Salary cap

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In professional sports, a salary cap (often called a wage cap in the United Kingdom) 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.

Contents

[edit] Adoption

Salary caps are used by major sports leagues around the world:

[edit] Reserve clause

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 with their previous team or with any other team. This situation, called Restricted Free Agency, 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.

[edit] Salary cap in the NHL

A salary cap existed in the early days of the National Hockey League (NHL). During the Great Depression, for example, the league was under financial pressure to lower its salary cap to $62,500 per team, and $7,000 per player, forcing some teams to trade away well paid star playersin order to fit the cap.[1]

[edit] Pre-salary cap

Prior to the resolution of the 2004–05 lockout, the NHL was the only major North American professional sports league that had no luxury tax, revenue sharing, salary cap, or salary floor.

Player salaries did not become an issue until the 1970s, when Alan Eagleson founded the NHL Players' Association (NHLPA) and the upstart World Hockey Association began competing with the NHL for players. On the other hand, owners such as Harold Ballard of the Toronto Maple Leafs spent among the league minimum on rosters, making his team the most profitable. There was little financial incentive for Ballard to spend money on star players to improve the quality of the on-ice product and attract fans, as all Maple Leafs games were sold out regardless of how poorly the team played.

The 1994–95 NHL lockout was fought over the issue of the salary cap. The 1994–95 season was only partially cancelled, with 48 games and the playoffs eventually being played.

Although six NHL franchises are based in Canada, all NHL salaries must be paid in U.S. dollars.[citation needed] This caused hardship among the small-market Canadian teams at the turn of the 20th century due to the weak Canadian dollar, as their revenues were in Canadian dollars. NHL Commissioner Gary Bettman successfully presuaded the US-based teams to donate towards a pool to mitigate the effect of the exchange rate.

[edit] Current salary cap

The negotiations for the most recent NHL Collective Bargaining Agreement revolved primarily around players' salaries. The league contended that its clubs spent about 75% of revenues on salaries; a percentage far higher than existed in other North American sports. NHL Commissioner Gary Bettman demanded "cost certainty" and presented the NHLPA with several concepts that the Players' Association considered nothing more than euphemisms for a salary cap, which it had vowed it would never accept.[citation needed] The previous CBA had expired on September 15, 2004.

A lockout ensued, leading to the cancellation of the entire 2004–05 NHL season, the first time a major sports league in North America had lost an entire season to a labor dispute. The lockout was resolved when the NHLPA agreed to a hard salary cap based on league revenues, although the NHL reciprocated by implementing revenue sharing which would allow for a higher cap figure.

The NHL salary cap is formally titled the "Upper Limit of the Payroll Range" in the new CBA. For the 2005–06 NHL season, the salary cap was set at US$39 million per team. Revenues for the six Canadian teams have all increased significantly since the lockout, and due to the fact the Canadian dollar has risen to around parity with its U.S. counterpart, league-wide revenues measured in U.S. dollars have been inflated accordingly. As a result of these factors, the cap was raised to $44 million for the 2006–07 NHL season, and to $50.3 million for the 2007–08.[2]

The CBA also contains a "Lower Limit of the Payroll Range", which is the minimum that each team must pay in player salaries. The lower limit is defined from 2006–07 onwards to be $16 million below the cap, therefore the 2006–07 minimum was $28 million, and the 2007–08 minimum was $34.3 million.[2] The difference between the salary cap and a team's actual payroll is the team's Payroll Room.

The NHL has become the first of the major North American leagues to implement a hard cap while retaining guaranteed player contracts. Guaranteed player contracts in the NHL differ from other sports, notably the NFL, where teams may opt out of a contract by waiving or cutting a player. NHL teams may buy-out player's contracts, but must still pay a portion (usually two thirds) of the money still owed. The buy-out is ammortized over double the remaining length of the contract under a relatively complex calculation.

Some formerly-common practices (such as trading cash for players or agreeing to pay a portion of a player's remaining salary after trading him) have been forbidden in the new CBA to prevent wealthier teams from evading the restrictions of the cap.

[edit] 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), and 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 initially $34.6 million. Both the cap and the floor are adjusted annually based on the change in the league's revenues.

This number has increased every year and will reach approximately $109 million in 2007, with a salary floor of approximately $81.75 million per team. Update: 2008 numbers: Cap = $116 million, Floor = 85.2% of cap = $98.8 million. The salary floor will increase 1.2% per year up to 90% of the hard cap.

Under the NFL's agreement with the NFLPA (with a few rare exceptions) the effect on the salary cap of guaranteed payments (such as signing bonuses) are prorated evenly over the term of the contract.

In transitions, if a player retires, is traded, or is cut before June 1st, all remaining bonus is applied to the salary cap for the current season. If the payroll change occurs after June 1st, the current season's bonus proration is unchanged, and the next year's cap must absorb the entire remaining bonus.

Because of this treatment, NFL contracts almost always include the right to cut a player before the beginning of a season. If a player is cut, his salary for the remainder of his contract is neither paid nor counted against the salary cap for that team. A highly sought-after player signing a long term contract will usually receive a signing bonus, thus providing him with financial security even if he is cut before the end of his 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 team's salary cap, or "not likely to be earned", which is not counted. A team's salary cap is adjusted downward for NLTBE bonuses that were earned in the previous year but not counted against that year's cap. It is adjusted upward for LTBE bonuses that were not earned in the previous year but were counted against that year's cap.

One effect of the salary cap has been the release of many higher-salaried veteran players and their replacement by lower-salaried players on a given team's payroll over time. On the other hand, many teams have made a practice of exploiting these adjustments and used free agents to restock with better personnel more suited to the team.[3]

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 while they develop into NFL capable players. In this respect, it functions as a supplement to the 53-man roster limit and practice squad limits.

Generally, the practice of keeping older players (sentimental favorites) who had contributed to the team in the past, but whose abilities have declined, has become less common in the era of the salary cap, as a veteran's minimum salary is required to be higher than a player with lesser experience and the ability to hire a cheaper less experienced prospect with growth potential that gives the same productivity as an older player mitigates in hiring the younger. To offset this dollars and cents driven tendency, the players association accepted an arrangement so that a veteran player who receives no bonuses in his contract may be paid the veteran minimum of up to $810,000, while only accounting for $425,000 in salary cap space.

Players who are willing to take pay cuts in return for the increased likelihood of winning a championship is becoming a more frequent occurrence. Consequently, effective use of the cap by such a team as the Patriots have led to a succession of salary concessions by big name players seeking championship teams instead of bigger paychecks. Such contract concessions has been in evidence by players such as Randy Moss, Junior Seau, and Tedy Bruschi among other examples.

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, including merchandising revenues and web enterprises which ownership is sharing with players as well.

[edit] 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. The salary cap for the 2007-2008 season will be $55,630,000[4]. 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 increasing 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 five years' experience, the maximum salary threshold begins at 25% of the salary cap, with annual increases of up to 10.5% possible beyond that for players re-signed by their original team, or 8% annual increases for free agents that sign with new teams. For players of greater experience, the salary limit is higher - but the 10.5% 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 $5.356 million, the highest of any major North American sports league.

[edit] 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 annually revised figure is taxed on the excess amount (or fined). This is paid to the league which then puts the money into its "industry-growth fund". [5]

For the 2004 season, only Boston, Anaheim, and the New York Yankees paid any luxury tax, as the team's superstar players earned yearly salaries close to the entire payroll of some other clubs. The tax has only been implemented on nine occasions and the Yankees have been the subject of five of those.

However, critics point out that the luxury tax has had little effect on maintaining competitive balance and on overspending by affluent teams.[citation needed] Due to opposition of a powerful MLB players' 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 success of NHL owners in their 2004-05 lockout as an opportunity for MLB to reform its collective bargaining agreement,[citation needed] baseball owners agreed to a new five-year deal in October 2006 that did not include a salary cap.

Unlike the other three major North American sports, MLB has no team salary floor. The only minimum limits for team payrolls are based on the minimum salaries for individual players of various levels of experience that are written into MLB's collective bargaining agreement.

[edit] Salary cap in the Canadian Football League

The Canadian Football League also has a salary cap. However, among the great Canadian football players such as amongst sports analysts, the CFL's salary cap has been well-known as being more of a guideline which few (if any) teams adhered to. In the CFL's 2005 season, the salary cap hovered around C$2.6 million per team. On June 13, 2006, the proposed salary management system featuring a $3.8 million Maximum Salary Expenditure Cap (SEC) initially proposed in January was ratified at the CFL board of governors meeting in Winnipeg, Manitoba.[1]

Enforcement of the new regulations is set begin starting with the 2007 CFL season, when the cap is set to rise to $4.05 million due to increased revenues. [2] However, critics point out that violation of the cap will apparently result only in fairly modest fines and forfeited draft picks. The effect on a violating team's draft selections has not been disclosed, however CFL teams rely more on trades and free agents cut from other teams and the NFL to stock their rosters. The fines have been revealed to be progressive in nature, up to three dollars for every dollar beyond $300,000 over the cap. [3] Critics believe such a system will operate more like a strict luxury tax regime as opposed to a true cap.

[edit] Salary caps in other North American leagues

Salary caps are common in other leagues. In Arena football, 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.

[edit] Salary caps in Europe

Several European football (soccer) leagues are considering salary caps. In 2002, BBC reported [4] that the G14 group of 18 leading European football teams would cap their 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.

Top executives in European football have acknowledged that a number of challenges not present in North America would confront anyone who tried to implement an effective cap across European football or even across a single league, especially if this were to be a flat limit put in place to create competitive balance:

  • European leagues are in competition with each other for the best players. Moreover, football leagues in European Union countries have been forbidden from prohibiting the signing of EU players from other nations, or even from limiting their numbers. Therefore, if one league imposed a strict cap on its teams, the best players from the country in question would still be free to move to uncapped rival leagues. Success in European club competitions is not only a matter of national pride - the number of places each country gets in these competitions is determined by its teams' past performances in Europe. In each of the North American major sports, there is only a single league which oversees a single premier competition, and those leagues which have strict caps do not have to deal with teams in rival leagues that could afford to maintain payrolls that are even close to the respective cap levels.
  • Different governing bodies have authority over domestic and international competitions. For example, UEFA governs European football and organizes the prestigious Champions League and UEFA Cup, but its authority over the domestic leagues is very limited. Although UEFA could, in theory, impose a wage cap, it would only apply to UEFA's club competitions and to the portion of each team's payroll paid to players registered with UEFA. A wealthy Champions League team could then sign players who would play exclusively in domestic competitions. In each of the North American major sports, there is only a single league which oversees a single premier competition.
  • The promotion and relegation system presents challenges especially if the cap system provisioned lower limits in the lower divisions. A club with a payroll close to the top division's cap might be relegated and then find themselves significantly over the second division cap. A promoted club might have to face the challenge of hastily finding players who it could then pay under a higher cap. North American leagues do not employ promotion and relegation systems.
  • European tax systems and rates vary greatly from country to country. One prominent club, AS Monaco, plays in a principality with no income tax at all. A flat payroll limit would therefore equate to aggregate take home pay that varied greatly from one club to the next, which would make it difficult for teams in countries with high taxation to attract the best players. By comparison, the differences between the tax systems and tax rates of Canada, the U.S. and between their respective provinces and states are not nearly as great.
  • Europeans use multiple currencies and football wages are usually paid in the local currency. Although the countries hosting all but one of the most prominent European leagues now use the euro, the one exception (England) has the richest league. Even if a hypothetical UEFA-wide cap were denominated in euros, fluctuating exchange rates would make it difficult for the cap to be fairly administered in the United Kingdom since its salaries are paid in pounds sterling. By comparison, most player salaries paid to players on Canadian major sports teams are paid in U.S. dollars, in fact this is now mandated in the NHL to ensure that payrolls do not fluctuate with exchange rates. On the other hand, trying to force British clubs to pay wages in euros so that their payrolls could not exceed a cap would meet with opposition from clubs since their revenues are collected in pounds, and might even provoke political opposition from Britons determined to prevent the euro from replacing the pound.

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.

[edit] Salary caps in Australia

[edit] Australian rules football

[edit] Australian Football League

The Australian Football League has implemented a salary cap on its clubs since 1987 (when Brisbane and West Coast were admitted) as part of its equalisation policy designed to restrict the ability of its richest clubs (such as Essendon, Collingwood and Carlton) to perennially dominate the competition.

The cap was set at A$1.25 million for 1987-1989 as per VFL agreement, with a floor coming in at $1.125 million (90% of the cap).

The salary cap and salary floor has increased substantially since the competition was re-branded as the AFL in 1990 to help to stem the dominance of high membership clubs such as West Coast and Adelaide. The salary cap in 2008 is $8.5 million (AUD), with the salary floor coming in at $7.65 million.

[edit] Penalties

The penalties for violating AFL salary cap and salary floor regulations include fines, loss of draft picks and loss of premiership points (which has not yet been implemented).

[edit] Breaches

No club has yet been penalised for violating salary floor regulations (i.e. deliberately underpaying players).

The following breaches of the salary cap have occurred:

  • In 1987 (the cap's first year) Sydney were fined the maximum amount of $20,000 and forfeited a first round draft pick after being found to have almost doubled the cap with a payroll of $2.4 million.
  • In 1996, Essendon were fined a then record $280,000 and barred from the first two rounds of the national draft for a string of breaches between 1991 and 1995.
  • In 2000, Fremantle were fined $54,000 and were barred from the 2001 pre-season draft for a minor breach.
  • In 2002, Carlton was found to have systematically rorted the regulations between 1994 and 2001. The club was fined an unprecedented total of $987,000, disqualified from receiving priority picks and barred from the first two rounds of the national draft for two years. The club is still recovering both on-field and off-field from these significant penalties.
  • In 2003, Essendon were fined $85,000 for a minor breach.
  • In 2005, St. Kilda were fined $40,000 for a minor breach. St. Kilda were also fined $10,000 for a minor breach in 2008.

[edit] Criticism of the cap

The AFL salary cap is occasionally controversial, as the cap is a "soft" cap and therefore slightly different for each club. Due to the larger number of players (40) in each squad compared to other sports, the cost per club can be higher than and individual player payments can be less than or equal to other rival national competitions. Clubs in poor financial circumstances do not use their full cap (in some circumstances not reaching the salary floor) to ensure they reduce costs.

The Sydney Swans have a slightly higher cap due to the increased cost of living in that city, and until 2004 the Brisbane Lions were also permitted a slightly higher cap, extensions justified in the name of AFL's expansion into rugby league's heartland in Sydney and Brisbane.

The Lions, with this assistance from the AFL's extra allowance within the salary cap, won a hat-trick of premierships from 2001 to 2003 and resulted in the AFL reducing Sydney's cap extension and eliminating Brisbane's altogether. The AFL Players Association negotiates for players with the AFL on the topic of average salary.

[edit] State and Regional Leagues

Apart from the AFL, several regional leagues also have salary caps which although widening between them and the AFL and overall less than national competitions, are substantial enough to dictate the movement of semi-professional and professional players between states and the overall playing quality and spectator attendance of the state leagues.

The overall salary of players is complicated somewhat by the affiliations with AFL clubs, allowing AFL players to play for state league clubs, which varies from league to league.

The highest of these is the SANFL, which in 2008 will have a salary cap of $400,000 (excluding service payments).[6]

The West Australian Football League in 2007 has a salary cap of $160,000 plus $15,000 in service payments for each club (this is set until 2009).[7]

The Victorian Football League in 2007 has a salary cap of $185,000 excluding service payments. There are a significantly higher number of AFL reserves due to affiliations with Victorian clubs, but player payments for these appearances is apparently not included in the VFL's salary cap.

The Northern Tasmanian Football League has a salary cap in 2007 of $52,500.[8]

Queensland State League competition also has a salary cap.[9]

[edit] Rugby league

[edit] National Rugby League

The National Rugby League adopted a salary cap based on the AFL model in 1990. In 2008 the salary cap for fifteen of the sixteen teams is $4.1 million, with a $3.69 million salary floor.

The NRL's stated purposes for having a salary cap are "to assist in 'spreading the playing talent'" and "ensure that Clubs are not put into positions where they are forced to spend more money than they can afford in terms of player payments, just to be competitive." [5]

In the NRL, clubs found to have breached the salary cap rules can incur a fine and/or a premiership points deduction.

[edit] Breaches

1991: The Canberra Raiders were fined $100,000 and ordered to repay $85,000 excess from 1990.

Eight clubs were fined in 2000: Newcastle ($159,000), the New Zealand Warriors ($100,000), Penrith ($81,000), Canterbury ($50,000), Parramatta ($40,000), Melbourne ($24,500), the Sydney Roosters ($13,000) and Cronulla ($7,000).

Three clubs were fined in 2001: North Queensland ($100,000), Melbourne ($90,000) and Brisbane ($84,000).

2002: Canterbury Bulldogs were found to have committed serious and systematic breaches totaling $920,000, which was at the time enough for two extra players. The club was hit with a $500,000 fine and were stripped of all 37 competition points accumulated to that date; the club won the wooden spoon as a result. An extensive NRL investigation resulted in criminal charges being laid against two senior club officials; they were convicted and sentenced to seven years jail for fraud (a fact that has been proven to be wrong because I read it on The Kennel).

Five other clubs were also fined: the Sydney Roosters ($149,000), Newcastle ($85,000), Melbourne ($67,000), the Wests Tigers ($58,500) and Brisbane ($57,500).

Nine clubs were fined in 2003 after a crackdown in light of the Canterbury scandal the year before: Melbourne ($131,000), Penrith ($60,000), Newcastle ($40,000), Brisbane ($20,000), South Sydney ($15,250), the New Zealand Warriors ($15,000), Cronulla ($10,000), and Canterbury ($10,000).

Six clubs were fined in 2004: Melbourne ($120,000), Canterbury ($82,500), St George Illawarra ($32,500), Penrith ($25,000), the Sydney Roosters ($25,000), Canberra ($5,000).

Four clubs were fined in 2005: St George Illawarra ($20,000), Newcastle ($11,000), Canterbury ($8,500) and Canberra ($1,000).

2006: The New Zealand Warriors revealed that their former management had exceeded the salary cap in 2004-2005. The club were fined $430,000, had to start the season with a four point deficit, and were ordered to play 2007 under a reduced salary cap of $3.15 million (and a reduced salary floor of $2.79 million).

2007: The Canberra Raiders were fined $175,000 but did not lose any points.

[edit] Soccer

[edit] A-League

The recently established A-League national soccer competition utilized a universal salary cap of AU$1.5 million for each squad in its inaugural 2005/2006 season. However, each team could also sign one "marquee player" whose salary was privately funded, and not included in the team's salary cap.

The cap has been increased to AU$1.85 million for the 2007/2008 season.

The cap is expected to reach AU$2 million by its fifth year.

[edit] National Basketball League

The NBL's salary cap is AU$776,000 for the 2006-07 season but will increase to AU$810,000 for the 2007-08 season. The cap has now risen for two consecutive years due to the continued growth for the League. [10]


[edit] References

  1. ^ Diamond, Dan (1991). The Official National Hockey League 75th Anniversary Commemorative Book. McClelland & Stewart, 69. ISBN 0-7710-6727-5. 
  2. ^ a b "The salary cap in the NHL is going up again", TSN.ca.
  3. ^ Michael Holly. Patriots Reign, 1st ed. HC, HarperCollins. 
  4. ^ NBA Sets Cap Chris Sheridan, ESPN.com, July 11, 2007
  5. ^ Four-Year Deal Includes Luxury Tax, No Contraction," ESPN.com, August 30, 2000.
  6. ^ 2007 Salary Cap Changes - FootySA
  7. ^ http://72.14.253.104/search?q=cache:c_shHKldzQMJ:wafootball.com.au/default.aspx%3Fs%3Dnewsdisplay%26aid%3D113399+%22wafl+salary+cap%22&hl=en&ct=clnk&cd=1
  8. ^ The Examiner Newspaper - Northern Tasmania news, classifieds and community
  9. ^ AFL Queensland Competitions Rules and Regulations 2005
  10. ^ NBL > News
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