In professional sports, a salary cap is a limit on the amount of money a team can spend on player salaries. The limit exists as a per-player limit or a total limit for the team's roster, or both. Several sports leagues have implemented salary caps, both as a method of keeping overall costs down, and to ensure parity between teams so a wealthy team cannot entrench dominance by signing many more top players than their rivals. Salary caps can be a major issue in negotiations between league management and players' unions, as they are designed to restrict the inflation of player salaries.
Salary caps are used by the following major sports leagues around the world;
Primarily, an effective salary cap prevents wealthy teams from certain destructive behaviours, such as signing a multitude of high-paid star players, preventing their rivals from accessing talented players and ensuring victory through superior economic power. With a salary cap each club has roughly the same economic power to attract players, which contributes to parity - roughly equal playing talent in each team in the league, which in turn brings economic benefits both to the league and to its individual teams.
Leagues need to ensure a degree of parity between teams so that games are exciting for the fans and not a foregone conclusion. The leagues that have adopted salary caps generally do so because they believe letting richer teams accumulate talent affects the quality of the sporting product they want to sell. If only a handful of dominant teams are able to win consistently and challenge for the championship, many of the contests will be blowouts by the superior team, reducing the sport's attractiveness for fans and for television. Television revenue is an important part of the income of many sports around the world, and the more evenly matched and exciting the contests, the more interesting the television product, meaning the value of the television broadcast rights is higher. An unbalanced league also threatens the financial viability of the weaker teams, because if there is no long term hope of their club winning, patrons of the weaker clubs may gravitate to other sports and leagues.
The need for parity is more pronounced in leagues that use the franchise model, rather than the promotion and relegation model, used in European football. The structure of a promotion and relegation system means weaker teams struggle against the threat of relegation, adding importance and excitement to the matches of weaker teams. International club competitions such as the UEFA Champions League also means that the top clubs always have something to play for, even in the most unbalanced of leagues.
A salary cap can also help to control the costs of teams and prevent situations in which a club will sign high-cost contracts in order to reap the benefits of immediate popularity and success, only to later find themselves in financial difficulty because of those high costs. Without caps there is a risk that teams will overspend in order to win now at the expense of long term stability. Team owners who use the same risk-benefit analysis used in business may risk not just the fortunes of their own team but the reputation and viability of the whole league. Sporting consumers are generally looking to support a team for life, not just a product to purchase for the short term. If teams regularly go bankrupt or change markets the same way businesses do, then the whole sport looks unstable to the sporting consumers, who may lose interest and switch their support to more stable sports where their team and their rivals are more likely to be playing in the long term.
Players and players unions generally concede that the overall wealth and stability of a league is just as important as the chance at higher wages for certain star individuals, and support the application of salary caps in principle, as long as they are not set too low.
Before the implementation of salary caps, the economic influence of clubs on player markets was controlled by the reserve clause, which was long a standard clause in professional sports player contracts in the United States. The clause forbade a player from negotiations with another team without the permission of the team holding that player's rights even after the contract's term was completed. This system began to unravel in the 1970s due largely to the activism of players' unions, and the threat of anti-trust legal actions. Although anti-trust actions were not a threat to baseball, which has long been exempt from anti-trust laws, that sport's reserve clause was struck down by a United States arbitrator as a violation of other labor laws.
By the 1990s most players with several years' professional experience became free agents upon the expiry of their contracts and were free to negotiate a new contract with their previous team or with any other team. This situation, called Restricted Free Agency, led to "bidding wars" for the best players—a situation which inherently gave an advantage in landing such players to more affluent teams in larger media markets.
Salary cap arrangements were implemented by the National Football League and the National Basketball Association in the United States in the 1990s in consultation with the respective players' unions as a response to the damage spiralling wages and unbalanced leagues was doing to fan interest in their sports.
A salary cap existed in the early days of the National Hockey League (NHL). During the Great Depression, for example, the league was under financial pressure to lower its salary cap to $62,500 per team, and $7,000 per player, forcing some teams to trade away well paid star players in order to fit the cap.
Player salaries did not become an issue until the 1970s, when Alan Eagleson founded the NHL Players' Association (NHLPA) and the upstart World Hockey Association began competing with the NHL for players. On the other hand, owners such as Harold Ballard of the Toronto Maple Leafs spent among the league minimum on rosters, making his team the most profitable.
Although eight NHL franchises were based in Canada at the time of the lockout, all NHL salaries must be paid in U.S. dollars. This caused some hardship among the small-market Canadian teams, as their revenues were in Canadian dollars, and the eventual relocation of the teams in the two smallest markets: the Quebec Nordiques to Denver, and the Winnipeg Jets to Phoenix. NHL Commissioner Gary Bettman successfully persuaded the US-based teams to donate towards a pool to mitigate the effect of the exchange rate.
The negotiations for the most recent NHL Collective Bargaining Agreement revolved primarily around players' salaries. The league contended that its clubs spent about 75% of revenues on salaries, a percentage far higher than existed in other North American sports. NHL Commissioner Gary Bettman demanded "cost certainty" and presented the NHLPA with several concepts that the Players' Association considered nothing more than euphemisms for a salary cap, which it had vowed it would never accept; the previous CBA had expired on September 15, 2004. A lockout ensued, leading to the cancellation of the entire 2004–05 NHL season, the first time a major sports league in North America had lost an entire season to a labor dispute.
The lockout was resolved when the NHLPA agreed to a hard salary cap based on league revenues, with the NHL implementing revenue sharing to allow for a higher cap figure. The NHL salary cap is formally titled the "Upper Limit of the Payroll Range" in the new CBA. For the 2005–06 NHL season, the salary cap was set at US$39 million per team, with a maximum of $7.8 million (20% of the team's cap) for a player.
Revenues for the six Canadian teams have all increased significantly since the lockout, and due to the fact the US dollar fell to relative parity with its Canadian counterpart, league-wide revenues measured in U.S. dollars have been inflated accordingly.
As a result of these factors, the cap has been raised each year to its current figure of $56.8 million for the 2009–10 season, with a cap of $11.36 million for a player. The CBA also contains a "Lower Limit of the Payroll Range", which is the minimum that each team must pay in player salaries. The lower limit was originally set at 55% of the cap, but is now defined to be $16 million below the cap, therefore the 2009–10 minimum is $40.8 million. The difference between the salary cap and a team's actual payroll is referred to as the team's "payroll room" or "cap room".
Each year of an NHL player contract, the salary earned contributes to the team's "cap hit". The basic cap hit of a contract for each year it is effective is the total money a player will earn in regular salary over the life of the contract divided by the number of years it is effective. This, in theory, prevents a team from paying a player different amounts each year in order to load his cap hit in years in which the team has more cap room. Teams still use this practice, however, for other reasons. Performance bonuses also count towards the cap, but there is a percentage a team is allowed to go over the cap in order to pay bonuses. A team must still factor in possible bonus payments, however, which could go over that percentage.
Salary for players sent to the minors, under most circumstances, do not count towards the cap while they are there. If a player has a legitimate long-term injury, his cap hit is still counted; however, the team is permitted to replace him with one or more players whose combined salary is equal to (or less than) that of the injured player, even if the additional players would put the team over the salary cap. If the team's cap room is larger than the injured player's cap hit, they may take on as much as their cap room; however, the injured player may not return to play until the team is again compliant with the original cap.
The NHL has become the first of the major North American leagues to implement a hard cap while retaining guaranteed player contracts. Guaranteed player contracts in the NHL differ from other sports, notably the NFL, where teams may opt out of a contract by waiving or cutting a player. NHL teams may buy-out player's contracts, but must still pay a portion of the money still owed which is spread out over twice the remaining duration of the contract. This does not apply for players over 35 at the time of signing, in this case a team cannot buy out the player's contract to reduce salary. Any other player can be bought out for ⅓ of the remaining salary if the player is younger than 28 at the time of termination, or ⅔ of the remaining salary if the player is 28 or older.
Trading cash for players or paying a player's remaining salary after trading him have been banned outright in order to prevent wealthier teams from evading the restrictions of the cap; players, agents or employees found to have violated the cap face fines of $250,000 - $1 million and/or suspension. Teams found to have violated the cap face fines of up to $5 million, cancellation of contracts, loss of draft picks, loss of points and/or forfeiture of game(s) determined to have been affected by the violation of the cap.
As of 2010, due to the NFL team owners deciding to opt out of their collective bargaining agreement (CBA) with the players' union, there will be no operable cap in the 2010 season.
The NFL's cap was a hard cap that the teams had to stay under at all times; penalties for violating or circumventing the cap include fines of up to $5 million, cancellation of contracts and/or loss of draft picks. There was also a hard floor, which is the minimum payroll the teams must pay their players, but that also will not apply for the 2010 season.
The cap was introduced for the 1994 season and was initially $34.6 million. Both the cap and the floor were adjusted annually based on the league's revenues, and they increased each year. In 2009, the final capped year under the current CBA, the cap was $128 million per team, while the floor was 87.6% of the cap. Using the formula provided in the league's collective bargaining agreement, the floor in 2009 was $112.1 million. The salary floor percentage would have increased 1.2% per year until it reached 90% of the cap in 2011.
In transitions, if a player retires, is traded, or is cut before June 1, all remaining bonus is applied to the salary cap for the current season. If the payroll change occurs after June 1, the current season's bonus proration is unchanged, and the next year's cap must absorb the entire remaining bonus.
Because of this setup, NFL contracts almost always include the right to cut a player before the beginning of a season. If a player is cut, his salary for the remainder of his contract is neither paid nor counted against the salary cap for that team. A highly sought-after player signing a long term contract will usually receive a signing bonus, thus providing him with financial security even if he is cut before the end of his contract.
Incentive bonuses require a team to pay a player additional money if he achieves a certain goal. For the purposes of the salary cap, bonuses are classified as either "likely to be earned", which requires the amount of the bonus to count against the team's salary cap, or "not likely to be earned", which is not counted. A team's salary cap is adjusted downward for NLTBE bonuses that were earned in the previous year but not counted against that year's cap. It is adjusted upward for LTBE bonuses that were not earned in the previous year but were counted against that year's cap.
One effect of the salary cap was the release of many higher-salaried veteran players and their replacement by lower-salaried players on a given team's payroll over time. On the other hand, many teams have made a practice of exploiting these adjustments and used free agents to restock with better personnel more suited to the team.
The salary cap prevented teams with a superior financial situation from the formerly widespread practice of stocking as much talent on the roster as possible by placing younger players on reserve lists with false injuries while they develop into NFL-capable players. In this respect, it functions as a supplement to the 55-man roster limit and practice squad limits.
Generally, the practice of retaining veteran players who had contributed to the team in the past, but whose abilities have declined, even those who are fan favorites became less common in the era of the salary cap. A veteran's minimum salary was required to be higher than a player with lesser experience. This means teams tended to favor cheaper, less experienced prospects with growth potential, with an aim to having a group of players who quickly develop into their prime while still being on cheaper contracts than their peers. To offset this tendency which pushed out veteran players, the players' association accepted an arrangement so that a veteran player who receives no bonuses in his contract may be paid the veteran minimum of up to $810,000, while only accounting for $425,000 in salary-cap space.
The salary cap also served to limit the rate of increase of the cost of operating a team. This has accrued to the owners' benefit, and while the initial cap of $34.6 million has increased to $128 million, this is due to large growths of revenue, including merchandising revenues and web enterprises which ownership is sharing with players as well.
Similarly to the NFL, the NBA's salary cap is calculated as a percentage of the league's revenues. The salary cap for the 2008-2009 season was $58.680 million. The NBA's salary cap is a so-called "soft cap", meaning that teams are allowed to exceed the cap number in order to retain the rights to a player who has already been on the team. This provision is known as the "Larry Bird" exception, named after the former Boston Celtics great who was retained by that team until his retirement under the provisions of this rule.
The purpose of this rule is to address fan unease over the frequent changing of teams by players under the free agency system, as fans become displeased over their favorite player on their favorite team suddenly bolting to another team. The "Larry Bird" provision of the salary cap gives the player's current team an advantage over other teams in free agent negotiations, thus increasing the chances that the player will stay with his current team, pleasing more fans in so doing.
The provision tends to result in most teams being over the cap at any given time. Teams that violate the cap rules face fines of up to $5 million, cancellation of contracts and/or loss of draft picks, as well as being prohibited from signing free agents for more than the league minimum. The NBA also has a salary floor, but teams are not penalized as long as their total payroll exceeds the floor at the end of the season.
The NBA also has a luxury tax system which is triggered if average team payroll exceeds a certain amount higher than the cap. In this case, the teams with payrolls exceeding a certain threshold have to pay a tax to the league which is divided amongst the teams with lower payrolls. However, this penalty is levied against teams in violation only if the league average also breaches a separate threshold.
The NBA has also implemented a maximum salary for individual players. This was done following a dramatic increase in player salaries, in spite of the salary cap, in the mid-1990s. Under the collective bargaining agreement, a player's maximum possible salary increases along with his time of service in the league. For a player of five years' experience, the maximum salary threshold begins at 25% of the salary cap, with annual increases of up to 10.5% possible beyond that for players re-signed by their original team, or 8% annual increases for free agents that sign with new teams. For players of greater experience, the salary limit is higher - but the 10.5% limit on annual increases remains the same.
In the NBA, the salary cap has not had quite the effect of breaking up championship teams that it has had in the NFL. Repeat championship winners have been far more likely to occur in the NBA than in the NFL in the salary cap era. Of course, the converse effect of this has been to make the overall rate of salaries paid and hence the expense to operate a team rise more rapidly in the NBA than in the NFL. The average NBA salary is $5.356 million, the highest of any major North American sports league. This is mitigated by the NBA roster size of 15 as opposed to 55 for NFL teams, 23 for NHL teams, and the varying 24-40 man rosters (24 or 25 after opening day, 24-40 after September 1) of Major League Baseball.
Instead of a salary cap, Major League Baseball implemented a luxury tax, an arrangement by which teams whose aggregate payroll exceeds a certain figure (determined annually) are taxed on the excess amount. The tax is paid to the league, which then puts the money into its industry-growth fund. 
As of the 2009 season, only the Boston Red Sox, the Los Angeles Angels of Anaheim, the Detroit Tigers, and the New York Yankees have paid any luxury tax. Over 95% ($164.1 million) of tax payments have come from the Yankees, and they have been subject to six of the eleven occasions the tax has been implemented.
A team that goes over the luxury tax cap for the first time pays a penalty of 17.5% of the amount they were over that cap. Second-time violators pay a 30% penalty. Those teams that exceed the limit three or more times pay a 40% penalty. The cap limits are as follows:
2003 - $117m
2004 - $120.5m
2005 - $128m
2006 - $136.5m
2007 - $148m
2008 - $155m
2009 - $162m
2010 - $170m (estimated)
2011 - $178m (estimated)
Measuring the success of the luxury tax in bringing the benefits of parity has brought mixed results. As a positive, only three times in the past 30 years has a team won the World Series with a $100 million plus payroll: the 2009 Yankees, 2007 Red Sox and 2004 Red Sox. This could have something to do with the fact that $100 million plus payrolls have only existed since 2000. In those 30 years, 20 different teams have won World Series titles, compared to 14 different teams winning the NFL Super Bowl, 13 winning the NHL Stanley Cup and 9 winning the NBA championship. While a top tier payroll increases the likeliness of making the playoffs, it does not result in teams consistently winning championships.
Others pundits, such as Michael Lewis, author of the bestseller Moneyball, have argued that using World Series championships as an example of parity may be misleading, and playoff appearances may be a better indicator of relative team strength. The playoff system used in baseball comprises a small number of games compared to success over a long season, and has been described as a "crapshoot" by Oakland A's General Manager Billy Beane.
Teams with consistently high payrolls including the New York Yankees and Boston Red Sox have secured high numbers of playoff berths while teams with low payrolls such as the Pittsburgh Pirates and Tampa Bay Rays have only made the playoffs once combined over the past decade.
Some teams, notably the Milwaukee Brewers, have called for the introduction of a salary cap, but any introduction is opposed by the powerful MLB players' union, who have threatened legal action. Although some saw the success of NHL owners in their 2004–05 lockout as an opportunity for MLB to reform its collective bargaining agreement, baseball owners agreed to a new five-year deal in October 2006 that did not include a salary cap.
Unlike the other three major North American sports, MLB has no team salary floor. The only minimum limits for team payrolls are based on the minimum salaries for individual players of various levels of experience that are written into MLB's collective bargaining agreement.
Monies collected under the MLB luxury tax are apportioned as follows: The first $5m is held in reserve, to pay for possible luxury tax refunds. Once it is clear that there are no refunds to be issued, this money is then earmarked for the Industry Growth Fund (IGF). 50% of the remaining money is used to fund player benefits, 25% is used to fund baseball programs in developing countries with no high-school baseball, and 25% is put into the Industry Growth Fund (IGF).
The Canadian Football League also has a salary cap. However, among the great Canadian football players such as amongst sports analysts, the CFL's salary cap has been well-known as being more of a guideline which few (if any) teams adhered to. In the CFL's 2005 season, the salary cap hovered around C$2.6 million per team. On June 13, 2006, the proposed salary management system featuring a $3.8 million Maximum Salary Expenditure Cap (SEC) initially proposed in January was ratified at the CFL board of governors meeting in Winnipeg, Manitoba. 
Enforcement of the new regulations is set begin starting with the 2007 CFL season, when the cap is set to rise to $4.05 million due to increased revenues.  However, critics point out that violation of the cap will apparently result only in fairly modest fines and forfeited draft picks. The effect on a violating team's draft selections has not been disclosed, however CFL teams rely more on trades and free agents cut from other teams and the NFL to stock their rosters. The fines have been revealed to be progressive in nature, up to three dollars for every dollar beyond $300,000 over the cap.  Critics believe such a system will operate more like a strict luxury tax regime as opposed to a true cap.
Salary caps are common in other leagues. The salary cap of the original Arena Football League was $1.82 million per team in its final season in 2008. Tampa Bay Storm head coach Tim Marcum was fined and suspended by the AFL for four games (two in the 2005 season, two in 2006) for salary cap violations.
The new incarnation of the AFL will have a lower cap, but its amount has not yet been announced.
Salary caps are little used in Europe. However several European football (soccer) leagues have considered introducing them in the early 21st century. In 2002, BBC reported  that the G14 group of 18 leading European football teams would cap their payrolls at 70% of team's income, starting from the 2005/2006 season - however, this did not eventually occur. Serie A, the leading Italian football league and The Football League in England have also considered salary caps.
Top executives in European football have acknowledged that a number of challenges not present in North America would confront anyone who tried to implement an effective cap across European football or even across a single league, especially if this were to be a flat limit put in place to create competitive balance:
As noted in the beginning of this article, the top English rugby competitions, the Guinness Premiership (Union) and the Super League (League), have caps in place. The Top 14, France's top rugby union competition, will impose a salary cap of €8 million in the 2010–11 season.
The Australian Football League has implemented a salary cap on its clubs since 1987, when Brisbane and West Coast were admitted, as part of its equalization policy designed to neutralize the ability of its richest clubs (e.g. Essendon, Collingwood and Carlton) to perennially dominate the competition.
The cap was set at A$1.25 million for 1987-1989 as per VFL agreement, with a floor coming in at $1.125 million (90% of the cap; increased to 92.5% of the cap as of 2009). The salary cap and salary floor has increased substantially since the competition was re-branded as the AFL in 1990 to help to stem the dominance of high membership clubs such as West Coast and Adelaide.
The salary cap (known officially as "Total Player Payments") is A$7,950,000 for the 2010 season, with a salary floor set at A$7,353,750.. Certain payments are excluded from the cap, and concessions are available for some players, in particular, "veteran" players (those over the age of 30 and/or who have also completed 10 seasons with their current club) and "nominated" rookie list players are discounted by up to 50% for purposes of the cap.
The AFL Players Association negotiates for players with the AFL on the topic of average salary.
The penalties for clubs found to have breached the AFL salary cap and salary floor regulations include fines, loss of draft picks and/or loss of premiership points. The latter penalty has never been implemented for any of the breaches that have occurred.
No clubs have yet been penalized for violating salary floor regulations (i.e. deliberately underpaying players).
The following breaches of the salary cap have occurred:
The AFL salary cap is occasionally controversial, as the cap is a "soft" cap and therefore can sometimes be slightly different for each club. Clubs in poor financial circumstances do not always use their full cap, in some circumstances not even reaching the salary floor, to ensure they reduce costs.
The AFL has in the past pursued a policy of supporting clubs in non-traditional markets such as Sydney and Brisbane. The Sydney Swans have a 5% higher cap due to the increased cost of living in that city, and until the 2003 season, the Swans and the Brisbane Lions were permitted a 15% higher cap. This advantage attracted criticism after the Lions won three consecutive premierships from 2001-2003. The AFL maintains that salary caps may be used in the future to support its expansion into rugby league's heartland in New South Wales and Queensland.
Apart from the AFL, several regional leagues also have salary caps which although widening between them and the AFL and overall less than national competitions, are substantial enough to dictate the movement of semi-professional and professional players between states and the overall playing quality and spectator attendance of the state leagues.
There are a significantly higher number of AFL reserves in the Victorian Football League due to affiliations with Victorian clubs, but player payments for these appearances is apparently not included in the VFL's salary cap.
|League||Region||Salary Cap (AUD)||Service payments excluded||Average player annual salary||Average salary per game||Highest paid (per year approx)|
|Australian Football League||Australia (national)||$7,950,000||Yes||$227,000||$10,300||$1,200,000|
|South Australian National Football League||South Australia||$400,000||Yes||$2,000|
|Victorian Football League||Victoria||$300,000||Yes|
|West Australian Football League||Western Australia||$200,000||Yes|
|AFL Queensland State League||Queensland||$120,000||Yes|
|Tasmanian Football League||Tasmania||$120,000||Yes|
|Sydney AFL||New South Wales|
|AFL Canberra||Australian Capital Territory|
|Northern Territory Football League||Northern Territory|
|Ovens & Murray Football League||Victoria|
The National Rugby League adopted a salary cap model in 1990. In 2010, the salary cap for the sixteen teams is $4.6875 million, with a $4.21875 million salary floor. The NRL's stated purposes for having a salary cap are "to assist in spreading the playing talent" and "ensure that Clubs are not put into positions where they are forced to spend more money than they can afford in terms of player payments, just to be competitive." 
The NRL is one of the only major leagues to implement a salary cap when there are competing leagues in other countries where there is either no salary cap or a much higher cap per club. As a result, there is a constant drain of players from Australia to Europe where salaries for the elite (and even for average players) are considerably higher. The NRL has chosen to continue with the cap, believing that any reduction in quality of the sporting product due to the loss of these players is less than allowing richer clubs to dominate. In practice, the goal of parity has been quite successful, with 8 different clubs winning the championship in the 9 seasons between 2001 and 2009. Since the NRL's inception in 1998, only two clubs have won the premiership on more than one occasion.
In 2008 the departure of two elite stars to play French rugby union has prompted calls for the cap to be raised. Australian rugby league players had suffered a 27% decline in their wages since 1999, whereas other Australian sportsmen had experienced steady, and in some cases explosive growth. Some of the blame has been apportioned to the fact that the media company News Limited is a major owner of the NRL, and would normally be expected to be a bidder for rugby league rights in Australia. Being an owner of the game means News can apportion rights to itself at a discount, reducing the overall income the league can make for itself through media rights. This has a flow-on effect reducing available income for players.
|League||Region||Salary Cap||Service payments excluded||Average player annual salary||Average salary per game||Highest paid (per year approx)|
|National Rugby League||Australasia (transnational)||AUS$4,400,000||Yes||$180,000||$6,920||$540,000|
|Super League||Europe (transnational)||GBP£1,650,000|
The penalties for clubs found to have breached the NRL salary cap and salary floor regulations include fines and/or loss of premiership points.
The following breaches of the salary cap and salary floor have occurred:
The recently established A-League national football (soccer) competition has utilized a universal salary cap of AU$2.2 million for each squad in the 2009/2010 season. However, each team can sign one "marquee player" whose salary is exempted from the team's salary cap. The practice is similar to the Designated Player Rule in Major League Soccer in North America, however an A-League marquee player's salary must not exceed AUD$1.5 million. The A-League has also introduced a "junior marquee" for eligible under 23 year old players with the aim of keeping young talented players in Australia for a longer period.
The National Basketball League has a salary cap of AU$1 million for each of its eight teams, for the 2009-10 season. In addition, since 2003-04, the NBL has used a "points cap" to encourage spread of talent: players are assigned points on a 1-10 basis each season "based on their performance in the NBL or based on the league they have participated in for the season just concluded", and each team's player roster (of between 10 and 12 players) must fall within a "Total Team Points" limit.