Why the Increased Salary in the KHL Comes With Increased Risk

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Why the Increased Salary in the KHL Comes With Increased Risk
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Many players in the NHL are going to the KHL. They can say whatever they want but at the end of the day the real reason they go to the KHL is money. First they offer a higher salary (for instance Evgeni Malkin was offered $12 million per year). The second issue is that the taxes are so much less (the $12 million offer was really worth $15 million in the US). 

So it seems logical to go to the KHL to make money right? And with all due respect to the fans, hockey is a short career. So I have no grudge against a player for doing that. After all, they need to make money too. 

The KHL however, is not giving their players more money. In fact, I would say the higher salary is due to the risk involved in signing a contract with the KHL. One of the things we learn in finance is risk is uncertainty, and the higher the risk the more money we need to be compensated for that risk.

So what is the risk in the KHL? Quite simply it is that you just will not be paid properly. That is to say they do not always honour their contracts. This thought first came into my head when I read an article stating the KHL teams were not all paying their players fully. The KHL kept saying this is a minor issue that will be resolved.

But has it been resolved? I find it highly unlikely. One of the things that occurred in April of 2009 is that players with a salary over $88,000 had their pay cut between five and 20 percent. The only exception was the players involved in a redraft which they used to make the talent levels on teams more equal. They also said teams that have not paid salaries for 2008-2009 have until May 31 to pay up. I don't know if they did but it shows the problems quite well.

The issue of the pay cut is actually quite interesting. It was supposed to be maximum of 20 percent, but everyone eligible to have their salary cut have apparently had their salaries cut by 50 percent.

So how risky is the KHL? I would say extremely risky for the long term, but I am not sure for the short term. This is because there are some extremely rich owners who can pay the huge salaries that they pay their star players. They would have to withstand some substantial losses because even NHL clubs cannot pay this kind of cash to their players, but have far more fans (and thus more money). So in the short run they can continue supporting this, in the long run they need the KHL to be profitable.

So would it make sense for an NHL player to play in the KHL? Well it is mostly like an investment. When you have a riskier investment you require more compensation and the KHL is willing to give that. However whether its enough or not depends on your risk tolerance. 

The second issue is Russia itself. Would you rather live in Russia or North America? This has an effect because you would have to live in Russia if you played there. This is somewhat helped by the fact that almost all players in the KHL are Russians (due to league rules), but how many want to stay in Russia? I am not saying Russia is a worse place to live. It's just every man has his own preference so this will be another issue.

The third and final issue is how long the league will continue paying you well. This is because if the league does not pay you well you are not making a lot more money than you could in the NHL. However your stock in the NHL has already gone down, so you won't get much there anymore. That is a huge risk as you would have alienated the NHL but also are not getting much money in the KHL.

In conclusion it depends on individual tastes whether or not they should jump to the KHL. It is almost like an investment, the risk is higher, but so is the reward. 

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