Exploring The Linkage Concept

Discussion in 'The Business of Hockey' started by LordHelmet, May 10, 2005.

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  1. LordHelmet

    LordHelmet Registered User

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    Would you say that most companies base employee salary levels on revenue?

    Yes or no.

    An explanation as to why, or why not would be appropriate too.
     
  2. Hockey_Nut99

    Hockey_Nut99 Guest

    To me the NHL is different. These guys have a great season at the end of a contract and if they don't get their big pay raise, they can sit out and demand money. If someone does that in a big company like Air Canada, the boss will tell em to go take a hike and find another job.

    I think if a company does very well they do other things such as giving bonuses and such. If the company is doing really bad, they can ask the employees to take pay cuts or lay them off as well. Every company is different.
     
  3. Slats432

    Slats432 Registered User

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    I agree, in my industry, we are paid by performance. If that were the case, guys wouldn't get long term guaranteed contracts, etc.

    Not a reasonable argument.
     
  4. Strazzobosco

    Strazzobosco Registered User

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    it depends on the industry and the position. Note that won't be the case for CEOs... they'd get the bonuses, and raises regardless of company performance. In the NHL, I still push for supply and demand. The supply of highly skilled players is not that great, whereas the demand is there. As long as there are GMs willing to pay those salaries, there will be players that will be paid those salaries.
     
  5. LordHelmet

    LordHelmet Registered User

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    You are correct, performance is one factor of an employee's salary adjustments. Another factor is the financial condition of the company. In other words, my question is phrased assuming employee performance that is neither above or below expectations.

    Perhaps I should rephrase my question: When making salary adjustments - and specifically when considering the financial aspect of the decision - is the typical employer interested in the company's revenue, or some other piece of financial data?

    I'm not making an argument yet, just posting a question. :D
     
  6. WC Handy*

    WC Handy* Guest

    Yes, a typical employer is certainly interested in the company's revenues. All you have to do is ask a person what his raises were over the last decade to find that out.
     
  7. jamiebez

    jamiebez Registered User

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    To answer the original question (Would you say that most companies base employee salary levels on revenue?), I would say that its one of many factors that goes into the determination of an individual employee's salary level, but there are several more important ones that spring to mind.

    Speaking only from my own experience, I would say that the factors that go into it are:
    - the marketplace: what would a competing company pay me?
    - geographical location (ie: you'll make more in Toronto than Saskatoon)
    - seniority and experience
    - performance of the employee relative to his/her peers

    But these things just relate to how one employee is paid relative to another. If you look at it from an overall budget perspective (how much money is there to go around for employees), then obviously the company's finances are the biggest determining factor. If there's not enough money coming in, they sure as hell won't be giving people raises :)

    I don't know that the analogy really applies to the NHL, due to guaranteed contracts, etc, but in general I think its pretty obvious to say that a company's finances determine its payroll budget.
     
  8. LordHelmet

    LordHelmet Registered User

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    :handclap: Very, very well put. And yes, my question is presented from the perspective of the overall budget.
     
  9. LordHelmet

    LordHelmet Registered User

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    Since this seems to be going nowhere fast, I'll get to the point...

    The amount of money budgeted for employee salaries is indeed tied to the financial condition of the company. However the 'financial condition' of the company is not indicated by revenue.

    When employers put together budgets for each year, they take projected revenues, subtract projected expenses, and arrive at a projected income. This number - the bottom line - is used to determine how much of the budget goes towards salaries. Some of this stays with the company as profit and some of it is distributed to the employees in various forms (additional hires, salary increases, bonuses, retirement contributions, gift certificates etc..)

    Point being: Regular companies do not link employee salary level to revenue, they link it to profits. The NHL obviously prefers to link it to revenue. Why? (psst, it's not 'for the good of the game' like they say)
     
    Last edited: May 10, 2005
  10. Jarqui

    Jarqui Registered User

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    Most companies manage by using percentages of revenue for types of expenses to monitor fiscal performance from year to year and set budgets. As the year progresses, they react to the actual numbers coming in compared with those budgets. The actual numbers change from year to year but the percentages commonly are much more stable and if they move, the company can quickly see what is happening to them.

    The pattern of percentages for comparison varies with industries and how the business work, where they work, etc. The gathering of player costs using the components Levitt did in the Levitt report is a classic accounting treatment of that assessment for the sort of components used to build up labor cost in most companies and measure it as a percentage of reveneus.

    Most companies do not have a union (only 12% in the US, 30+% in Canada). Most companies with unions set the pay rate for each type of employee in the contract - they don’t bid for UFAs under the contract within the company. Most companies that have union contracts, have those contracts with one company - not 30 owners linked like the NHL Most unionized companies can layoff workers to deal with a temporary down turn in business. It’s tough to imagine an NHL team trying to go with ten skaters. It is more difficult with guaranteed contracts and the inability to layoff players (75% player costs of the revenues) for an NHL team to react to changes in the business in as timely a way as most other businesses can. They’re largely stuck for the year with the exception of a salary dump.

    We do see circumstances where the fiscal performance of the company (% of revenues) is used to justify lowering workers pay during union negotiations. Delta Airlines is one example. I’m sure you could find a steel mill in Canada for another. etc. We do see things like profit sharing. performance bonuses, cost of living increases and commissions to compensate workers/employees (some of these much more usual in a non-union environment). And sometimes we might see a portion or bonus related to company revenues. We do not commonly see a union where it’s workers pay is directly linked to the revenue of a company.

    The situation with the NHL has so many unique features that affect their CBA relative to other business models that I don’t think one can merely say "they should not use linkage" because such and such a business does not. You’d have to look more closely at the two businesses being compared.

    You do commonly see and hear of companies head offices or top management saying "Plant labor and G&A are each two points too high relative to sales, nuke X people on Friday." The NHL can’t do that in a timely way. They largely roll the dice for a year.

    Ultimately, the owners are responsible for this business and bear a major hunk of the blame. But they have had to do without many of the traditional management tools to react in a timely fashion. And they cannot collude for the staffing of their business like a single owner can within his business (not collusion illegally). So they are dealing with an unusual business circumstance pitting their egos against their bank accounts while everyone else but the owners around the league seems to have done financially well over the last ten years.
     
  11. LordHelmet

    LordHelmet Registered User

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    Another well thought out and intelligent post.

    Agreed, and this is what I'm getting to, it's uncommon (whether union or not) to link salaries & benefits to revenues. If linking salaries to revenues were a good system, would it not be more common?

    And likewise, I don't think one could merely say that they should use linkage...

    I'm not pointing to linkage as a bad concept, I'm pointing to revenues as a bad thing to link to.

    It's not quite that easy for 'regular' employers. They have to consider employee morale, payout of unemployment benefits, the potential for lawsuits and other factors before laying folks off.

    And, it's not quite that hard for pro sports franchises. They can trade away players with high salaries & make cuts in administrative staff or advertising.
     
  12. Jarqui

    Jarqui Registered User

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    Yes, it is but an option to deal with the problem.

    I find it appealing in that no party gets burned too badly - win or lose. Both parties play a part in the marketing of the game : the players in their on ice performance and in their conduct with the media and public and the owners with the more usual marketing dollars, staff and effort, etc.

    If that goes well, both win. If it doesn't, both lose. But there's a sharing of the wins and losses so that one party doesn't do a lot better than the other. You don't have a situation where one side wins a lot while the other loses a lot.

    In that way, it is attractive after what they've been through. They become partners for financial victory.

    It beats profits. Then the bickering spreads to expenses on top of revenues "the owners are counting too many expenses and not enough revenues !!" Or it becomes an issue of how well the team is managed including marketing but much more than just marketing.

    If you pick a hard cap number, then you’re almost assured one side will do better than the other. The only way for an "equal" win is to hit that number. If the owners do better in revenue than expected with the hard number, the players lose more than the owners. If not, it’s the other way around.

    The hard cap number is tougher to fairly nail now because of the uncertainty of damage from the lockout. The owners have to dig in for a more conservative hard number because of the uncertainty which has to tick the union off even more.

    If they get no decent controls in place, the owners face the potential risk of collusion while trying to control laboe costs or risk a return to losses as they had been experiencing.

    All businesses can make cuts in administrative staff or advertising. If the NHL owner cuts admin staff, he also faces "consider employee morale, payout of unemployment benefits, the potential for lawsuits and other factors before laying folks off".

    The tough part with the salary dump is two currencies are involved. Yes, the team can dump the salary. But they frequently made a "talent" investment for that asset. Often, in a salary dump of recent times, the team didn't get a return on the talent dumped. (ie Kovalev or Jagr). And that costs money indirectly either through a less competitive team that doesn’t sell as many tickets or not enough economic youth coming up through the system. And of course, the legal offset to a costly wrongful dismissal lawsuit might be a typical arbitration award for a RFA.
     
  13. Jarqui

    Jarqui Registered User

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    Maybe I can restate more simply:

    A minority of companies have unions. Of those companies that do have unions, very, very few have collective agreements that do not define what the workers covered by them are actually paid in dollars and cents based on some rate of pay. From that they have cost certainty and a formula based upon units of workers to manage it.

    The NHL and other pro sports leagues have struggled with this. A good part of the reason why is because the rates of pay are not clearly negotiated in the agreement. That’s tougher to manage. The owners will to win gets routinely tested in a talent bidding war that also tests his diametrically opposed will for a healthy bottom line. Wirtz and Jacobs don’t have much of a problem with this. But local hockey fans don’t seem to mind too much when Illitch or Snyder or Peddie for example do.

    In business, it is an usual problem in my opinion and that is why looking at unusual things like linkage, caps, taxes and rvenue sharing have happened. The answer for all of this isn’t in any of the text books.
     
  14. WC Handy*

    WC Handy* Guest

    WHY?
     
  15. AXN

    AXN Registered User

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    Yes Definitley but they are not guaranteed profit. If Company loses money they layoff employees which is not good. There isn't however one single organization that controls employees salaries, that is up to each company.

    However when dealing with city unions, teachers, police and firefighters do have some cap on their salaries that was negotiated between the city and the union.
    Again the city is not guaranteed a profit. The is no linkage between salary and city revenue. A fair cap is negotiated that the city can afford.
     
  16. Ron C.

    Ron C. Registered User Sponsor

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    A company that loses money does not continue to employ anyone...unless the State of New York is involved. :)
     
  17. AXN

    AXN Registered User

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    I only know one organization that cannot afford to pay anyone because they are losing money and involves unions. That is NY City or NY State. :)
    Oh Yea, the NHL. That's two.
     
  18. Taranis_24

    Taranis_24 Registered User

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    Each year the government looks at the budget and allocation is made for salaries of gov't employees. Each year the goverment can decide which positions get filled and which don't. Sort of maintaining a salary level thru attrition and not filling vacant positions. My understanding is that the union may negotiate a wage scale but the overall amount set aside for employee salaries is done within the goverment budget w/o union influence. Gov'ts have other means of watching their bottom line, just look at the latest news DoD is looking to close some 150+ military installations what goes with that? Jobs. Gov't also have a fund to offer bonuses to deserving employees if the budget can't afford them then those bonuses are not offered. The unions for government employees are there mostly to protect their rights not to negotiate their salary.
     
  19. Weary

    Weary Registered User

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    Well it's apparently not true for Independence Airways. From the Yahoo! Message Board
     
  20. nhlfan79

    nhlfan79 Registered User

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    All of these threads analogizing the NHL to a free market simply miss the point. The NHL is a closed economy with different priorities. The goal of the league is to have each franchise compete on a relatively even playing field, not have franchises trying to put each other out of business. If it truly were a free market with no controls whatsoever, eventually there'd be only a three team league (TO, DET, NYR), and the fans would get tired of seeing their team play the only other two teams.
     
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