April 14, 2020

Salary cap on the example of major American sports leagues

In the world of sports, there are a large number of supporters and opponents of the salary cap, who actively state their position on the advantages and disadvantages of this mechanism for economic regulation of professional sports leagues. In order for you to be able to take sides, I suggest that you familiarize yourself with the specifics of applying the salary cap in the NBA (National Basketball Association), NHL (National Hockey League), NFL (National Football League), MLB (Major League Baseball).

The concept

The salary cap is an agreement or rule that sets a limit on the amount of money a team can spend on salaries of players.

It can exist as a salary cap for each player, a general salary cap for the entire team, or a combination of the options presented.

The salary cap includes the amount of money the League earned over the past year, the profit from ticket sales, merchandise, and the profit from television contracts divided by the number of teams in a particular sport.

History of creation

The NBA pioneered the implementation of the salary cap mechanism, introducing it during the 1984-1985 season. At that time, the upper limit of the salary cap was at $ 3.6 million. By the 2019-2020 season, this limit had grown to more than $ 109.14 million. The NBA has a so-called «soft salary cap», which means that some teams may actually exceed the upper limit of the salary cap due to spending exceptions designed to allow them to retain players who have been with them for a number of years in the interest of securing fan loyalty. In today's NBA teams have to pay luxury tax if they exceed the salary $132,627 million.

The NBA set an example for other professional sports leagues, and it proved infectious. In 1994, the NFL introduced a salary cap with a salary cap at $ 34.6 million, and the upper salary cap for the 2020 NFL season is $ 188.2 million. In the NHL, the salary cap came immediately after the season that was missed due to the lockout, namely the 2005-2006 season. The upper limit of the salary cap that season was $ 39 million, and in 2020 it grew to a crazy $ 81.5 million by those standards. Unlike the NBA's «soft salary cap», the NFL and NHL's salary caps are «hard limits», so teams can't spend above the limit under any circumstances.

Major League Baseball is the only league of the four major professional sports leagues in the United States that does not have a salary cap. Instead, MLB teams pay luxury tax for spending over a certain limit. There were many arguments for limiting baseball's salary cap because teams with large payrolls consistently made the playoffs and eventually won the world series of baseball. However, due to the strong players' Union, it is unlikely that MLB will accept the salary cap without a battle from the players.

Purpose of creation

  • prevent the existence of an unfair advantage of one team over the rest of the competition, which, due to its large financial resources, can afford to have more star players in its composition;
  • to allow smaller franchises to remain competitive and to expand the circle of its fans;
  • help the league maintain a high level of competition, which will be interesting to watch for a large number of fans.

Arguments for/against

There are many arguments for and against the salary cap from different stakeholders. Some of them include:

  • The player’s side: salary caps in leagues limit the potential revenue for players. While players can make up for this with additional off-field revenue (advertising contracts, image rights, etc.), they can still view the salary cap as providing discounts to billionaire team owners who lower their salary levels below what they could achieve in a truly free market;
  • The owners’ of the clubs side: wage limits make ownership of the team more manageable. Owners, especially from small-market teams, claim that more teams have the opportunity to create more equal squads that have a better chance of reaching the playoffs and winning the championship in a league with a salary cap;
  • The fans' side: salary caps create higher competition and greater parity between all teams in each specific league. Salary caps in the NFL, NBA, and NHL may contribute to this, but in MLB, luxury tax requirements may not be enough to thwart dominant clubs in the market. However, MLB's revenue continues to grow, so this market doesn't need a salary cap to retain fans.

It is also worth noting that the appearance of the salary cap in the leagues does not affect the cost of tickets and goods sold at stadiums and in stores of fan’s paraphernalia, which means that we, as ordinary consumers, do not bear any financial burden due to the presence of the salary cap in the leagues.

Based on what you have read, make your own choice about which camp to join: are you for the salary cap or against it?


Sources: https://onlinesportmanagement.ku.edu/community/salary-caps-in-sports