Transcript Effects of Salary Caps in Professional Sports By: Matt Dutro, Steven Dulisse,

Effects of Salary Caps in
Professional Sports
By: Matt Dutro, Steven Dulisse,
Jacob Drerup, Jeremy Falk
Salary Cap
• Limit a team can spend on their player’s
annual salaries
• Different for every sport
– Punishments for going over salary cap
• Alex Rodriguez Salary
Salary Caps
• National Football
League
– $128 million per team
(32 teams)
• National Hockey
League
• $56.8 million for the 2009-2010
season
• $11.36 million for a player
Major League Soccer
• $2.3 million as of 2008
• Does not count the Designated Player Rule
“Beckham Rule”
– Implemented in 2007
– One player will only count as $415,000 toward
the salary cap no matter how good they are
• David Beckham annual salary of $6.5 million
dollars
National Basketball Association
• $58.680 million salary cap for the 30 teams
– Luxury Tax- is a mechanism that helps control team
spending
– It is paid by high spending teams -- teams whose
payroll exceeds a predetermined tax level
– For the 2009-2010 season, the luxury tax level is set at
$69.92 million
– A team who exceeds $69.92 million, will pay a $1 tax
for each $1 they go over
– NBA is estimating the teams under the tax will each get
around 4.4 Million for the teams over the tax
2010 – The Year of the Free Agent
• NBA 2010 Free Agency
– LeBron James, Dwayne Wade, Chris Bosh, Michael Redd
– Luxury tax will play key role in this market
• Teams have cleared out line-up to make cap room
– New York Knicks, New Jersey Nets, Detroit Pistons
• Combined wins: 37
– 65 games under .500
Competitive Balance (NBA)
• 62 players make $10+ million
• Only three teams without a $10+ million
player
– Oklahoma City
– Portland
– Sacramento
Major League Baseball
• There is currently no salary cap in Major
League Baseball
– Luxury Tax system
Luxury Tax
• Luxury Tax- tax on teams if
their team exceeds a numerical
figure, determined annually.
• 1st offense = 17.5% of the
amount over the cap
• 2nd offense= 20%
• 3rd offense/more= 40%
• Luxury Tax Caps from 20032011
– 2003= $117m
– 2004= $120.5m
– 2005= $128m
– 2006= $136.5m
– 2007= $148m
– 2008= $155m
– 2009= $162m
– 2010- $170m (estimated)
– 2011- $178m (estimated)
All Stars vs. Second Stringers
• MLB – Teams are able to buy the best
players
• New York Yankees had ten times more
money spent on players than the
Washington Nationals
– Result: NYY: (89-73)*
WN: (59-102)*
*September 30, 2008
All Stars contd.
• Competitive advantage can be bought in
MLB
– Alex Rodriguez 2006 salary
• $21,000,000
– Division rival Tampa Bay Rays 2006 team cap
• $14,000,000
Positives of Salary Cap
• Keep owners from squandering money
– Less wasteful with monetary habits
• Helps small market teams
– Fair competition
Negatives of Salary Cap
– Market forces can find ways around the salary
limits
• Endorsements – not included in salary
• Under the table – cars, etc.
– Team owners, not athletes, would keep more
revenue.
Destructive Behaviors
Salary caps: protect teams from themselves
Advantages
• Buy high-cost contracts
to receive popularity
and sell tickets
– Immediate success
figures
Disadvantages
• Eventual financial
difficulty
– Risk losing fans
• Long term instability
Keeping the Fans Interested
• Unbalanced leagues threaten weaker teams
– If a fan’s team keeps losing they may gravitate
to another team or sport
The Numbers Don’t Lie
Cleveland Cavaliers (41-11)
Indiana Pacers (18-33)
Real Life Examples
• Houston Rockets star Tracy McGrady
– Top five highest paid NBA player despite not
playing
– 46 minutes played entire season
– $22,843,124 annual salary
• If he continues to not play, he will make
$496,589.65 per minute
Overpaid, Underplayed
• Jermaine O’Neal
– Third highest paid NBA player
– $23,016,000 this year
• 13 points, 7 rebounds per game
Performance Based Salary
• Base pay dependent on total income of the
sport
– Different sports may have higher or lower base
pay depending on revenue generated
• Performance based pay rewards for personal
athletic achievement and team success
– Awards, records, wins, postseason, etc.
– More incentive to perform at highest capability
Pro Bowl
• Some players no longer care about going to
the Pro Bowl
– Receive a bonus for being selected
• NOT for attending
– “Some of the guys missing make it not a true
all-star game” - Antonio Gates
• World’s best players?
– Many players this year had to be filled in
because players decided to not come
Putting the Entertain Back in
Athletic Entertainers
• If pay reflects success on the playing field,
players will work harder to perform at a
higher level
• Better for fans
– Top tier players less likely to sit on the bench