NHL salary cap: What does it mean?

An impasse between the NHL and the players' union before the current collective bargaining agreement expires could jeopardize the 2012-13 season, raising the spectre of a third NHL lockout in 18 years.

The deadline to hammer out a new contract structure is midnight on Sept. 15, but the major sticking point in the negotiations is salaries.

Understanding the collective bargaining agreement (CBA) requires a basic knowledge of the "salary cap" structure introduced after the 2004-05 season was lost due to a lockout.

Matthew Wuest, the founder of CapGeek.com — a website entirely devoted to calculating and compiling salary cap data — concedes it can be a complicated business.

"The current CBA can make your head spin," the Halifax-based freelance hockey writer said.

Here's a primer to explain what's at stake.

Last season, each of the NHL's 30 franchised clubs was given a limit of $63.4 million US to spend on player salaries.

The league now says teams are spending too much on players. The union has proposed a salary cap of $69 million per team — about a million dollars less than current earning limits under the existing contract terms.

The NHL decides how much money the teams can spend on player salaries, based on a slice of the total revenues generated by the league in the previous season. The cap puts restrictions on that amount — namely, a "ceiling" (the maximum players can be paid) and a "floor" (the minimum).

Salary caps are generally regarded as a way to keep a grip on escalating salaries. They can change annually according to the economic ups or downs of the pro hockey industry.

Proponents of salary caps argue that they promote fairness, by ensuring revenues are spread equally amongst all clubs. In theory, this would allow smaller-market franchises to compete with richer teams, Wuest explained.

"So you can't go out and spend $110 million to buy a team of all-stars," he said. "But there's more to it than that."

Critics say salary caps lead to roster instability and increase turnover as teams jockey to recruit new, cheaper players in order to stay under the spending limit. Players have said a free-agency model is a better barometer for determining player worth.

Unlike in 2004, the players are no longer resisting the concept of having a salary cap this time around.

"They know it's here to stay," said Lyle Richardson, a freelance writer who reports for The Hockey News and runs the Spector's Hockey blog.

But the NHLPA also wants a program for sharing revenue that would help struggling clubs. One alternative the union is open to is a "luxury tax" system, such as the one already used by Major League Baseball.

"It would establish a percentage level, a certain set amount," Richardson said. "Teams could spend over that, but if they did, they would be taxed a certain percentage, depending on how far over the limit they went."

That money would then be pooled to help struggling teams.

"The issue now has more to do with a combination of distribution of hockey-related revenue, and how a revenue-sharing system will be employed," Richardson said.

Right now, the salary cap is dependent on the NHL's financial success in the season. The industry's earnings — known as "hockey-related revenues" — help to dictate the payroll formula. A more profitable year for the NHL is reflected in higher salary cap ceilings for players.

A fixed percentage (57 per cent in the 2011-12 season) of the league's pooled revenues is split amongst the teams each year.

That means that under the current system, players' wages would be linked to the record $3.3 billion the NHL took in last season through ticket sales, broadcasting money and merchandise sales.

Back in 2004, the revenue figure was $2 billion. Owing to the game's tremendous growth, the NHL has continued to post strong revenues that have lifted salary ceilings and floors.

The problem for the owners is that the cap has been consistently rising by an average of about seven per cent each year since the 2005-06 season, according to Richardson.