, player costs would be able to increase at a higher rate than revenue. While possible, in fact, despite not having revenue sharing, MLB players received a lower percentage of league revenue from 2003-2007 than players in the other three leagues.

Is the percentage-based model the only option for revenue sharing? Not at all.

Other leagues in North America and around the world use different methods of sharing revenue. Leagues such as the WNBA, the MLS and the National Rugby League in Australia use a fixed cap system. They have negotiated an amount of money that the players are guaranteed and the players get no more and no less. Leagues like this method because they know their player costs ahead of time and the teams can keep any extra money beyond the guaranteed amount. This is why the CFL has moved in this direction with their new CBA - and the NFL wants to follow suit.

Other leagues, such as the now-defunct Arena Football League and Aussie Rules Football use a mix of the two systems. The players are guaranteed a fixed amount and if revenues are higher than projected, the league would pay out more money to the players. This provides some certainty of player costs for the teams and allows the players to reap the rewards if the league grows.

In the 3rd part of our series of comparing CBAs, we will look at how the different leagues determine their salary caps and how it is tied to the way the leagues share revenue with its players.


Aaron Gordon said...

Maybe I'm just a huge nerd, but this was completely fascinating to me. Great work guys!

Eric Macramalla said...

Thanks Aaron. Well we must be nerds too then. Perhaps we havbe a nerd party. I'll invite the robot from the short circuit movie, Gilbert Gottfried and Elvin from the Cosby Show to the big party.

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