How Salary Caps Work in Sports Leagues?

It is common knowledge that sports leagues all over the world rake in billions of dollars when it comes to annual revenue. It is also known that all these leagues have a well-developed fan base.

Famous leagues such as the English Premier League, the NBA, etc have various sports franchises which are very competitive. They also have well-established rivalries. The end result of all this is that it is almost impossible to factor in the outcome of the league at the very beginning.

It needs to be understood that the existence of this close competition and rivalries is not a mere coincidence. In most parts of the world, this competitiveness is built into the league using various administrative tools. Salary caps are one such strategic tool used by sports league franchisors all over the world.

In this article, we will have a closer look at what salary caps are and what is the objective behind imposing these salary caps.

What are Salary Caps?

Whenever a franchisor organizes league sports, they have the authority to create rules which govern that league. One such rule created is to limit the salaries that clubs can give to their players. This rule is called a salary cap.

Salary cap can either be a fixed number such as ten million dollars or it can be a percentage of another number such as ticket sales revenue. Generally, in most leagues across the world, the number is a percentage of the revenue generated by the franchise in the previous year.

The details of the salary cap rule vary significantly between leagues. However, the moot point is that salary caps are used to restrict the total salary-related expense being incurred by a league.

It needs to be understood that salary caps do not place restrictions on the remuneration of a single player. There are separate rules related to that. Salary caps place restrictions on the payroll cost of the entire team. Hence, if a team decides to purchase an expensive player, they have to compensate for that by also acquiring a cheaper player since the total budget is restricted!

Hard Cap Vs. Soft Cap

There are two main types of salary caps that are common amongst sports leagues worldwide.

The first type of cap is called a hard cap. This means that the salary cap amount is final and non-negotiable. No team will be allowed to breach this salary cap under any circumstances.

There is another type of cap known as a soft cap. This means that the salary cap figure is indicative. Franchise teams are recommended to stay within these limits. However, it is possible for certain franchises to breach these limits. The cost of the privilege to breach this limit will have to be compensated by the franchise in some other form viz. lower revenue share.

The basic difference is that the hard caps do not provide any flexibility whereas soft caps try to impose an unviable economic cost in order to deter such behaviour.

Objectives of Salary Caps

We have already mentioned that salary caps are strategic in nature. It is claimed that they are implemented in order to ensure that the league remains competitive. The details of the objectives are mentioned below:

1. Create a Level Playing Field: It is important to realize that salary caps create a level playing field. This is because the financial prowess of different sporting clubs varies wildly.

   Some sporting clubs have significantly more money than others. In such cases, if these clubs are allowed to use their monetary strength without any restrictions, they are likely to corner all the resources.

   Talent is one of the biggest resources when it comes to sports leagues. Hence, the objective of salary caps is to ensure that smaller clubs are also able to compete with larger clubs on the field. The larger clubs should not be able to amass so many resources that the competition becomes one-sided and predictable.

2. Promote the Use of Skill and Strategy: Also, salary caps have been created to ensure that teams have to use innovation and creativity in order to win the league.

   No team should be allowed to win the league using brute force i.e. money power alone. Salary caps ensure that even the richest of clubs do not have access to unlimited amounts of money while purchasing talent. They should also have to deal with monetary restrictions which compel them to become creative and come up with innovative strategies.

Salary Floors

Over the years, many leagues witnessed sports franchises taking undue advantage of salary caps in order to unfairly restrict payroll costs and increase their profits. It is for this reason that salary floors were also created to go along with salary caps.

Salary floors work in the same manner as salary caps. However, they work in the opposite direction. Also, salary floors can also be bifurcated into the hard floor and soft floor just like salary caps.

The fact of the matter is that there are league-level rules which have been created in order to control the amount of funds that are available to players. This is a hotly debated topic with many advantages, disadvantages, and alternatives. In the next few articles, we will have a closer look at these other aspects.