Hard v. soft salary caps One of the first caps on team pay was introduced into the NBA in the…

Hard v. soft salary caps One of the first caps on team pay was introduced into the NBA in the 1984/85 season. The size of the cap was determined by the revenue of the league. Revenue streams from sources such as gate receipts and national TV money were aggregated and referred to as Basket Related Income (BRI). A collective bargaining agreement between the team owners and players union specified that 53 per cent of BRI should be spent on players salaries. The system worked as an absolute cap on all teams. Once 53 per cent of BRI was calculated, this figure was split equally between all 30

Hard v. soft salary caps One of the first caps on team pay was introduced into the NBA in the 1984/85 season. The size of the cap was determined by the revenue of the league. Revenue streams from sources such as gate receipts and national TV money were aggregated and referred to as Basket Related Income (BRI). A collective bargaining agreement between the team owners and players union specified that 53 per cent of BRI should be spent on players salaries. The system worked as an absolute cap on all teams. Once 53 per cent of BRI was calculated, this figure was split equally between all 30 teams in the NBA and this represented each teams salary cap. For example in 1984/85: In theory, whether it was a large market team (e.g. LA Lakers or New York Knicks) or a small market team (e.g. Seattle Supersonics or Milwaukee Bucks) the maximum amount that could be spent on players wages that year was $3.6 million. The collective bargaining agreement also specified that teams had to spend a minimum of 90 per cent of the cap on players wages or $3.24 million. The scheme became known as a soft cap because it had various exceptions built into it. The most famous of these is known as the Larry Bird Exception. This worked in the following way. A player who had completed his contract and became a free agent was free to negotiate with any team. If the original club re-signed the player, his salary did not count towards that clubs salary cap. Larry Bird re-signed for the Boston Celtics in 1985, hence the name of the exception. The exceptions meant that by 1997/98 more than half the clubs in the NBA broke the agreed salary cap ($26.9 million) that year. The Chicago Bulls re-signed Michael Jordan for a salary of $33 million i.e. more than the salary cap for the whole team! The NFL introduced a salary cap in 1994 that was very similar to the one used by the NBA. Revenues generated by the league were called Defined Gross Revenue (DGR) and it was agreed that 64 per cent of this figure could be spent on players salaries. The salary cap for each club in the 1994/95 season was $34.6 million. However, unlike the NBA there were no exceptions to this scheme so the NFL cap became known as a hard cap. In 2009, the cap was $128 million per team, while the floor was set at 87.6 per cent of the cap, which meant that each team had to spend a minimum of $112.1 million on players salaries. We might anticipate that the large market clubs would want to find ways of signing more star players and avoiding the constraints of the salary cap. While teams in the NBA had an easy way of circumventing the soft cap the Larry Bird Exception teams in the NFL had to be more innovative. One approach was to backload players contracts. A team could agree a four-year contract with a player worth $10 million. Instead of allocating the salary equally over the contract (i.e. $2.5 million/year) it could be allocated in the following way: This would free up space in the early years so that more could be spent on other players salaries. The team could then release the player at the end of the third year of his contract to avoid having to pay the large backloaded part of the salary. The team could also pay players by using signing on bonuses. These bonuses would not count towards the cap in a given year. Instead, they were spread evenly (i.e. prorated) over the length of the contract. Hence if a player signed a four-year contract with a signing on bonus of $2 million, they would receive the cash immediately. However, only $500,000 would count towards the teams salary cap for that year with the remainder prorated over the following three years. Discussion question 3 Recently proposed schemes in European soccer have tried to set salary caps as a percentage of each teams revenue rather than an absolute salary cap. Why would an absolute salary cap be more difficult to introduce into European soccer than the leading American team sports?

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