Revenue sharing between leagues and players does not work unless there is a way to determine how much of that revenue is spent by the teams individually. Otherwise, the players may get a percentage of league-wide revenue, but it might all go to players on the Lakers or the Cowboys and none would go to players on the Grizzlies or Bills. In this case, the league would have given the players their share of revenue but some teams would have paid a higher share of this revenue than others. This has a negative impact on the bottom line of those teams and on the competitive balance of the league.
A salary cap system, with a salary maximum and minimum for each team, ensures that the shared revenue gets to the players in a relatively equal manner between teams. From a team perspective the main advantage of a salary cap is that it ensures certainty of its player costs. They know ahead of time that their player costs will be between a minimum and a maximum dollar amount. This allows them to plan out the amount of revenue they will need to maximize profitability. They don’t have to worry about a big increase in the cost of free agents that might raise their payroll by 30%.
For every salary cap system there are two things that must be figured out. There must be a way to determine the salary floor, which is the amount of money a team must spend on players, and the salary cap, which the maximum amount of money a team can spend on players. Once that range is determined, you need guidelines for what payments to players count against the salary cap.
In part 3, we will look at the way the leagues determine their salary cap figures and how it is tied to the way leagues share revenue.
NFL
Up until this season, the NFL had what is called a “hard cap” This means that no team could spend even one dollar more on player costs than the salary cap. In fact, the Commissioner will not approve a contract that will take a team over the salary cap. The salary cap is calculated based on projected shared revenue for a season. From the last blog comparing CBAs from a revenue sharing standpoint, you’ll recall that players are guaranteed a portion of revenue, termed shared revenue. The league will estimate the value of shared revenue in advance of the season and this value is used to determine the salary cap in that season. In 2009, the salary cap was set at 57% of projected shared revenue. So, to determine the salary cap the league calculates 57% of the projected shared revenue amount.
The league will take this number and subtract player benefits. At this point the league will make certain deductions from the salary cap and adjust it depending on whether the projected shared revenue from the previous season was higher or lower than the actual shared revenue for that season. This number is then divided by number of teams to get a preliminary salary cap. The salary cap cannot be less than the cap in the previous season, except that the salary cap plus player benefits can never be more than 61.68% of shared revenue.
Example
Assume the year 1 Salary Cap: $109 million
If Year 2 Projected Shared Revenue equals $205 million per Club:
57.5% = $117.875 million
61.68% = $126.44 million
Then Projected Benefits/salary cap deductions of $20 million per Club are deducted, which means:
57.5% = $97.875 million
61.68% = $106.44 million
Both figures are less than the salary cap of the previous year but because the salary cap cannot be higher than 61.68% of projected shared revenue, this is the number the salary cap is set at.
The salary floor, or minimum team salary, is set at a percentage of the salary cap. In 2009, the minimum team salary was set at 87.6% of the salary cap.
NBA
Unlike the NFL, the NBA operates a soft cap. This means that teams can spend over the salary cap in certain specified cases (can do a whole blog on NBA free agency exceptions). Player salaries over a certain amount above the salary cap will be subject to a luxury tax. Teams like the Lakers and the Mavericks routinely spend over the salary cap and into the luxury tax.
The salary cap itself, however, is calculated in a similar way as in the NFL. In 2009, the salary cap was set at 51% of projected shared revenue. At this point the league will adjust the value of projected shared revenue depending on whether the projected shared revenue from the previous season was higher or lower than the actual shared revenue for that season. The league will take this number and subtract player benefits. This number is then divided by number of teams to get the salary cap for the year.
The minimum team salary is also set as a percentage of the salary cap in the NBA. In 2009, the minimum team salary was set at 75% of the salary cap.
NHL
The NHL, which also has a hard cap, calculates its salary cap in a slightly different way, but it is still tied to shared revenue. The league starts the calculation process for the upcoming season at the end of June. It sets the projected shared revenue for the upcoming season equal to preliminary numbers for the previous season’s shared revenue. The league takes this amount and multiplies it by the player’s percentage of shared revenue (57% in 2009). The league then subtracts player benefits and divides by the number of teams. This number, after it has been adjusted upward by a 5% growth factor, becomes the midpoint of range between the salary cap and the salary floor. The growth factor is designed to account for the fact that the league’s revenues are growing every year.
Once the league has established a midpoint, $8 million dollars is added and subtracted from that amount to establish the salary cap and salary floor, respectively.
One final issue must be considered. Since the midpoint is calculated using a preliminary report of the previous seasons’ shared revenue, the league may make an adjustment before the start of the season based on the final report of shared revenue. The league will recalculate the midpoint based on the final numbers and if the midpoint would increase or decrease by more than $3 million, then the midpoint will be adjusted to that amount, and the salary cap and salary floor will be adjusted accordingly. This is done to account for any major differences in the value of shared revenue between the preliminary and final reports.
Example
Assume that the preliminary shared revenue for Year 1 is $2.7 billion and preliminary benefits are $66 million. The midpoint for Year 2 would be calculated as follows:
The Midpoint is (57% of $2.7 billion) - $66 million =$1.473 billion divided by 30 teams=$49.1 million.
This is then adjusted upward by 5%=$51.555 million. The salary cap would be $59.555 million ($51.555 million + $8 million) and the salary floor would be $43.555 million ($51.555 million-$8 million)
If, before the start of the season, a recalculation of the midpoint using the final shared revenue amount for Year 1 would increase the midpoint to $54.555 million or more, or decrease the midpoint to $48.555 million or less, this recalculation of the midpoint will be used to adjust the salary cap and salary floor for the season.
To allow for flexibility in the offseason, the league allows a team to spend up to 10% over the salary cap from July 1 until the start of training camp. This is why you see teams, like the Devils, scrambling in the summer to get rid of contracts after they signed a large deal with a player.
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