Salary caps, team payrolls and competitive balance

Salary Cap Definition Cap on payroll spending that is equal across all teams (NFL, NBA, NHL, but not MLB) In the NBA, also involves a cap on individual player salaries Goals: to equalize talent spending/enhance competitive balance to counteract increased salaries resulting from free agency.

Process 1. During collective bargaining, owners and players agree upon the portion of league-wide revenues they will share. NFL: Defined Gross Revenues (DGR) NBA: Basketball Related Income (BRI) NHL: Hockey Related Revenue (HRR) Example: DGR does not consist of all team revenue. Gate revenue from preseason, regular season and post season games. Broadcast rights Other licensing agreements Ticket revenue portion of income from luxury boxes & premium seating. (NOTE: not all luxury box revenue which also includes the much larger concessions revenue from luxury boxes)

Process (Cont) 2. Then they decide on the split between owners & players. Hard Cap (all payments to players: salaries, bonuses) Soft Cap (exceptions allowed: ex/ rookie & Larry Bird)

Salary Caps and Payrolls in the NBA Qualifying revenue BRI includes: Ticket Sales (regular season, exhibition and playoffs) Television Contracts Concessions, Parking, Temporary Stadium advertising A portion of the revenues generated by stadium naming rights deals, luxury suites and "fixed" advertising signage. Players / Owners split = 57%/43% The owners dont like current split partly because BRI is based on gross revenue: expenses are not factored in. A team can increase attendance by spending more on marketing and promotions; the players get the benefit from the increased attendance, but don't have to share in the investment that generated that revenue. Current proposals???? Individual salary scale based on experience Soft cap

Salary Caps and Payrolls in the NHL Payrolls limited to 54% of qualifying revenue Rises to 57% if league revenue exceeds $2.7B No individual can receive over 20% of the teams allowable payroll Hard cap

Salary Caps and Payrolls in the NFL Players receive 62.24% of qualifying revenue Percentage is higher than other leagues Base is lower (not as much qualifies) The NFL has no individual limits Mostly a Hard Cap: Bonuses are a complicating factor Counted if the bonus is easily obtained (e.g., signing bonus) Bonuses that are not likely to be obtained (e.g., setting a career record for sacks) do not count against the cap

Incentives to Cheat Regulations designed to prevent CHEATING "Hockey-related" revenue is defined in the agreement, and team revenue reports are audited. A team found to be hiding revenue is fined $1 million plus the amount misreported for the first offense, and $5 million plus the double the amount misreported for further offenses. Side deals are not allowed. Teams cannot circumvent the salary cap by paying players through other means - such as gifts, reimbursements on expenses, personal deals, money redirected through related corporate entities, separate contracts for marketing and promotion, etc.

Research Questions 1. What effect have salary caps had on team payrolls? Caps have significantly reduced payrolls See Leeds graph 9.3 p Hockey

2. What effect have salary caps had on competitive balance? How to measure Competitive Balance? Standard Deviation: dispersion of observations around the mean In a normal curve, the Empirical Rule (note: this does not strictly apply if the distribution is not normal): Approximately 68% of the observations are contained with a distance of 1 s.d. around the mean (µ±1ν) Approximately 95% of the observations are contained with a distance of 2 s.d. around the mean (µ±2ν) Example: µ=70 s.d. = 10 Interpretation: 68% of the subjects have scores between 60 & 80

Competitive Balance & S.D. Mean winning percentage=50% If perfect competitive balance, every team would have win.%=50%, so S.D.=0 Lower S.D. means more competitive balance Must adjust for the fact that the NFL plays 16 games vs. over 100 for the rest.

2008 Information Dispersion of Winning Percentages League2008 ActualIdeal2008 Ratio MLB NFL NBA NHL English Premier Ideal S.D. =.5/Games Ratio = S.D. actual / S.D. ideal

Caps and Competitive Balance Caps have significantly leveled payrolls Payrolls are more dispersed in baseball than in other sports (even when the Yankees are taken out) PROOF: Assignment 4