Intervening in labour markets – Different types of salary cap in professional sport leagues

Officials from Rugby Union’s Aviva Premiership recently announced that the salary cap used by the league would increase from £4.76 million to £5.1 million per team for the 2015-16 season. It is not the only professional sports league to use this type of regulation. The NFL currently has a salary cap of $133 million/team while in the NBA it is set at $63 million/team. What is the rationale for placing restrictions on the amount an organisation can pay its employees? How do these caps work in practice?

A salary cap is a regulation that limits the amount that an organisation can pay its employees. Sanctions are usually imposed if the ceiling is broken.

It is hard to imagine this type of policy being introduced in most industries. For example there may have been a number of calls for much greater regulation of the big six firms in the energy market with the Labour party suggesting that prices should be frozen for 20 months. However in amongst all the calls for more intervention, nobody has suggested that limits should be placed on the wages that these firms pay their staff.

One example where the authorities are thinking of intervening on pay is the proposal by the European Union to introduce a cap on the size of bonuses that can be paid by firms in the banking industry. However this is more of a constraint on the method of remuneration rather than an absolute limit on the level of pay. If the policy was introduced there would be nothing preventing firms from increasing basic salaries in order to make up for any shortfall caused by the reduction in bonuses.

There is one sector of the economy where salary caps are widely used – professional team sports. There are a number of different ways they have been implemented. For example the Football Association once placed a limit on the amount that a club could pay an individual player. This was originally set at £4/week in 1901 and increased to £20/week before it was finally abolished in 1961.

In recent times it has been far more common for salary caps in professional sports leagues to place limits on the size of a team’s total wage bill rather than the amount that can be paid to an individual player. This is the case in the Aviva Premiership, the NFL and the NBA. Perhaps it would be more accurate to refer to these policies as a cap on payrolls rather than on salaries.

The Aviva Premiership gives the following 4 reasons for having the payroll cap that it first introduced in 1999:

It is claimed that the policy has helped the league to achieve these objectives as (a) more clubs are now breaking even and (b) compared with other rugby competitions it has the greatest number of games that finish with less than one score between the teams.

There are a number of different ways that a payroll cap can be implemented. With an absolute payroll scheme all the teams in the league, no matter what their size, face the same constraint. This is the policy adopted by the NFL, NBA and the Aviva Premiership. An alternative is to implement a percentage payroll cap. Examples of these can be found in League 1 and League 2 of the English Football League. League 1 teams can spend up to 60% of their turnover on wages while League 2 teams can spend up to 55% of their turnover on wages. Obviously this means that well supported clubs with a larger turnover can spend more on players’ wages than less well supported clubs with a smaller turnover.

Another way that payroll caps differ is whether they are ‘hard’ caps or ‘soft’ caps. With a ‘hard’ cap there are no exceptions to the scheme. All the teams’ payrolls must remain within the same limit set by the league officials. With a ‘soft’ cap the authorities identify some exceptions that enable clubs to exceed the limit. The payroll cap used in rugby union is an example of a soft cap and works in the following way.

There are a number of elements to the scheme:

The senior salary cap is the major part of the regulation and the Aviva Premiership announced that this would increase from £4.76 million per team in the current season to £5.1 million per team for 2015-16. The Academy credits enable teams to exceed this £5.1 million limit if they train and develop younger players. The teams have to prove that they have young players that meet the following criteria:

For a player who meets these conditions it is only their salary in excess of £30,000/year that is considered. For example if a young player was paid £50,000/year then only £20,000 of his wages would count towards the team’s payroll cap. The first £30,000 would not count. The Aviva Premiership recently announced that a home grown player credit would replace the academy credits. Under the new scheme the upper age limit will be removed and clubs can claim up to £400,000 in allowances. This means that teams could spend up to £5.5 million a year on wages if they train and develop younger players.

However other exceptions means that teams can exceed even this figure. The payroll cap arrangements allow teams to identify one player whose wages are not included when the payroll cap is calculated. In order to be nominated the exempted player has to meet certain criteria. In the 2015-16 season teams will be allowed to have two excluded players.

Sir Iain McGeechan has suggested that these changes will increase the effective salary cap to £7 million/year with some star players earning £1 million/season. However this would still be below the level of the basic salary cap in the French Rugby Union Super 14 League which is €10 million per season (approximately £8.5 million)

Premiership salary cap will leave small clubs playing catch-up The Telegraph (20/9/14)
Bath line up move for Australian Will Genia as new salary cap regulations come into effectThe Telegraph (15/9/14)
The salary cap in Rugby Union Law in Sport (15/4/14)
Barwell blasts salary cap ‘cheats’ ESPN (1/3/13)
Salary Cap changes confirmed Premiership Rugby (17/9/14)
What is meant by a salary cap in Sport and would this ever be used in English football? In Brief (accessed on 22/9/14)

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