Short Read

If the cap fits, should we wear it?

With wage bills in the English Premier League beginning to spiral out of control, there has been lots of talk as to whether a team-based salary cap should be implemented to regulate the inflation. This discussion was prompted by the revelation that teams such as Crystal Palace and AFC Bournemouth are spending 78% and 76% of their annual revenues respectively on their wage bills in attempts to challenge the six biggest teams in the PL. This is cause for concern as there is a loose guideline in place (which is not a salary cap by any means) suggesting that teams should restrict wages to less than 70% of overall revenue – a breach of this value is a rough signal of impending insolvency. At one level, stopping clubs from paying players too much protects the clubs from themselves. 

The growth of footballers’ salaries has been particularly noticeable in those clubs who are historically successful and so continue to be. This has created a huge salary disparity between teams but so long as these clubs continue receiving higher revenues year-on-year through broadcasting rights, there appears to be no incentive for top European football clubs to agree to a salary cap. This is a considerable problem as evidence from one study suggests that clubs who earn higher revenues perform consistently better in terms of points per season. This allows them to attract the best players, thereby further perpetuating the problem. So, if clubs cannot agree between themselves that a salary cap is necessary, then why should anyone want any kind of intervention in a market that works well enough? 

Would a salary cap level the playing field? 

Economically, there are several reasons why domestic leagues and their governing bodies would want to implement a salary cap. Firstly, fan loyalty is (supposedly) to the team and not the player so in theory, fans should not want clubs to overpay and/or suffer financially. It could then be that the competitive balance be restored between teams ensuring more revenue will be earned from neutral fans who enjoy new teams challenging for the title, in contrast to the current situation, where certain teams experience continued dominance. Furthermore, talent will spread throughout a league as each team will only be able to afford a few marquee players in turn resulting in higher levels of competition for the division title. It also enables smaller teams to remain competitive and draw local fans who may have previously supported a historically successful team due to the lack of their local team’s success. 

Across the Atlantic, the NFL and NBA each have their own version of a salary cap which has allowed many teams to compete for titles each year. For example, The NBA has a “soft cap” that being, there are many exceptions to the $109 million per year limit. Teams in the NBA are allowed to spend over the limit but experience reduced ability to sign players as free agents (players not contracted to a team). If you breach the “luxury cap” set at $132 million, fines get incrementally bigger. There is another incentive not to break this limit. The NBA will distribute 50% of luxury tax to other NBA teams who do not break the luxury cap. To ensure parity, the NBA gives every team equal amounts of revenue every season meaning that 49-51% of all NBA revenue goes towards paying their players. 

The NFL & MLS have a “hard cap” with almost no exceptions and no team may breach this. There are ways around this cap mainly through player signing bonuses which are paid to players on a specific date stipulated in the contract but, spread over the course of the contract to manage the amount of cap space that team has available. One result of the NBA, NFL & MLS salary caps is that the owners of teams make more money than they would without the caps and insolvencies are very rare. 

“Football as it’s meant to be” 

The slogan of the German Bundesliga shows that it believes lower ticket prices  can offer a more “real” football experience. The irony in this however is not the ticket pricing, but the competitiveness between teams in the Bundesliga. This becomes extremely visible when comparing European football teams who do not have a salary cap, to their American counterparts, the NFL and the NBA, which do. This is highlighted below.  

Since the Premier League started in 1992, over twenty seven seasons ago, only six different teams have won the league with Manchester United winning it thirteen times. A similar story can be seen across European Football. In the same period there have only been five different teams who have won the La Liga (Spain) Barcelona with fourteen titles. In the Bundesliga (Germany) six different teams have won it, Bayern winning a staggering seventeen times and in the Serie A (Italy), Juventus have won it thirteen times and the next two biggest clubs (Internazionale and AC Milan) have both won it five times. 

Now compare this to the American sports leagues, which have a salary cap in place, albeit soft or hard. In the NBA since 1992, eleven different teams have won the NBA Finals. Interestingly the biggest winners in that period, the Bulls and LA Lakers, each with five wins since 1992 shared the same coach at different points. Furthermore, in the NFL, fifteen different teams have won the Super Bowl in that same period since 1992. The team who have the highest percentage of Super Bowl wins in the same period, the Patriots with six wins, had a head coach in Bill Belichick and quarterback Tom Brady who, even when considered separately are said to be the greatest coach and quarterback of all time. Even in America’s soccer league, the MLS, which started in 1996 has had the league title won by thirteen different teams. 

Does it look like salary caps produce a fairer distribution of winners? 

If we look beyond the superficial however, life is as ever more complicated and other questions need to be answered. Who deserves the money earned by sports teams? The players? Or the owners? Should fans pay less? It has been argued that teams in Europe pursue winning rather than their counterparts in the North American sports leagues who are profit seeking. Interestingly, wages in European football accurately reflect the income with which they generate but in America there is huge wage inequality between the highest and lowest earners within the league, particularly the NFL.  Between 2000-2005 the average Gini coefficient of salary cap values across teams was 0.25, a salary inequality worse than that of the most unequal economy in the world, the Ukraine. This is due to the tendency to reward key players very highly and subsequently spreading the remaining salary cap across the less well-known members of the team leading to substantial pay inequality across teams. This begs the question; do salary caps actually produce a better sport? 

The greatest irony, however, is that in the US, a paragon of the free-market economy, players can endure a form of serfdom which is imposed on sportsmen in its major teams where owners have control. This is also visible in college sport, so popular in the US that it creates similar levels of revenue for the National College Athletics Association (NCAA) as many major sports leagues. Even then, the athletes don’t receive an adequate share of the revenue they are so instrumental in generating for their respective colleges and the NCAA, which recently has been a source of huge criticism. In Europe however, football is a free market where players wanted by clubs are in a considerably improved negotiating position to negotiate wages in line with the revenue which they generate.  

For European Football, a cap which limits wages, ensures increased competition and will continue to attract the top players would be inherently difficult to design. There is immense competition from many high spending European clubs to sign the top players. Similarly, due to the sheer number of leagues across and huge regional variance in wage bills across leagues, a one size fits all approach would be extremely difficult to implement without the revenue sharing element that comes into play with the NFL and NBA salary cap. What is certain however, is that salary capping does ensure that every team has an equal possibility of signing top players and going on to win their domestic competition, but this is only really possible in leagues where there is a certain element of monopsony power. It will be some time before any cap fits in Europe and until then, we will only see the same teams winning.  

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