How Salary Caps Changed Sports

By Chris Neiger | September 28, 2010 AAA
How Salary Caps Changed Sports

Salary caps are a hot topic in sports, debated from the most casual of sports fans to the highest tiers of professional clubs. Enforcing a limit to how much a team can spend on their athletes' salaries has been around at least since the Great Depression, and with the current 2010-2011 NFL season being upcapped, the cap debate goes back and forth more than Brett Favre in the off-season. (For more, see Who's Cashing In On Pro Sports Revenue?)
In most professional sports, teams must adhere to a predetermined amount of money to find good players, which is determined by a somewhat complicated mathematical equation involving how much money the league made in the previous year, ticket sale profits, merchandise sales, television contracts, divided by how many teams there are and something do to with the Mayan calendar. So how has this affected sports over all? For the fans, it's actually not much of a game-changer.

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Anyone who's ever attended a professional sports game has probably felt like they paid a lot for their ticket. After all, you're only renting a space that's half the size you would take up if you were at home, and most people attending are getting a view that is worse than watching it on their own HD television. But everyone knows it's not about that, it's about the experience. So we pay.

But are the prices more expensive when there are no salary caps? Some current research into the topic shows that ticket sales and merchandise sales aren't directly affected by salary caps. Both tickets and merchandise are mainly determined on something much more basic - profits. According to a study by the University of Antwerp in Belgium, teams determine the amount of profits they want to make off of ticket sales, factoring in the demand of their team, and then set prices based on those figures. (Do you know how much commissioners are paid? Check out 5 Top-Paid Sports Commissioners.)

For example, some research done by Gerald W. Scully shows that for each home game won during an early 1990s season in MLB the average club's attendance was raised by about 3,500 attendees. The increase in attendance obviously translates into an increase in profits at the gates. So the more wins a club has, the more ticket sales it brings in, regardless of salary caps. Scully also reported that besides championship teams, ticket prices typically increase around the same rate as inflation.

Think of it this way, when a club has a stadium, workers and players all on their payroll, those costs are part of the total expenses regardless if one or 30,000 fans show up to watch a game. What the study says is that because the cost of an attendee is close to zero, because the club would be paying for everything even if that fan isn't there, then each ticket sale equals a profit and therefore the prices are determined by how much profit the club thinks it can make.

Salary caps, either high or low, do not have a trickledown effect to cheaper ticket prices.

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What the Salary Caps Do Influence
Although salary caps don't directly influence merchandise and ticket prices, they do affect how teams acquire and retain athletes. The salary caps allow teams with less talent to have the opportunity to entice players away from better teams because all teams (theoretically) have the same amount of money to work with. Instead of having some teams with deep pockets and some teams with little to spend on talent, all teams should have the same buying power and ability to build a strong franchise.

Obviously, capping the amount a team can spend on players affects how much athletes can earn in any given year. This sometimes causes top performing athletes to protest cap restrictions, causing serious implications for sports. In 1994, almost the entire Major League Baseball season was called off because the players and the league couldn't come to an agreement on a proposed salary cap. Owners insisted on the cap, while players refused to play.

Besides strikes, salary caps also effect how players get paid. When a multi-million dollar contract is awarded to a player, the salary isn't necessarily divided up evenly each year. A player may get less than a million dollars one year, over a million the next and then get the remaining millions he is owed during his third and fourth season. This allows the team to have more room to get out of a contract and to be able to plan out how their team budget meshes with their actually salary cap number. Since this isn't the best set-up for players, teams can sometimes offer signing bonuses to players which may or may not be included in the overall salary cap structure.

The Bottom Line
As the salary cap discussions continue on, it's good to remember that professional sports is big business with tons of financial factors that influence how salaries are paid, how high ticket prices are set and how salary caps are established. But at the end of the day, profits are what drive the major financial effects on the fans. It all comes back to supply and demand. (To see who's raking it in in sports, check out the Top 7 Pro Athlete Contracts.)

For the latest financial news, check out Water Cooler Finance: The End Of The Recession.

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