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.
For 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. It involves how much money the league made in the previous year, ticket sale profits, merchandise sales, television contracts, and divided by how many teams there are in a particular sport.
Major league baseball is the only sport played in the U.S. that does not have a salary cap. In the U.S. football, basket, and hockey national sports leagues all have them.
For the fans, it's actually not much of a game-changer, although if you are an investor who is also a sports fan, you might be interested in the Pros and Cons of Sports Investing.
Highway Robbery, Minus the Highway
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 HDTV.
But everyone knows it's not about the seats, it's about the experience. So we pay.
But are the prices more expensive when there are no salary caps? Some research into the topic shows that ticket sales and merchandise sales aren't directly affected by salary caps.
- The salary caps in the professional sports industry is supposed to be an equalizer among teams.
Not all athletes and coaches believe in salary caps and over the years there have issues, like strikes, around them.
- Salary caps for players have increased in the last decade.
- Major League Baseball is the only national sports league that does not have a salary cap.
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. In addition, research has shown that the more a team wins, the more ticket sales go up.
(Do you know how much commissioners are paid? Check out 5 Top-Paid Sports Commissioners.)
Ticket prices typically increase around the same rate as inflation.
Think of it this way, when a team 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.
Salary caps, either high or low, do not have a trickledown effect to cheaper ticket prices.
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, like player strikes.
Besides strikes, salary caps also impact 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 budgeting 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 figure. Since this isn't the best set-up for players, teams may offer high-figure 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 the professional sports industry 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 impacts on the fans, because, in sports, it usually comes back to supply and demand. (To see who's raking it in in sports, check out the Baseball Greats Who Were Paid Like Benchwarmers.)