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Salary cap

From Academic Kids

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 mostly used by North American sports leagues: the 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 Zurich 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.

Contents

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. (Anti-trust actions were not a threat to baseball, which has long been exempt from these laws.) 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", which were generally (although not always) won by 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 NFL

The NFL's cap is a so-called "hard cap", which no team can exceed for any reason under penalty from the league. This figure is increased annually based on growth of the league's revenues. As of 2004 the NFL salary cap is 80.5 million US dollars per team.

The player salary which 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 multi-year contract and is paid a signing bonus, only a part of the bonus counts towards the salary cap in the first season. (The rest is divided over the next years of contract.) The full relationship between a player's actual annualized salary and his so-called "cap number" is quite complex and beyond the scope of this article. Teams often design contracts so that some of money paid in the first years does not count towards cap until later. This effectively results in real salaries being slightly higher than the cap.

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 from formerly widespread practices such as keeping a one-time stellar quarterback whose skills are beginning to decline with age around to train a new, highly-touted but "raw" rookie, or generally keeping older players who had contributed much to the team on the playing roster until they are ready to retire on their own terms. It 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.

Salary cap in the NBA

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 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 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 league which is divided among the teams with lower payrolls.

The NBA has recently 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.

Salary caps in other leagues in North America

Ongoing negotiations for the next National Hockey League collective bargaining agreement have revolved around players' salaries. The league contends 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 has demanded "cost certainty" and presented the National Hockey League Players Association with several concepts the league says will achieve this goal. The NHLPA contends that "cost certainty" is nothing more than a euphemism for a salary cap, which the union has vowed it will never accept. The current CBA expired on September 15, 2004 (the day after the World Cup of Hockey final). A lockout ensued, leading to the cancelation of the 2004-2005 season. Ongoing negotiations are based on the concept that the NHLPA has agreed in principle to a salary cap but not yet agreeded upon the details of its implementation.

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. For the 2004 season, only the New York Yankees, Boston Red Sox and Anaheim Angels paid any luxury tax.

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 was recently fined and suspended by the Arena organization for four games (two in the 2005 season, two in 2006) for salary cap violations.

Salary caps in Europe

Several European football (soccer) leagues are considering salary caps. In 2002, BBC reported [1] (http://news.bbc.co.uk/sport1/hi/football/europe/2402329.stm) 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 Zurich Premiership (Union) and the Super League (League), have caps in place.

Breaches

In the Australian National Rugby League, if clubs are found to have breached the salary cap rules, a fine usually ensues. For example, six clubs were fined for minor infractions in 2003.

However, in 2002, one club, the Canterbury Bulldogs, were found guilty of serious and systemic breaches. In additional to a more substantial fine, they were stripped of their competition points, and hence denied a place in the finals.

Criticisms of salary caps

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. 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. 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.

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