Salary cap
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In sports, a salary cap is a limit on the amount of money a team can spend on player salaries, either as a per-player limit or a total limit for the team's roster (or both). Several sports leagues have made salary caps mandatory, both as a method of keeping overall costs down, and in order to balance the league so a wealthy team cannot become dominant simply by buying all the top players. Salary caps are often the major issue in negotiations between management and players' unions.
Salary caps are used by major sports leagues around the world:
- North American sports leagues: the National Hockey League, National Football League and the National Basketball Association and minor leagues in various sports.
- In England, the top-level leagues in both rugby codes—the Guinness Premiership in Rugby Union and the Super League in Rugby League—have salary caps. Recently, several European football (soccer) leagues have also discussed introducing salary caps.
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History of salary caps in North America
Salary caps were largely unnecessary in the era of the reserve clause, which was long a standard clause in professional sports player contracts and which forbade a player from negotiations with another team without the permission of the team holding that player's rights even after the contract's term was completed. This system began to unravel in the 1970s due largely to the activism of players' unions, and the threat of anti-trust legal actions. Although anti-trust actions were not a threat to baseball, which has long been exempt from anti-trust laws, that sport's reserve clause was struck down by a United States arbitrator as a violation of other labor laws of that country. By the 1990s most players with several years' professional experience became free agents upon the expiry of their contracts and were free to negotiate a new contract their previous team or with any other team. This situation led to "bidding wars" for the best players--a situation which inherently gave an advantage in landing such players to more affluent teams in larger media markets.
In a response to this and as a way of limiting the damage this did to the competitive balance necessary to maintain fan interest in their sports, in the 1990s both the National Football League and the National Basketball Association negotiated salary cap arrangements with their respective players' unions.
Salary cap in the NHL
The negotiations for the most recent National Hockey League collective bargaining agreement revolved around players' salaries. Some pundits expected this dispute to set the precedent for the MLB and NBA. The league contended that its clubs spend about 75% of revenues on salaries, a percentage far higher than exists in other North American sports. NHL Commissioner Gary Bettman demanded "cost certainty" and presented the National Hockey League Players Association with several concepts the league says will achieve this goal. The NHLPA, for its part, contended that "cost certainty" was nothing more than a euphemism for a salary cap, which the union vowed it would never accept.
The previous CBA expired on September 15, 2004 (the day after the World Cup of Hockey final). A lockout ensued, leading to the cancellation of the 2004-05 NHL season - the first time a major sports league in North America has lost an entire season to a labor dispute. Millions of dollars were lost and fans were turned off, but the league owners were well prepared and did not break. The lockout was resolved with the NHLPA agreeing to a hard salary cap, although the NHL reciprocated by implementing revenue sharing which enabled the NHL to have a higher cap figure. For the 2005-06 NHL season, the salary cap is US$39 million per team.
Salary cap in the NFL
The NFL's cap is a so-called "hard cap", which no team can exceed for any reason under penalty from the league. A lesser-known fact is that the NFL also has a hard salary floor—a minimum team payroll that no team can drop beneath for any reason. The cap was introduced for the 1994 season and was set at $34.6 million initially. Both the cap & floor are increased annually based on growth of the league's revenues. As of 2006 the NFL salary cap is approximately 102 million US dollars per team, while the salary floor is roughly USD 75 million per team. This number has increased annually and will likely increase after a new collective bargaining agreement is signed. The NFL's agreement with the NFLPA lets teams release players in the middle of contracts without being responsible for the player's salary owed for remaining years on the contract. As a result, players and their agents realize that contracts with large signing bonuses are optimal.
Due to bonuses, the amount of a player's salary that counts towards the salary cap is not necessarily the same as the amount which he is actually paid in the current year. For example, if a player signs a six-year contract and is paid a signing bonus, only one sixth of the bonus counts towards the salary cap in the first season, with the remaining five sixths divided equally over the remaining five years of contract. If a player is traded or retires, the entire remaining amount of his signing bonus which has not yet been accounted for will count against the team's salary cap for that season. (Additionally a signing bonus is merely guaranteed payment, and is not necessarily paid in its entirety upon signing. Part of the bonus can be placed in escrow to be paid at a later date negotiated in the contract.) Incentive bonuses require a team to pay a player additional money if he achieves a certain goal. For the purposes of the salary cap bonuses are classified as either "likely to be earned" which requires the amount of the bonus to count against the cap, or as "not likely to be earned" meaning it will not count against the team's salary cap. NLTBE status can be re-evaluated if a player actually achieves an unlikely goal. Large NLTBE bonuses are written into contracts to make them sound larger in the media.
Teams usually design contracts so that the player's cap salary is highest in later years of the cap. They accomplish this by setting the player's base salary at lower amounts in the first years of the contract than the higher years. This effectively results in real salaries being slightly higher than the cap for a given season, unless a team finds itself in 'salary cap hell' and has a large portion of its cap space devoted to players who are no longer on the roster.
The effect of the salary cap has been the release of many higher-salaried veteran players and their replacement by lower-salaried younger players. The salary cap prevents teams with a superior financial situation from the formerly widespread practice of stocking as much talent on the roster as possible by placing younger players on reserve lists with false injuries. This was often used to allow an inexperienced player to learn valuable skills, and some money, while not counting as a player on the active roster. This practice allowed teams to keep an experienced, capable quarterback, whose skills were beginning to decline with age or who was merely nearing retirement, to train a potentially great, but inexperienced young quarterback. (A notable example is the case of the San Francisco 49ers playing Hall of Famer Joe Montana while grooming future Hall of Famer Steve Young.
Generally, the practice of keeping older players who had contributed to the team in the past, but whose abilities have declined, had fallen out of favor, as a veteran's minimum salary was required to be higher than a player with lesser experience. To prevent this, a veteran player who receives no bonuses in his contract may be paid the veteran minimum of $650,000, while only accounting for $450,000 in salary cap space.
The salary cap has also served to limit the rate of increase of the cost of operating a team. This has accrued to the owners' benefit, and is widely regarded as being responsible for the NFL being overall the most financially stable of the major North American sports organizations. While the initial cap of $34.6 million has increased to $102 million, this is due to large growths of revenue, in all probability because of the pragmatism of the cap, and financial flexibility it gives to owners.
Salary cap in the NBA
- For a more detailed discussion, see the article NBA Salary Cap.
Similarly to the NFL, the NBA's salary cap is calculated as a percentage of the league's revenues. As of 2004-2005 season, the number was approximately $46 million (U.S.) per team. The NBA's salary cap is a so-called "soft cap", meaning that teams are allowed to exceed the cap number in order to retain the rights to a player who has already been on the team. This provision is known as the "Larry Bird" exception, named after the former Boston Celtics great who was retained by that team until his retirement under the provisions of this rule.
The purpose of this rule is to address fan unease over the frequent changing of teams by players under the free agency system. Fans become displeased over their favorite player on their favorite team suddenly bolting to another team. The "Larry Bird" provision of the salary cap gives the player's current team an advantage over other teams in free agent negotiations, thus incresasing the chances that the player will stay with his current team, pleasing more fans in so doing.
The provision tends to result in most teams being over the cap at any given time. There is no official penalty for being over the cap, but teams over the limit are prohibited from signing free agents for more than the league minimum, with only a few exceptions. The NBA also has a salary floor, but teams are not penalized as long as their total payroll exceeds the floor at the end of the season.
The NBA also has a luxury tax system which is triggered if average team payroll exceeds a certain number higher than the cap. In this case, the teams with payrolls exceeding a certain threshold have to pay a tax to the league which is divided amongst the teams with lower payrolls. However, this penalty is levied against teams in violation only if the league average also breaches a separate threshold.
The NBA has also implemented a maximum salary for individual players. This was done following a dramatic increase in player salaries, in spite of the salary cap, in the mid-1990s. Under the collective bargaining agreement, a player's maximum possible salary increases along with his time of service in the league. For a player of four years' experience, the salary threshold begins at approximately $9 million, with annual increases of up to 20% possible beyond that. For players of greater experience, the salary limit is higher - but the 20% limit on annual increases remains the same.
In the NBA, the salary cap has not had quite the effect of breaking up championship teams that it has had in the NFL. Repeat championship winners have been far more likely to occur in the NBA than in the NFL in the salary cap era. Of course, the converse effect of this has been to make the overall rate of salaries paid and hence the expense to operate a team rise more rapidly in the NBA than in the NFL. Average NBA salary is $4.9 million (U.S.), the highest of any major North American sports league. The collective bargaining agreement came up for agreement in 2005 but NBA Commissioner David Stern decided to make no attempt to implement a hard cap or any other major changes, to the dismay of many commentators who felt that changes were long overdue and that the NBA could take advantage of the NHL's momentum.
Luxury Tax in Major League Baseball
Major League Baseball has instead implemented the so-called luxury tax, an arrangement by which teams whose aggregate payroll exceeds a certain figure (annually revised) must pay into a pool designed to help the less affluent teams pay higher salaries. However, critics point out that the luxury tax has had little effect on maintaining competitive balance and on overspending by affluent teams. For the 2004 season, only the New York Yankees, Boston Red Sox and Anaheim Angels paid any luxury tax; such teams had superstar players whose yearly salary was close to the entire payroll of weaker clubs. Due to opposition of a powerful MLB union and because the Yankees and Red Sox refused to side with the majority of MLB owners, the implementation of a salary cap is unlikely at the moment, although some saw the 2004-05 NHL lockout as an opportunity for MLB to reform its collective bargaining agreement.
Unlike the NFL and NBA, MLB has no team salary floor. The only minimum limits for team payrolls are based on the minimum salaries for players of various levels of experience written into MLB's collective bargaining agreement.
Salary Caps in minor sports
Salary caps are common in North American minor leagues in many sports. In Arena football, which is probably best characterized as being too big to be a true minor league but not truly a big-time sport either, the current salary cap is $1.82 million per team. Tampa Bay Storm head coach Tim Marcum was recently fined and suspended by the Arena Football League for four games (two in the 2005 season, two in 2006) for salary cap violations.
The Canadian Football League, a minor league in relation to the NFL but the top level of football in Canada, also has a salary cap. However, amongst sports analysts, the CFL's salary cap is well-known as being more of a guideline which few teams adhere to. In 2005, the CFL salary cap hovered around CDN$2.6 million per team, with the league board of governors voting 7-2 to increase the cap to $3.8 million for 2006.
Salary caps in Europe
Several European football (soccer) leagues are considering salary caps. In 2002, BBC reported [1] that the G14 group of 18 leading European football teams has decided to cap the payrolls at 70% of team's income, starting from the 2005/2006 season. Serie A, the leading Italian football league and The Football League in England have also considered salary caps.
As noted in the beginning of this article, the top English rugby competitions, the Guinness Premiership (Union) and the Super League (League), have caps in place.
Salary caps in Australia
The Australian Football League has implemented a salary cap on its clubs since the 1980s as part of its equalisation policy designed to restrict the ability of its richest clubs (such as Adelaide, Carlton, Collingwood, Essendon and West Coast) to perennially dominate the competition.
The penalties for breaching AFL salary cap regulations can be severe. In 2002, Carlton was found to have systematically rorted the regulations over a period of some years. Resultingly, it was heavily fined and stripped of its top player picks in that year's national draft. Carlton is still recovering from these penalties.
The AFL salary cap is occasionally controversial, as the cap is slightly different for each club. Some clubs in poor financial circumstances have not been permitted to use their full cap to ensure they reduce costs. The Sydney Swans, on the other hand, have a larger cap due to the increased cost of living in that city. Until 2004 the Brisbane Lions were also permitted a slightly higher cap. Both of these cap extensions were justified in the name of Australian rules football's expansion into Australian rugby league's heartlands in Sydney and Brisbane. However the Lions' astonishing success, winning a hat-trick of premierships from 2001 to 2003, resulted in a revolt by other clubs (most notably Collingwood, led by its president Eddie McGuire). In 2004 the AFL bowed to the pressure, reducing Sydney's cap extension and eliminating Brisbane's altogether.
The National Rugby League adopted a salary cap based on the AFL model in the early 1990s. In the NRL, clubs found to have breached the salary cap rules usually incur a fine. For example, six clubs were fined for minor infractions in 2003.
However in mid-2002, the Canterbury Bulldogs were found guilty of serious and systemic breaches. In addition to a more substantial fine, they were stripped of their competition points accumulated to that date, and hence denied a place in the finals. As the club had been leading the competition table prior to the penalty's imposition, this was a shattering outcome for the club and its fans. Furthermore, in the 2006 pre-season the Warriors revealed that their former management had rorted the salary cap in the 2004 and 2005 seasons. As a punishment the club was stripped of four comeptition points for 2006 and fined 430,000 Australian dollars. They also must play 2007 under a reduced salary cap.
Criticisms of salary caps
Any criticism of a salary cap cannot simply ignore the importance of money to professional sports. One can argue that being able to spend more on player salaries is just as much of an unfair advantage as having an extra player on the field, and thus that money must be a consideration in the rules of the league.
One of the most common criticisms of the salary cap is that it is simply a way for management to get an unfair advantage in labor negotiations with players. Most labor disputes engender a fair amount of media sympathy for the side of labor and the "working man," but professional sports generally do not receive the same understanding. The notion of millionaire athletes and billionaire owners arguing over contract clauses and percentage points strikes many as unseemly, and is perhaps best illustrated by NBA player Kenny Anderson's statement to the media during the 1999-2000 lockout: "I may have to sell a couple of my [eight] cars to make ends meet." Anderson later claimed to be joking, but his words were quickly pounced on by pundits and used to portray him, and pro athletes in general, as out of touch with the general public on financial issues.
Owners have tried to avoid this perception by portraying a salary cap as necessary for competitive balance, but even this can be troublesome. In the case of the NHL lockout, the owners first tried to implement a hard salary cap while shying away from revenue sharing. This was viewed cynically as an attempt to benefit the wealthy teams since they would see a drop in player payrolls while getting to retain their significant revenue streams. A hard cap without revenue sharing would also need a lower-than-acceptable cap figure (to players) to suit the weaker teams. Based on the NFL model, a hard salary cap should be accompanied by extensive revenue sharing and a hard salary floor in order to create true competitive parity among teams.
As already alluded to, often a team will have to let go of many of its players – frequently, veterans who have been with the club for a long time – in order to comply with the salary cap; this has led some observers to lament the fact that situations in which a player remained with the same team for his entire career have become far less common since the salary cap was implemented than before.
Also, some have blamed changing fan attitudes for creating the perceived need for salary caps. Many decades ago, for example, in baseball it was considered a positive achievement for a team to finish in the first division, even if it did not qualify for post-season play; nowadays, by contrast, fans tend to lose interest in a team once it is out of playoff contention. However, many fans acknowledge that the lack of a salary cap has caused skyrocketing player salaries and that these increased costs are eventually passed on to rising ticket prices. Also, players are no longer the heroes that they once were in the eyes of fans; an increasing number of fans are blaming players for "greed" in trying to command the highest salaries possible with little regard for a team's competitiveness or financial health. A growing view among fans is that owners are no longer entirely at fault for overspending; the players bear the blame since they benefit from usurping such a system that encourages owners to spend freely.
Still other critics, such as talk radio host Rush Limbaugh, have even objected to the concept of the salary cap on libertarian grounds, expressing the opinion that there should be no artificial limit on what anyone is able to earn if they have the talent. However, this is countered by the all-too-frequent possibility of teams that sign a supposed superstar to a lucrative and guaranteed long-term contract, only to see him perform below expectations right after; overpaid and underperforming players perhaps contribute the most to escalating player salaries. It should be noted that in most interpretations of libertarian theory, a salary cap is perfectly acceptable as long as it is freely agreed to by both parties, and not coercively imposed from without.
The libertarian view also ignores the fact that sports leagues are premised upon competition that is more tightly regulated (by the rules of the sport) than almost any other occupation. Sports leagues, especially in North America, are in a sense socialistic in nature. In order to survive, they must continue to draw new and existing fans by keeping the games interesting and unpredictable, and this requires guaranteeing every team a minimum degree of competitiveness, perhaps at the expense of the most successful teams.