Salary cap


In professional sports, a salary cap is an agreement or rule that places a limit on the amount of money that a team can spend on players' salaries. It exists as a per-player limit or a total limit for the team's roster, or both. Several sports leagues have implemented salary caps, using them to keep overall costs down, and also to maintain a competitive balance by restricting richer clubs from entrenching dominance by signing many more top players than their rivals. Salary caps can be a major issue in negotiations between league management and players' unions because they limit players' and teams' ability to negotiate higher salaries even if a team is operating at significant profits, and have been the focal point of several strikes by players and lockouts by owners and administrators.

Adoption

Salary caps are used by the following major sports leagues around the world:
Recently, several European association football leagues have also discussed introducing salary caps. The Union of European Football Associations introduced a set of Financial Fair Play Regulations in 2011, which limits football clubs' spending relative to their income.

Benefits

In theory, there are two main benefits derived from salary caps – promotion of parity between teams, and control of costs.
Primarily, an effective salary cap prevents wealthy teams from certain destructive behaviors such as signing a multitude of high-paid star players to prevent their rivals from accessing these players, and ensuring victory through superior economic power. With an effective salary cap, each club has roughly the same economic power to attract players. This results in roughly equal playing talent in each team in the league, and in turn brings economic benefits to the league and to its individual teams.
Leagues work to ensure a degree of parity between teams so that games are appealing for fans and not a foregone conclusion. This is what American football fans are referring to when they say anyone can win or lose on any given Sunday.
Leagues with salary caps generally believe letting richer teams accumulate talent affects the quality of the sporting product they want to sell: if only one or a few teams can win consistently and challenge for the championship, many contests will be blowouts by the superior team, reducing the sport's attractiveness for fans at the stadium and television viewers. Television is an important revenue source for many leagues worldwide; the more evenly matched and exciting the contests, the more interesting the television product, and the higher the value of the television broadcast rights. An unbalanced league will also threaten its weaker teams' financial viability: fans of the weaker clubs will gravitate to other sports and leagues if their teams have no long-term hope of winning.
One notable example of this occurring was in the Union Association, a baseball league that operated in 1884. The Association was dominated by the St. Louis Maroons, whose owner, Henry Lucas, was also league president, and bought all the best players for his own franchise, leaving the Maroons to easily win the pennant with a record of 94–19, 21 games ahead of their nearest rivals. The league folded at the end of the season.
Another famous example is the All-America Football Conference, which operated between 1946 and 1949. Despite starring many top players and innovative coaches, the AAFC was dominated by one team, the Cleveland Browns, who lost only three games in four years and won every championship in the league's four-year existence, being unbeaten in 1948, and winning three of the championships in blowouts. This resulted in a consistent fall in attendance and heavy losses after the league's second season, for the Browns as well as their rivals, and the league folded at the end of 1949.
The need for parity is more pronounced in leagues that use the franchise system rather than the promotion and relegation system, which is used in European football. The structure of a promotion and relegation system means weaker teams struggle against the threat of relegation, adding importance and excitement to the matches of weaker teams. International club competitions such as the UEFA Champions League also means that the top clubs always have something to play for, even in the most unbalanced of national leagues.
However, as of the 2020s, empirical evidence increasingly pointed to the conclusion that promotion and relegation, standing alone, was insufficient to ensure adequate parity in any given game or the overall financial performance of a sport. Most importantly, the failure of most association football leagues to adequately regulate individual player compensation had resulted in too many games ending in predictable blowouts, and thereby reduced the financial value of such games in terms of ticket sales and media rights. This explained why in the 2020s, association football leagues were collectively bringing in annually only about two times the revenue of the National Football League, even though association football had eight times the number of fans worldwide as American football.

A salary cap can also help to control the costs of teams, and prevent situations in which a club will sign high-cost contracts for star players in order to reap the benefits of immediate popularity and success, only to later find themselves in financial difficulty because of these costs. Without caps, there is a risk that teams will overspend for immediate victory at the expense of long-term stability. Team owners who use the same risk-benefit analysis used in business may risk both the fortunes of their own team and the reputation and viability of the whole league. Sports fans often seek to support a team for life, not merely for the short term. If teams regularly go bankrupt or change markets as businesses do, fans may deem the whole sport unstable and lose interest, switching support to a more stable sport in which long-term stability is more likely.

Hard cap, soft cap and salary floor

A salary cap can be defined as a hard cap or a soft cap.
A hard cap represents a maximum amount that may not be exceeded for any reason. Contracts which cause a team to violate a hard cap are subject to major sanctions, including the voiding of violating contracts, and the stripping of championships won while breaching salary cap rules, which happened to the Melbourne Storm in the NRL. Hard caps are designed so that penalties deter breaking the cap, but there are numerous examples of clubs who have occasionally or systematically cheated the cap.
A soft cap represents an amount which may be exceeded in limited circumstances, but otherwise exceeding the cap will trigger a penalty which is known in advance. Typically these penalties are financial in nature; fines or a luxury tax are common penalties used by leagues.
A salary floor is a minimum amount that must be spent on the team as a whole, and this is separate from the minimum player salary that is agreed to by the league. Some leagues, in particular the NFL, have a hard salary floor that requires teams to meet the salary floor every year, which helps prevent teams from using the salary cap to minimize costs. This also ensures that money from revenue sharing is used for player salaries instead of being pocketed by owners.
When the salary cap and floor are the same, the result is a standard form contract model of payment, in which each player is paid the same amount, sometimes varying by position. The standard form contract model is used extensively in North American minor leagues.