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02 Apr

What is a Salary Cap in Sports?


What are salary caps

It seems like every offseason for American major national sports leagues brings discussions about salary caps. You probably know the basics about what they do, but you may have wondered about some of their specific mechanics, especially considering that the sport finance regulations concerning them can differ confusingly between sports. Salary cap definition parameters vary depending on the league, with the National Football League (NFL), the National Basketball Association (NBA), the National Hockey League (NHL) and Major League Baseball (MLB) each governed by different regulations.

Salary caps in sports are wage caps that impose a limit on the total amount of money a professional sports team can spend on players' salaries. During a “free agency” period, when players are allowed to sell their services to teams, a salary cap prevents the most well-capitalized teams from snatching up all the top players.

In the spirit of healthy competition, the rationale for the use of a salary cap is that they:

  • Prevent one team from gaining an unfair advantage over the rest of the competition because they can afford more star players
  • Enable smaller franchises to remain competitive and grow their fan base
  • Help a whole league thrive by ensuring that a larger number of teams are potentially interesting to casual fans

Understandably, players don't always see salary caps positively. In other industries, such a codified restriction on employee earnings would be seen as unfair or anti-competitive. Are salary caps in sports fair to players? Are they good for fans? And do they really help protect professional sports organizations? Here's a look at the history of salary caps and how they can affect those at all levels of a sport organization.

A History of Salary Caps In American Sports

Salary cap in sports

Salary caps were first introduced into professional sports during the 1984-1985 season of the NBA.1 This followed nearly a decade of contentious free agency that arose after the abolition of the reserve clause that bound a player to the team that drafted them for life. Under the reserve clause, player salaries never had to be raised substantially, since clubs basically owned their players.

In 1976, an agreement between players and ownership created modern free agency by eliminating the reserve clause for non-rookie contracts. With players allowed to enter free agency and make themselves available for other teams at the expiration of their contracts, an open market for bidding on their services was created, which enabled higher player salaries. This eventually strained the budgets of teams with smaller revenues, which warranted a system that could ensure a more equal playing field in the acquisition of talent. Thus, the salary cap was born.

Back then, the salary cap was $3.6 million. By the 2017-2018 season, the salary cap had risen to more than $99 million.2 The NBA has what is known as a “soft salary cap,” meaning that some teams may actually exceed the cap because of spending exceptions designed to allow them to retain players who have been with them for a number of years in the interest of ensuring fan loyalty.3 In today’s NBA, teams must pay a luxury tax if they exceed a payroll of $119 million.4

The NBA's salary cap pioneered the idea for other professional sport leagues. A $34.6 million salary cap was introduced in the NFL in 1994,5 and the salary cap for the 2018 NFL season is $177.2 million.6 After a lockout in the NHL that cancelled the 2004-2005 season, a salary cap was introduced in that league as well, and it is expected to reach up to $82 million in the 2018-2019 season.7 Unlike the soft cap of the NBA, salary caps in the NFL and NHL are “hard caps,” so teams cannot spend above the cap for any reason.

Major League Baseball is the only league of the four major professional sport leagues in the United States that does not have a salary cap. Instead, MLB teams pay a luxury tax penalty for spending over a certain limit. There have been many arguments for a salary cap in baseball due to teams with large payrolls consistently making the playoffs and eventually winning the World Series.8 However, because of a strong players' union, it is unlikely that MLB will adopt a salary cap without a strong fight from players.

How Salary Caps Affect Players and Fans

There are many arguments for and against salary caps, from many different stakeholders. Some of these include:

  • From the players’ side: Salary caps limit the potential income for players. While players can make up for this through endorsements and other off-the-field appearances, they still may view salary caps as giving discounts to billionaire team owners by suppressing their wages below what they could achieve in a truly free market.
  • From the ownership side: Salary caps make team ownership more manageable. Owners—particularly those of small-market teams—would argue that more teams have the opportunity to create well-rounded rosters which have a better chance of making playoffs and winning championships in a salary-capped league.
  • From the fan side: Salary caps mean better competition and more parity between all teams in a given league (in theory, anyway). Salary caps in the NFL, NBA and NHL can foster this, but in MLB, luxury tax requirements may not be enough to prevent large-market teams from dominating. However, MLB revenue continues to grow, so this particular market may not demand a need for a salary cap to retain fans.9

Research on salary caps continues to expand, examining factors such as how effective salary caps are in promoting competition.10 Those who are involved in sport management need to have an understanding of how salary caps affect not only the business of a team or league, but the well-being and security of athletes and the quality of the entertainment delivered as well.

Study Salary Caps and Other Sport Management Issues at the University of Kansas

If topics like salary caps interest you, you may find pursuing a career in sports to be appealing. The University of Kansas online Master’s in Sport Management* program prepares students to work on issues like salary caps through a curriculum that includes sport finance among its areas of focus. Learn more about the KU sport management program online.

*This program is a Master of Science in Education (M.S.E.) degree in health, sport management, and exercise science with an emphasis in sport management.

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