NHL PAy Essay

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Christy Hammond
SM 331
October 24, 2007

Revenues, Payrolls, and Winning in the NHL

The 2004-2005 season was lost when the 30 team owners decided to lockout its players. The two sides eventually agreed on a hard salary cap linked to league revenue. The mass media focused on the league’s financial concerns leading up to, during, and following the lockout. The NHL CBA News website compiled quotes from a variety of industry analysts during the lockout. One Marquette University professor calculated 18 correlations on the payrolls of the four major professional leagues in the United States. He wrote, “there’s a 54.5 percent chance that a National Hockey League team will finish in the top fourth of the league if it starts in the top fourth in payroll” (“What industry analysts are saying”). He believed higher payrolls helped teams competitively compared to those teams with low payrolls in the NHL, MLB, and even the NBA. The NFL had a greater level of parity and thus salary was not as accurate of a predictor for a team’s competitive play. Others argued that the correlation between payroll and winning wasn’t as high as the league would like you to think. In the playoffs of the four seasons leading up to the lockout, “14 different clubs have appeared in the 16 slots in the conference finals” (Farber). Low payroll teams reached the conference finals in each of those years. In 2003, Minnesota made it to the Western Conference finals on a $20 million payroll. In 2004, Tampa Bay won the Stanley Cup with a $33 million payroll. That same season, two teams had payrolls at almost $80 million (New York Rangers and Detroit Red Wings). That’s why the small-market teams liked the new salary cap implemented after the lockout. “Now even if we spend $40 million, we will be within 20% of the higher-spending teams. That’s not much of a disparity,” Tampa Bay president Ron Campbell said (Allen). Economist Brandie Glasnapp examined the relationship between team payroll and team performance in the NHL. She came to the conclusion that an NHL team doesn’t have to have a high payroll in order to be successful. “The teams with the highest payrolls did not go far in the playoffs, nor did they do well financially last season” (35). The 2001-2002 Detroit Red Wings team was one of the exceptions. The team had a $64.4 million payroll, finished the season with 116 points, and went on to win the Stanley Cup. She found a moderate positive relationship between total points and team payroll, but that cannot be used to determine causality. Glasnapp also performed a Granger Causality test and noted that “there is no evidence that relative team payroll precedes team points” (32). The Granger test did show that team performance does cause “relative” team payroll. Sports economist Andrew S. Zimbalist wrote in May the Best Team Win that there are significant correlations between payroll and team performance despite the outlier that is the NY Rangers, who had the highest payroll in the league of $67.3 million in 2001-2002. However, the team only finished the season with 80 points and a 0.439 win percentage. He did note that one should look at midseason payroll numbers rather than the beginning payrolls because winning percentages are more closely correlated to the midseason payroll. “This result suggests that causality runs in both directions between pay and performance. Higher pay creates better teams, but better teams create higher pay” (37). He mentioned nothing of revenue and its relationship with payroll and winning. Our textbook Sports Economics argues in Chapter 6 that “revenue disparity drives competitive imbalance in all leagues” (166). It should come as no surprise then that three of the four teams in the bottom of the NHL in terms of revenue in 1993-1994 moved to different markets by 1997. These same teams also struggled with winning and were some of the worst teams in the league that year in terms of final points at the end of the season. The
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