Wednesday, July 11, 2007

A look at 'stupidity insurance'

The Hockey Rodent is getting some well-deserved column inches over at Fox Sports, and today he looks at how the NHL's escrow provision works to limit player salaries (something I've been meaning to do myself):
It's officially known as Article 50.4. But I call it "Stupidity Insurance."

It basically says that the 30 clubs don't actually decide what to pay the players they recruit. Instead, the Holmgrens and Glen Sathers of the hockeysphere are merely granted license to allocate "shares." OK ... they were also granted the right to commit latent franchise salary-cap suicide no matter how much they front-load these deals.

You see, player salaries are a now a zero-sum game. Well, that's a misnomer. The sum is hardly zero. But the trough these athletes feed at is no longer extensible by the individual clubs as it was before the lockout. The trough now remains fixed in length. Gomez and Briere will merely enjoy more elbow room than their peers.
Some of the Rodent's figures are off — his calculations are relying on a far too low, $2-billion hockey-related revenue figure — but it's still some nice work, and it gives you somewhat of an idea of just how much of that $10-million payout Daniel Briere and Scott Gomez will actually get their hands on.


At 12:36 a.m., July 12, 2007, Anonymous David Johnson said...

This is the 'cost certainty' that Bettman went on about during the lockout claiming the NHL just wanted to operate like any other business where they can control costs. Problem is, no other business has absolute cost certainty or costs directly linked to revenue. I don't like the term 'cost certainty.' Stupidity insurance as you put it is a good name but I also go by 'Guaranteed Profit' clause. Whatever it is called pretty much no other industry in the world (aside from NHL and NBA) operates like that.

I believe the rollback last season was less than 5% so if it were the same next season Briere would take home $9.5 million, not $10 million.

At 2:44 p.m., July 12, 2007, Blogger namflashback said...


Insurance companies around the world have created a virtual cost certainty. Some insanely catasrophic things can happen, but in general they WILL get their profit. Even if they make shitty decisions in their investments, they will up your premiums to make sure they get their take.

Each player, when they come up to contract time can hope the market conditions favour them getting a bigger "share" of the player salary pool. If the revenue levels off, its the guys who negotiate their compensation in the future that will get hit.

Works great.


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