Monday, September 17, 2007

 

"Here's some news worth calculating." (Disclaimer: does not contain calculations)

It's my considered opinion that snarking at the Main Stream Media is just about the most boring thing a weblogger can do. However, this Globe on Hockey entry by Al Maki made me ask myself a new question: can something be both misleading and uninformative? It's short, so here's the whole thing:
Here’s some news worth calculating: the more our Canadian dollar rises, the more likely it is that NHL players may soon be taking a pay cut.

According to NHL bylaws, all player contracts are paid in U.S. dollars. It’s the way the NHL does business and it’s not a point open to negotiation.

This was all to the players’ advantage when our dollar was slumping much like the Florida Panthers (think as low as 61.80 cents U.S. in January 2002). Top-end performers were pulling in extra millions thanks to a currency conversion that was entirely in their favour.

But soon, our dollar and the U.S. dollar are expected to be equals. And should our dollar surpass its US counterpart – a possibility, according to some economists – NHL players will be taking home less money.

By the way, since the NHL deals in U.S. currency, it won’t allow clever agents to negotiate deals in either US or Canadian dollars, depending on which one is higher.

NHL players making less – what a concept.

To begin, for the majority of NHL players, this is entirely wrong: when the Canadian dollar goes up, players on American teams will make more.

Take Brian Rafalski for example (or Jagr, Lidstrom, Ovechkin, etc.). He's being paid $6M/year in Michigan. At no time will the Canadian dollar value of his paycheque be relevant to him in the slightest: whether that $6M US is worth $5M or $7M Cdn is of no consequence to him.

However! Recall that total player salaries (for all 30 teams) are adjusted up or down depending on NHL hockey-related revenues. The players as a whole will be paid 55.5% (IIRC) of those revenues, so the exact amount they collect depends on NHL revenues. Eventually, every player will end up with 92%, or 103%, or 97.5% of the face value of their contracts: it all depends on how much escrow is retained after final revenue figures are tallied up.

A higher Canadian dollar means higher NHL revenues, since Canadian revenues will be converted to $US prior to these calculations. Say the Canadian revenues this season will be $800M Cdn. If the CDN$ = $0.90 USD, then Canadian revenues in USD$ will be $720M. If the dollars are at par, then Canadian revenues in USD$ will be $800M. That's (uh, carry the one..) an $80M increase in NHL revenues, which means that players will get more escrow back, i.e. make more money. So again: for all players on American teams who have no need to convert any of their wage to CDN$, a higher Canadian dollar is entirely beneficial -- they will make more.

Who is it bad for? The hardest case is a Canadian playing for a Canadian team who is going to convert all his salary to CDN$ right away (for an apples-to-apples comparison, let's say Wade Redden, and that his salary is $6M). With a 90-cent CDN$, his contract is worth $6.667M CDN; with dollars at par, it's only worth $6M CDN. Luckily, the stuff about revenues above still mitigates his problem: for every CDN$ that comes out of his pocket due to increasing exchange, he gains about 35 cents back thanks to higher revenues.

These are the cases at either end of the spectrum, but there are several in the middle:
See below, but basically all of these guys are better off -- or certainly no worse off -- when the CDN$ goes up. I wish I knew exactly what Maki meant. Presumably he was referring to the Redden example, and sure, I guess it's worth pointing out in a little aside on a group blog that "Hey, when the CDN$ goes up relative to the US$, the CDN$-value of US$-denominated hockey contracts goes down". It's true. But there's enough other issues here, including the major one regarding NHL revenues, that saying "Rising dollar brings pay cuts" is entirely dis-informative.

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Boring Math Appendix

Here's a wee bit of math for the 5 different classes of players noted above. I rounded all their salaries to $6M/yr to avoid a bit of confusion. Also, example players are selected for illustrative purposes only: clearly I have no direct knowledge of their individual financial needs or plans.

Everyone's income taxes are shown as 1/3 of income; this is obviously oversimplified, but works for this exercise. At any rate: here are the financial situations for five $6M/yr NHL players, the point being to compare how much better or worse off they are with two distinct exchange rates.

As discussed above, for non-Canadians playing in the US, a higher CDN$ is a good thing. Revenues go up, the players' share goes up. For all these examples, I've assumed that with a 90-cent dollar, escrow is 10%. It's been thrown around on fairly good authority that the Canadian teams generate one-third of NHL revenues: that's the assumption I've made here (which is a pretty good one) and that these revenues are in CDN$ (which I think is true, although if the CBC et al pay their rights fees in US$, this would change things).

At any rate, if the exchange rate goes from 0.90 to 1.00, NHL revenues increase by a factor of
1/3 * (100/90) = 3.7%
which is where the two escrow numbers come from.


So assuming Wade Redden converts all his US$ to CDN$ -- let's say all his investments are land in Saskatchewan -- the higher CDN$ is bad for him as a whole.


This class of players is the non-Canadians playing in Canada. Sure, some of them may want to retire here, or maybe they'll have the same problems converting their US$ into Swedish Kroner, or rubles, or whatever as they would into CDN$, but this is an illustration. And it shows that even after converting some US$ into CDN$ to pay their taxes and their half-million-dollar living expenses, they still have more US$ in the end with the higher exchange rate.


To ensure balance, here's the other class of player who's clearly worse off with the higher exchange rate: the Canadian playing for a U.S. team who socks all of his income (less living expenses) away back in his beloved homeland.

These last two examples are, with Rafalski, the most realistic: Canadians who, regardless of whether they are presently playing in an American or Canadian city, are going to keep in the neighbourhood of two-thirds of their "savings" in US$-denominated investments.



The columns don't exactly match up here, but you may get the picture anyway. Iginla is shown with $500k Canadian expenses and $1M Canadian investments, and ends up with the same amount of US$ regardless of exchange rate; Sakic is shown with $500k US expenses and $2M US investments, and ends up with the same amount of CDN$ regardless of exchange rate.

Is anybody still there? Oh...

Screw it. Conclusions:

Comments:

I had the exact same thought as you when I read this nonsense. Snarking on the MSM is a big part of my gig though, so don't knock it.
 


It 'almost' seems ridiculous to mention the pay cut these guys are thinking about when it reaches the current rate of salary most of us make.

When Ryan Smyth made the remark that he was only trying to set up his family for the future I felt very Lewis Black like.

"What were you trying to set them up for? Their own space program?"
 


The original article was pretty dumb ... I understood that league revenues went up this year (taking the salary cap along with it) largely because of the increased value of the Canadian dollar. Otherwise, league revenue was essentially flat.

It will be sweet though, when the loonie reaches, say, $1.25 to watch all the 'big market' American teams start crying poverty.
 

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