Wednesday, December 21, 2011

CBA Look - Part 2 - The Salary Cap

Salary caps are now as big a part of our sports lexicon as touchdown, goal, and sex scandal. 3 of the 4 major sports have them, and the 4th has a luxury tax system that effectively functions as a salary cap for most of the MLB franchises.

Let's take a look at each sport's system (the Revenue Split is Players %/Owners %):

LeagueRevenue SplitCurrent CapCurrent FloorRoster Size
NHL57/43$64M Hard Cap$48M23
NBA50/50$58M Hard Cap¹$49M12
NFL50/50$120M Hard Cap89% Of Cap47
MLBNone$178M Luxury Tax²None25

¹ Hard Cap to become Soft Cap with Luxury Tax in 2013 and each year thereafter.

² The MLB Luxury Tax Threshold year to year is set in the CBA and not as a function of revenues.

Salary caps have a two-fold function - first, they limit the amount that top revenue teams can spend on players. This is under the guise of competition, but we'll see that it doesn't exactly work that way. Second, they depress salaries for top players. Both the NHL and NBA have a maximum dollar amount per year for a player contract, yet while the NBA has had several max contracts, the NHL has only had one. It's not just that the cap-bending huge deals have altered the NHL landscape for player contracts - despite the fact that revenues have clearly returned to pre-lockout levels, the salary cap restricts teams from signing players to the kind of deals we were seeing before the introduction of the salary cap. People with long memories will remember the summer of 2002, when both Bill Guerin and Bobby Holik received $9 million per season. Both of these guys were fine players, but neither one is going to the Hall of Fame except perhaps to visit. The only player currently making that more than that over the entire length of his contract is Alexander Ovechkin, and I suspect it will stay that way.

One thing that is interesting about the present NHL salary cap is that players on one-way contracts who are sent to the minors or overseas don't count on the cap. It's unclear whether or not this will change in the next CBA - on the one hand, someone like Wade Redden probably doesn't want to play in the AHL, but on the other hand, he certainly makes more money doing that than if he were bought out or signed to a less risky contract. The rumblings in journalists' columns suggests the NHL wants it so that all one-way contracts count against the cap, but we'll see how the NHLPA reacts - I can't imagine they're married to the idea of guys riding buses for millions of dollars, so they could give that up in exchange for NHL concessions.

The salary cap as a whole doesn't interest me all that much - anyone paying attention will see that it will come down if the revenue split changes. I'll show just how much it might come down when I focus on the NHL's escrow system in a later post. What's more interesting to me is the salary floor, a mechanism that forces teams to spend money whether it's in their best interests to do so. We already saw a strange move earlier this season when the Dallas Stars picked up Eric Nystrom because otherwise they would have been under the salary floor.

Salary floors have three functions:

A: Ensure that teams receiving revenue sharing spend it on player salaries

B: Ensure that teams do not intentionally lose by fielding a horrible roster (see also: 2004 Penguins)

C: Ensure that players are properly compensated

In practice, however, salary floors often necessitate superfluous free agent signings or superfluous trades. Some markets quite simply won't be appealing to free agents and will, for whatever reason, have a dearth of existing expensive contracts. We saw that as a possibility this summer when the Florida Panthers had less than $25 million in contracts on the books, but the Panthers quickly signed half the available free agents. Regardless, the salary floor is currently $9 million above where the salary cap was set in 2005 - have hockey-related revenues in markets near the floor really risen that much since then? I doubt it.

These are estimates, but Derek Zona via Putting On the Foil provides us with these numbers for the profits that NHL clubs reaped in 2010:

Top Six Most Profitable Teams (average): $37.9 million

Everyone Else (average): -$2.79 million

Now since these are estimates based on estimates, we can't be sure that these are even close to correct, but it doesn't take a financial whiz to figure out that there are some teams in the league whose revenues are off the charts, and likewise a lot of teams at the bottom of the food chain who struggle to make anything.

(This will be a feature on each of my CBA articles outlining what I think should happen. I by no means think that they will happen - that will go in my predictions.)

Triumph's Take: The salary cap should come down from its current high of $64 million, as it is driving the middle market teams to spend above their means. The NHL should institute a luxury tax above a soft salary cap - teams would pay $2 for each $1 spent above the salary cap, with that money going towards revenue sharing. There should be a hard ceiling of 15% above the soft salary cap where teams interested in paying luxury tax can spend to. Furthermore, all one-way contracts should count on the cap whether or not the player is playing in the NHL.

The salary floor should reflect the revenues of the bottom teams, and not the league as a whole. The salary floor should be set according to a percentage, say 60%, of the revenues of the bottom 15 revenue teams in the league plus, say, 80% the total amount of revenue sharing received by these teams divided among them equally. This enables the NHL's lower revenue teams to spend without having to spend above their means.

The NHLPA's ability to increase the salary cap by 5% each year by placing a greater amount of their money into escrow should be eliminated or scaled back.

What Will Happen: I think despite the clear need for reform, the NHL owners will be persuaded that a falling salary tide raises all their boats. The system in place will remain largely the same, all that will change is the percentage of revenues, which will likely fall at 50/50 as they have in the other two major sports leagues that have a salary cap. This revenue change will also result in salary rollbacks and the possibility of amnesty buyouts.

Now a question for the reader - was this post clear? Should it have more citations from the NHL CBA? The NHL CBA is written so jargon-y that it's usually best to avoid it unless we need it for some sort of clarification, but I'm not sure if I'm assuming too much knowledge here (for instance, on what the revenue split means).


  1. Tri - i thought it was pretty clear. Citations are fine when necessary and you used them but adding them just for the sake of doing so turns this into (even though those are footnotes).

    Perhaps taking a couple teams from this year to create an example for your "Triumph's Take" section.

    If the owners push a 50/50 with rollbacks and buyouts, i don't know what they have to counter with as a give back to the players - and i don't think owners are interested in another prolonged work stoppage. They won't have Bill Simmons out there clamoring everyday to get the league back.

  2. Once you tie revenues to salaries, as the NHL has done, there's no getting out. The NHLPA and NHL are in the same boat - if the NHL sinks, the PA sinks too.

    Maybe the revenue split will end up at 51 or 52% for the players, but the only weapon Donald Fehr has is decertification. I don't think the NHL has any fear of a prolonged work stoppage because all that money they lost will come right out of the players' pockets.