Please explain salary caps in professional sports to me

I know they’re used to induce parity among teams in the NFL, NBA and (I think) the NHL.

But whenever I read stories about them, about what a salary cap is exactly, how it’s determined, and the concept of “cap room”, it all just makes no sense to me.

So can someone give me a layman’s explanation of what all this salary cap business is about?

I’m sure there are people who are more experienced than myself in this matter, but the basic idea is twofold:

  1. To prevent profitable teams from dominating the league (so-called parity).

  2. To preserve money for the owners by keeping down players’ salaries.

In the NFL, for instance, the salary cap is mandatory. I’m not sure what the penalty is for breaching it. In the NBA, teams face a luxury tax (which I think is equal to twice the difference between payroll and the cap).

Cap room is the difference between the the current payroll and the expected salary cap. How they come up with the actual formulae (salaries vs. signing bonuses, etc.) can be pretty complex.

There are also different types of caps, with various loopholes.

If a league has a “hard cap,” then every time is given the exact same amount of money to spend on salaries for the year. That’s what the NFL has.

Some leagues have “soft” caps, which set upper dollar limits but make allowances for teams to go above that amount in SOME cases. That might mean allowing teams to spend more to KEEP the players they have than they can to obtain free agents from other teams.

Major league baseball has no cap, but now has a “luxury tax” system, under which teams that spend more than X dollars on salaries have to pay penalties, which are put into a pool and shared by teams with lower revenues. That is, George Steinbrenner is still allowed to pay as much as he wants for free agents… but for every dollar he spends above a certain limit, he has to cough up ADDITIONAL money and give it to the Expos and Pirates.

The NHL does not (at least yet) have a salary cap. In fact, the current Collective Bargaining Agreement (CBA) is set to expire at the end of next season (2004), and there are talks that the entire 2004-2005 season may be lost. This is because the players’ union (NHLPA) strongly opposes any sort of salary cap, while the owners (for obvious reasons) are all for it. It could be the worst labour conflict in sports history…

The two above explanations are pretty good, but in case you wanted a LAYMAN’s layman’s explanation:

The league sets a limit on how high a team’s total payroll (player salaries, bonuses, and under certain conditions some other expenses) can be. When a player’s contract with one team expires, making him a free agent, other teams can sign him for however much they want, provided they can “fit” the salary under the total cap. That’s cap room.

Example: in the NBA assume the salary cap is $60 million. Tim Duncan is set to be a free agent next year, and he’s a good enough player that plenty of teams would pay him however much he wanted, up to the NBA’s maximum salary (call it ten million/year). A team could only sign him for the 10 million if their total salaries of everyone else under contract was $50 million or less ( the salary cap minus Duncan’s salary)

You can make it seem really complicated or you can just simplify it and say teams can only pay their players X dollars per year.

What are the consequences of major breaches of the salary cap in US sports? Last year in Australia, there was a large breach by the Cantebury Bulldogs in our National Rugby League competition.

While previous breaches by teams had resulted in large fines, the extent of this breach (and perhaps as a warning to other teams which were also over the cap but hadn’t been caught) resulted in the Bulldogs losing all of their competition points for the season with a couple of rounds remaining, thereby going from premiership favourites to wooden spooners.

What type of reaction would occur in the US if an NFL team recieved such a penalty (besides the obvious litigation)?


The owners set salary caps to stop themselves from over spending. Then they built a way around it by deferring salary.

Go figure.

Well, there are also limits on how much any player can make off of a particular contract, as well. The NBA has limits on what kind of deal a player can sign depending on how many years experience he has.

Tony, let me reference the NBA for you, because that’s the only cap I vaguely understand. The NBA has maximum salaries (already explained), a salary cap of $40 something million this year, and a luxury tax that will be estimated at around $50 million. What this means is that no player can earn more than the maximum salary. The salary cap, as astorian pointed out, is soft. This means that teams can violate the cap for a variety of specific reasons. If a team is in violation of the cap, it can’t sign anymore free agents except those that fall under the exception rules. Also, if they are in violation of the cap then they can’t trade for a player(s) of higher monetary value according to the 15% rule. The 15% rule is that the incoming player(s) salaries can be no more than $100,000 time 1.15 the contractual value of the outgoing player.

The luxury tax is that real killer. Every dollar above the luxury tax threshold is taxed double. So if the threshold is $50 million and my payroll is $51 million, the million I am over gets doubled. So my actual payroll is $52 million with the tax going to the league. The kicker is that the threshold is determined at the end of the season according to a prescribed formula, so teams don’t know whether or not they are going to be in violation of the cap for that year until the end of the season when they are then punished for being over a threshold they didn’t know the value of.

If you are a masochist you can read up about everything at this site. But it’s dense stuff.

So, as I understand it, the Cap relates to individual salaries. In Australian sports, the salary cap is related to the entire payroll for playing staff. I also believe that there is a proposal in the AFL (Australian Football League) to include coaches in the salary cap.

Therefore, theoretically, in the NBA you could pay your entire roster $40million dollars each, while in the NRL (Australia), you have $3.25million to divide among your 20 players (bearing in mind that League’s highest earning players get about 1
$700,000.00 per year).

Of course, in Australian professional sports, there are very few privately owned clubs, most of them are ‘owned’ by the supporting leagues clubs and their members.

  • Bubba.

The thing that has intrigued me the most about the salary cap issue is the problem of enforcment. Do the various leagues (like the NFL) actually send their accountants into each team to make sure that the club’s public figures are, in fact, correct?

I ask this because it seems to me that, in a business with so much money involved, hiding a few million bucks wouldn’t be too hard.

I grew up in Australia, and when i was about 23 (1992) i worked in a rugby league club in Sydney, and was friends with quite a few players. It was common knowledge that teams couldn’t attract players if they stuck to the salary cap. What happened was that the player would be given an official salary that allowed the club to stay under the salary cap, but would also be put on the books of the leagues club in a different occupation (e.g. bartender; glass collector). The player would then just have to turn up to the club for a few hours a week, and would be paid another salary for the “work” he did there. I’m not sure whether the League has cracked down on this or not.

The San Francisco 49ers I know have been fined for violating the terms of the salary cap. And in the NBA, the Minnesota Timberwolves were severely punished for reaching a not-so-tacit agreement with Joe Smith that would have worked around the salary cap at the time.

I seem to remember the T Wolves losing something like 4 or 5 first round picks in the upcoming drafts.

No. There’s no way you could pay your entire staff $40 million each season under the cap. It would violate the individual maximum contracts and you could never do it even under the soft cap. But that’s just the NBA. In baseball you could do that if you wanted, although there would be a luxury tax for each dollar over $100 million. You could never even come close in the NFL since that has a hard cap of $30 million or something around there.


Go figure??? The poorer owners (bearing in mind that we’re still talking about folks who engage in multi-million dollar businesses) want salary caps to stop the rich owners from spending, and when it passes the vote, the rich ones try to circumvent it. It’s relatively simple - the owners are still in competition with one another.


Man, if that happened, I’d be… :mad:

I don’t know how much leverage the players would have in that fight, given all the troubles teams have had with bankruptcy and such.

And thanks for all the explanations so far, all. It now makes (slightly) more sense.

Something else to add to the mess in the signing bonus aspect. The bonus is spread over the years of the contract, counting against the salary cap. The math on this is tricky and savvy owners have used it to their advantage. A number of players in the NFL actually make more per year from their pro-rated signing bonus than they do in salary.

Barry Sanders was tripped up by this recently. He retired with years left on his contract, so he had to repay the Lions the portion of of the bonus which those years represented.