Advocates believe that it helps create competitive balance by preventing large market teams from signing all the top talent. Detractors say that it unfairly suppresses salaries for players.
Whichever side of the debate they fall on, team owners must learn to manage salary caps in the sports that have them.
What Is a Salary Cap?
A salary cap is a limit on how much a team can spend on the total salaries of the players on the team.
In unionized sports, such as the National Football League, the salary cap is part of the collective bargaining agreement between the players' association and the league.
The salary cap is intended to promote competitive balance among the teams in the league. Managing the salary cap is part of each team's revenue operations.
How Do Teams Manage the Salary Cap?
There are a variety of strategies teams take to balance team performance with the need to keep salaries under the cap:
Pay As You Go
With this strategy teams aim to match cash spending with cap accounting.
Some teams attempt to get around salary cap issues by prorating salaries for star players so that in many cases the team continues to pay a player after that player is no longer on the team.
The pay-as-you-go strategy attempts to avoid jeopardizing the future of the team in exchange for short-term gain.
Signing Bonuses
Signing bonuses are one of the main tools teams use to manage salary caps. Player salaries are charged as a salary cap in the same year that the salary is paid.
For example, if a team is paying a player $20 million per year in salary, then $20 million is subtracted from that team's salary cap space for each year that the team owes the player a salary under that contract.
Signing bonuses are charged to the salary cap on an accrual basis. Even though teams pay the signing bonus at the beginning of the contract, the cost of the bonus is spread out over the length of the contract when it comes to the salary cap.
For example, if a player is given a $10 million signing bonus for a five-year contract, instead of using $10 million of cap space in the first year of the contract, the bonus will use $2 million in cap space for each of the five years.
Non-Guaranteed Contracts
Some professional sports have guaranteed contracts.
This means that if a team decides to cut a player before that player's contract has expired, the team must still pay the remaining salary owed on the contract, though that amount may be reduced if the player signs somewhere else after being released.
However, in some sports, such as the NFL, most contracts are not guaranteed. This means that if a team decides to cut a player before the contract is up, the team does not have to pay the player the remainder of the contract.
Teams can take advantage of non-guaranteed contracts to create cap space.
For example, if a team has a player who is owed $10 million for two more years, but the team does not feel that player's production warrants using up $10 million in cap space, the team may decide to cut the player, opening up an additional $10 million of cap space to sign a different player.
Backloading Contracts
Recognizing that many players are cut before the end of their contracts, some teams entice players to accept less money in the early years of their contract by offering more money in the later years.
This helps teams free up cap space in those early years. Then, later in the contract, when the player's production may be less, the team can cut the player to avoid paying the higher salary amounts.
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Salary cap management is a complicated and controversial topic in the world of professional sports. Effectively managing a salary cap is critical for teams that want to remain competitive in sports that have salary caps.
