3 Compensation and Working Conditions Spring 1998

The use of salary caps, limiting

how much teams can pay

their players, is a relatively new

development. Basketball was the first

sport to cap salaries, in the 1984-85

season, and a similar restriction went

into effect in football in 1994. In other

sports, salary caps were contested in

both the 1994-95 baseball strike and

the 1994-95 lockout in hockey. In

these sports, unions have been able to

fend off acceptance of a general cap,

although “luxury taxes” were put into

effect on baseball team payrolls exceeding specified amounts, and hockey

now has a salary cap for rookies.

Labor relations models in the four

sports have certain commonalities.

Since 1967, when the initial team

sports collective bargaining agreement

was reached in basketball, owners and

players have experimented with ways

of sharing power and dividing revenues. Today, all sports have a form

of free agency, allowing players to sell

their services to other clubs after a certain period of time has elapsed. Salary caps have emerged as a quid pro

quo to free agency. That is, while players are allowed to sell their services to

the highest bidder, the salary cap restricts how much can be paid to players on a team as a whole, thus preventing labor costs from rising beyond

the stated limits.

This article examines the nature

and operation of salary caps in basketball and football, and the controversies and arrangements over the issue in baseball and hockey. Because

salary caps can be viewed as a counterpart to free agency, there is particular interest in how these two features

interact. Salary caps are also viewed

in the broader context of owners versus players, and their effects on collective bargaining.

Basketball

Like the other sports, basketball

went through its “dark ages” for player

salaries during the years of owner application of the reserve clause. Players are drafted by National Basketball

Association (NBA) teams that have an

exclusive right to sign the player they

select. Once a drafted player signs a

contract he becomes the exclusive

property of the club. The initial use

of the reserve clause was to bind a

player to a particular club for life, unless the player was sold, traded, or put

on waivers. With a right to continued

use of the players’ services, clubs had

monopsony control—they were the

only buyer in the market—and had

little incentive to pay high salaries.

While players made several legal

challenges to the reserve clause, it was

not until the mid-1970s that the courts

Salary caps and payroll taxes may seem beneficial to owners, but

are their effects more symbolic and cosmetic than fundamental?

Labor relations models in basketball, football, baseball, and

hockey have certain commonalities.

BY PAUL D.STAU D O H A R

Salary Caps in

Professional Team Sports

Paul D. Staudohar is a professor of business

administration, California State University,

Hayward, CA. A version of this article was presented at a conference on Player Market Regulation in Professional Team Sports in Neuchatel,

Switzerland. The author’s views are his own and

do not necessarily reflect those of the Bureau of

Labor Statistics or the U.S. Department of Labor.
 Compensation and Working Conditions Spring 1998 4

partially lifted the restriction.1 In

1976, a new collective bargaining

agreement was reached between the

NBA and the National Basketball

Players Association (NBPA) that

eliminated the reserve clause option

from nonrookie contracts. However,

there were some restrictions on free

agency set forth under the agreement.

One was the establishment of a right

of first refusal system (beginning in

1980), whereby a team about to lose a

free agent could match the offer made

by another club, and thus retain the

player. Another was an arrangement

for compensating teams that lost free

agents. As determined by the commissioner of basketball, teams could

be awarded players, draft choices, or

cash upon losing a free agent.

In succeeding collective bargaining

agreements free agency continued to

become more liberal. The compensation rule was jettisoned in 1980, and

the right of first refusal, which replaced the compensation rule, was

modified in favor of the players. However, in part due to the difficulty of

adjusting to the higher compensation

levels for players that free agency

wrought, many clubs were not doing

well financially. They wanted relief

through a salary cap.

Gary Bettman (Commissioner of

the National Hockey League) devised

the idea of a salary cap in the NBA.

In the early 1980s Bettman was the

number three man in the NBA, behind

then Commissioner Lawrence O’Brien

and current Commissioner David

Stern. In July 1982, O’Brien and Stern

sat down with Lawrence Fleisher,

counsel for the NBPA, and its president Bob Lanier, to work out what is

considered one of the pioneering collective bargaining agreements in all of

sports.2

 Negotiations were difficult,

particularly because of the proposal to

moderate salaries. There was even talk

of a strike. Although the 1982-83 season opened without an agreement, the

players made it clear that the deadline

for reaching the agreement was April

1, shortly before the playoffs would

begin. The owners would have been

especially vulnerable to a strike at that

time, because a sizable share of their

revenues comes from post-season play.

The talks gained momentum when

the owners offered to share league revenues with the players, as an offset to

the salary cap. The revenue sharing

proposal was initially set at 40 percent, then raised in negotiations to 50

percent, and finally to 53 percent by

the owners, who agreed to guarantee

this percentage of gross revenues to

the players. This overcame the final

barrier in negotiations, and the agreement was reached on March 31, 1983,

establishing the first salary cap in

sports.

The salary cap began with the

1984-85 season and was initially set

at $3.6 million. Because five teams

were already paying more than $3.6

million, their payrolls were frozen.

Although the cap was scheduled to rise

to $3.8 million in 1985-86, it actually

rose to $4,233,000. The reason the

actual figure was higher is that the

scheduled figure was only a minimum

cap, while the actual figure represents

the maximum cap of 53 percent of revenues. The amount of the salary cap

over the years is shown in table 1.

Change and impact. A distinction can

be made between a hard salary cap and

a soft salary cap. Basketball’s cap was

and remains a soft cap. The reason is

that there are loopholes that have developed in the operation of the system

that make it possible for teams to exceed the cap. In a hard salary cap,

exceptions would not be allowed and

teams could not spend more than the

cap.

Under the 1983 agreement, teams

were allowed to retain at any price one

player who became a free agent, and

that player’s salary would not count

against the cap. Thus, a team could

re-sign its own free agent player regardless of the impact that the signing would otherwise have had on the

cap. If a hard cap had existed, all salaries would count toward the cap, irreTable 1. Basketball average salaries, percentage changes, salary caps, and ratios, 1984-85 through 1997-98

1984-85 ...................................................... $340,000 - $3,600 10.6:1

1985-86 ...................................................... 395,000 16.2 4,233 10.7:1

1986-87 ...................................................... 440,000 11.4 4,945 11.2:1

1987-88 ...................................................... 510,000 15.9 6,164 12.1:1

1988-89 ...................................................... 601,000 17.8 7,232 12.0:1

1989-90 ...................................................... 748,000 24.5 9,802 13.1:1

1990-91 ...................................................... 1,034,000 38.2 11,871 11.5:1

1991-92 ...................................................... 1,202,000 16.2 12,500 10.4:1

1992-93 ...................................................... 1,348,000 12.1 14,000 10.4:1

1993-94 ...................................................... 1,558,000 15.6 15,175 9.7:1

1994-95 ...................................................... 1,800,000 15.5 15,964 8.9:1

1995-96 ...................................................... 2,027,261 12.6 23,000 11.3:1

1996-97 ...................................................... 2,189,442 8.0 24,300 11.1:1

1997-98 ...................................................... 25,000

Average salary

percentage change

Salary cap

(thousands)

Ratio of salary cap

to average salary Average salary

SOURCE: 1984-85 through 1994-95, National Basketball Association; 1995-96 through 1997-98, National Basketball Players Association.

Season
5 Compensation and Working Conditions Spring 1998

spective of whether they involved a

team’s own free agent.

Another feature of the 1983 agreement was that teams that were at or

over the salary cap could sign rookies

to 1-year contracts for only $75,000

for first-round draft choices, and

$65,000 for lower picks. The problem this caused was that teams that

had not reached the level of their cap

could sign rookies for much more than

capped teams. For example, Akeem

Olajuwon signed with the Houston

Rockets for $6.3 million over 6 years,

while Charles Barkley signed with the

Philadelphia 76ers for $75,000. Houston was under the cap, while Philadelphia was at or over it. This put

Barkley and other rookies drafted by

capped teams at a considerable disadvantage. Indeed, one of these players,

Leon Wood of the 76ers, challenged

the salary cap in Federal court on antitrust grounds. His suit was dismissed, however, because the salary

cap had been established through collective bargaining between the owners and players’ union, and the court

determined that the antitrust law did

not apply.3

In negotiations for the 1988 agreement, the NBPA sought to eliminate

the salary cap as well as the college

draft and other features that it contended were in violation of antitrust

law by restricting player movement in

the labor market. The union used the

interesting tactic of threatening decertification. The courts had held in

Wood and other cases that as long as a

bargaining relationship existed, the

antitrust laws would not apply. Thus,

reasoned the NBPA, by decertifying

itself there would no longer be a bargaining relationship and thus the

league’s antitrust immunity would disappear.

But the union did not need to move

ahead with its decertification plans,

because an agreement was reached.

The agreement addressed a key union

concern by reducing the draft from

seven rounds to three in 1988, and to

just two rounds thereafter. With fewer

rounds in the draft, there would be

more free agent rookies, although experience showed that teams signed few

players beyond the second round.

The salary cap continued to be

based on players receiving a guaranteed 53 percent of gross revenues. It

remained a soft cap in that teams were

able to re-sign their own free agents

without affecting the cap. A case in

point involved Chris Dudley of the

New York Nets, who was a free agent.

Despite receiving offers of about $3

million from other teams, Dudley

signed a 7-year $11 million contract

with the Portland Trail Blazers, which

paid him only about $790,000 in the

first year. The catch was that the contract allowed Dudley to become a free

agent after his first year with Portland.

He would then be able to sign a big

contract as Portland’s free agent and

thus circumvent the salary cap. This

is what in fact happened, as Portland

tore up Dudley’s old contract after a

year and signed him to a multiyear deal

at $4 million a year. The league saw

through the ruse and Commissioner

Stern went to court to try to prevent it,

unsuccessfully as it turned out.

Negotiations for the 1995 agreement brought some interesting developments. The union was still determined to eliminate the salary cap,

college draft, and right of first refusal.

But little progress occurred in negotiations and the NBPA agreed to play

the 1994-95 season without a replacement contract. In frustration, the

union also resuscitated its old decertification ploy in an effort to clear the

way for a favorable antitrust decision

in court. This time the union nearly

went all the way, but in the end voted

against decertification.

The vote came as a result of a complex series of events that began with

the abrupt resignation of the union’s

executive director, Charles Grantham,

who had replaced the retired Fleisher.

Simon Gourdine (ironically, a former

deputy commissioner of the NBA) took

over the union and negotiated a tentative agreement. But several players,

notably Michael Jordan and Patrick

Ewing, sought to decertify the union.

One of the things the proposed agreement would have done was turn the

salary cap from soft to hard, something

the players and their agents viewed

negatively. When the tentative agreement was modified to return to a soft

salary cap the players voted against

decertification and ratified the agreement.

The new 6-year 1995 agreement

raises the players’ guaranteed share of

NBA revenues from 53 percent to 57.5

percent. It also broadens the base on

which the 57.5 percent is applied, by

inclusion of luxury box revenues. In

addition, contract language tightens up

owners’ revenue reports, a problem

area that had recently come to light.

In l990, Chicago Bulls owner Jerry

Reinsdorf had sued the NBA for trying to limit the number of Bulls broadcasts on the television superstation

WGN. (The suit was settled in l996.)

Evidence came to light during the case

that led to the discovery, by the NBPA,

that some owners were underreporting

revenues that determined the salary

cap.

The soft salary cap allows a team

to sign a replacement for an injured

player at up to 50 percent of the injured player’s salary without this additional salary counting against the

cap. But another change in 1995

works in favor of the owners. This is

a cap on all rookie salaries, which is

based on average salaries received by

the picks at each draft position over

the past 7 years plus an increase of up

to 20 percent.

Has the salary cap influenced salaries? Average salaries of first-year

players have been significantly affected; those of other players less so.

Were NBA revenues to level off or

decline, the effect of the cap on salaries would be greater. Because there

has been a steady growth of revenue

to the league since the cap was instituted, this has not been the case. In

fact, the increasing revenues have enlarged the pool of money that the players share. Accordingly, the salary cap

has risen but the ratio of average salaries to the cap has not moved in tandem. (See table 1 and chart.) The soft

nature of the cap and the numerous

exceptions have blunted its impact.
 Compensation and Working Conditions Spring 1998 6

19 8 4-8 5 19 8 6-8 7 19 8 8-8 9 1 99 0-9 1 1 99 2-9 3 19 9 4-9 5 19 9 6-9 7

7

8

9

1 0

1 1

1 2

1 3

1 4

So, as salaries were rising between

1984 and 1989, the cap rose even

more; and then over the next 5 years

average salaries outpaced the cap.

Since 1994, however, the cap has

shown phenomenal growth as average

salaries increased more modestly.

Table 1 also shows the rapid rise in

NBA salaries. How much greater salaries would have risen without the cap

cannot be determined, but the difference would probably not be great.

In theory, the salary cap works to

prevent high-paying teams from signing quality free agents from other

teams. As a result, it is expected that

low-paying teams which are under the

cap could sign free agents and thus

improve their chances of winning

games. However, as Roger Noll notes,

a player’s current team can match any

outside team’s free agency offer, and

most players would rather stay with a

good team than switch to a weak one.4

Therefore, Noll indicates that the salary cap doesn’t help the weak teams

so much as it prevents wealthy teams

from competing for each other’s players.

Football

With the exception of baseball,

football’s labor relations have been the

most tumultuous of any sport. Strikes

in 1982 and 1987 were among the

longest and hardest fought in sports

history, and typified the acrimonious

relationship between the National

Football League (NFL) and the NFL

Players Association (NFLPA).

The 1987 strike was a particularly bitter defeat for the union, because its attempt at revising the free

agency system fell short. From 1977

to 1987, only one free agent, Norm

Thompson of the St. Louis Cardinals, signed with another club; voluntary movement of players was virtually nonexistent. The reason for

this was the compensation required

for teams that signed free agents.

For example, in 1988, the Washington Redskins signed Wilbur

Marshall, a free agent player from

the Chicago Bears for $6 million

over 5 years. While there was no

formal agreement in effect at this

time (it expired in 1987 and was not

renewed), the prior free agency compensation rules continued to be applied by the parties. Consequently,

the Redskins had to give up their

first-round draft choices in 1988 and

1989 as compensation to the Bears,

a stiff penalty that discouraged future deals.

Having to cope with this kind of

system was frustrating for the players

because it kept salaries relatively low.

The union was outmaneuvered by the

league in 1987, when the owners

brought in replacement players to act

as strikebreakers. Defeated at the bargaining table, the union turned to the

courts for relief, challenging the restraints on free agency and other noncompetitive practices as violations of

antitrust law. The union lost this suit,

known as the Powell case,5

 because,

even though the collective bargaining

agreement had expired, there was a

“labor exemption” insulating the owners from the antitrust law. That is, the

existence of a union representative was

all that was needed for a labor exemption, even if that representative was at

impasse in negotiations with the

league.

As a result of this decision the

NFLPA decertified itself as the players’ representative, hoping that in the

absence of a bargaining relationship

the league could not insulate itself

from application of the antitrust law.

To try to counter this tactic, the NFL

liberalized the free agency system

through what was called “Plan B.”

Although the revised system allowed

all but 37 players on a 47-player team

roster to become free agents, it continued to restrict the best players from

movement.

Eight players, led by Freeman

McNeil of the New York Jets, filed an

antitrust suit challenging Plan B. A

jury found that the plan was too restrictive.6

 Although the league considered the possibility of appealing the

decision, it instead sought to resolve

the problem of its vulnerability to antitrust violation by renegotiating a contact with the union. In 1993, after 5

years of impasse, the parties reached

a new collective bargaining agreement.

New agreement. The 1993 agreement

provides a compromise that benefits

each side, with the union getting real

free agency for the first time and the

league obtaining a salary cap to protect the owners from excessive spending. Originally set up as a 7-year

agreement, it was extended in 1996,

adding 1 year and possibly 2 more at

the option of the union. Thus, the

agreement could extend through 2002.

Rules on free agency currently allow players with 4 years of NFL service to change teams without restriction when their contracts expire. Table

2 shows free agent signings from 1993-

96, for unrestricted free agents who

signed with a new club as well as those

Ratio of salary cap to average salary, NBA, 1984-85 through 1996-97

Ratio

1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97

14

13

12

11

10

09

08

0

00
7 Compensation and Working Conditions Spring 1998

Football Salary Cap Formula

 Projected designated gross revenues, all teams

$2,255,510,000

 x 62 percent = $1,398,420,000 players’ share

: 30 clubs = $46,614,000 per club

 - $5,160,000 for collectively bargained

 benefits = $41,454,000 salary cap

 SOURCE:National Football League Players

Association

who signed with their old team. On

the whole, the table shows significant

increases in the salaries of free agents.

Not all players are pleased with free

agency, depending on their circumstances. For instance, teams have cut

some veteran players to make room for

other players. This partly results from

salary cap limits on how much teams

can spend on players. Under free

agency, more money may go to fewer

players. If a team pays out large

amounts to sign a few star free agents,

this leaves less money for paying the

remaining players. The latter may

wind up making the league minimum

salary ($196,000 in 1997 for players

with 3 to 5 years of experience and

$275,000 for veterans of 5 or more

years).

Players together receive a minimum

of 58 percent of designated gross revenues in salary guarantees under the

1993 agreement. This minimum has

not come into play, however, as the

players have received about 65 percent

of revenue. The salary cap became

effective in 1994 at 64 percent, meaning that teams could spend no more

than 64 percent of their revenue on

salaries. The cap was 63 percent in

1995, 63 percent in 1996, and 62 percent in 1997. For each of the 30 NFL

teams the salary cap was about $41.5

million in 1997. Calculation of the

cap is shown in the box.

There is also a rookie salary cap.

It is designed to limit the salaries paid

to rookies to the 1993 level of pay,

about $2 million per team. However,

the rookie salary cap rises with designated gross revenues, so that it had

grown to about $3 million in 1997.

While the salary cap in football was

originally intended to be a hard cap, it

has turned out thus far to be a soft one.

The loophole that has developed in

football is the signing bonus. A signing bonus is not counted fully against

the salary cap in the year in which it

is paid. A team is allowed to prorate

the signing bonus over the life of the

contract for purposes of the salary cap.

Thus, even though a player might actually receive a $4 million signing

bonus in 1997, only $1 million would

count against the cap for that year if a

4-year contract was signed.

The practice of signing bonuses is

more common in the NFL as a result

of the salary cap and the need to avoid

it. Table 3 shows the growth in signing bonuses since 1990. This growth

has far outstripped the increase in average salaries, indicating that a larger

proportion of total compensation is

paid in signing bonuses for free agents

and rookies.

Evidence of the soft nature of the

NFL salary cap can also be seen in

table 4. It shows that for 1994, 1995,

and 1996 as a whole, if a club spent

up to the cap limits it would have averaged an outlay of $37.5 million per

season on salaries. Shown in the table

Table 2. Football free agent signings and average salaries, 1993-96

1993 .................................................. 276 $535.3 $995.6 85

1994 .................................................. 293 567.9 710.6 25

1995 .................................................. 298 459.0 713.9 56

1996 .................................................. 245 702.0 1,064.0 52

Unrestricted free

agents

Prior year average

salary (thousands)

New average yearly

salary (thousands)

Average salary

percentage change

Year

Table 3. Football signing bonuses, l990-96

1990 .......................................................... $363 $133 $206

1991 .......................................................... 423 212 340

1992 .......................................................... 490 224 307

1993 .......................................................... 664 458 841

1994 .......................................................... 636 595 1,045

1995 .......................................................... 718 906 1,625

1996 .......................................................... 795 1,064 2,146

NOTE: 120 free agents signed with new teams in 1993,

140 in 1994, 184 in 1995, and 125 in 1996.

Year Average salary

(thousands)

Players’ average

signing bonus1

(thousands)

Starters’ average

signing bonus1

(thousands)

1

 Average for all players receiving a signing bonus. SOURCE: National Football League Players Association.

SOURCE: National Football League Players Association.
 Compensation and Working Conditions Spring 1998 8

are the actual amounts spent by each

team. All NFL teams equaled or exceeded the average salary cap for the

3-year period. It was the prorating of

signing bonuses over the length of

player contracts that enabled teams to

spend more for players than the cap

limits.

Free agency and the salary cap are

linked in a timetable. Free agents can

begin testing the market on February

14 of each year. On June 1, teams begin to release players whose high salaries make them expendable. These are

usually players good enough to contribute but too old to have many years

left. Prior to June 1, the remaining

prorated shares of those players’ signing bonuses would have been counted

against a team’s salary cap. But by

releasing the players before June 1,

clubs are able to count some of the

money against the salary cap for the

following year, which would be a

higher cap.7

In contrast to baseball and basketball, football player contracts are usually not guaranteed. Releasing a veteran player thus creates room to

maneuver under the salary cap. There

is virtually continuous action in signing players from February until August, when the final training camp cuts

are made.

Some players win from this timetable, while others lose, depending on

whether there is a glut or shortage of

players at a particular position. It is

not uncommon for a veteran who was

once paid, say, $2 million a year to be

offered only the league minimum the

following year. In contrast, some free

agents who are playing at positions

where there are few available stars may

increase their salaries several times

over. General managers of clubs have

always needed player assessment

skills, but today these must be combined with astute cap management.

Baseball

Baseball does not have any form of

salary cap, although it does have a

luxury tax on clubs that annually spend

beyond a certain amount on salaries.

This tax may have an effect on salary

growth, as discussed below, but so far

it has been minor.

The first discussion of the salary

cap in baseball negotiations occurred

in 1989-90. The owners proposed a

cap that would limit the amount of

salary any team could pay to players.

Those with 6 years or more of experience would still be free agents. However, they would not be signed by a

team if doing so would put the team

over the salary cap.8

 Also part of the

owners’ proposal was a guarantee to

the players of 43 percent of revenue

from ticket sales and broadcast contracts, which was about 82 percent of

the owners’ total revenue.

The purpose of the proposed salary

cap was to protect teams in small markets, like Milwaukee and Minnesota,

from having their talented free agents

bought up by big-market teams in New

York and Los Angeles. In theory,

teams in large cities would be unable

to dominate the free agent market because the cap would limit the players

they could sign. Also, because teams

spend large sums in developing young

players, a salary cap would allow them

to retain more of their young players

because free agency opportunities

would be more limited.

Although negotiations began in

November 1989, nothing much happened until February 1990, shortly

before spring training was to begin.

At that time Commissioner Fay

Vincent began to sit in on negotiations.

He made some formal proposals that

were released to the media, and this

had the effect of causing the owners

to drop their demands for radical

change, including the salary cap. A

32-day lockout by the owners ensued,

with the main issue in the dispute being salary arbitration eligibility.

1994-95 strike. Baseball’s 4-year collective bargaining agreement expired

on December 31, 1993. A year earlier the owners had reopened the contract for negotiations on salaries and

the free agency system, but no real

proposals were made by either side.

Baseball, as other sports, has its bigmarket and small-market teams and

economic disparities between clubs.

Baseball teams share money from the

sale of national broadcast rights

equally. But, until recently, they kept

all sales from local broadcast rights.

The New York Yankees in a typical

year receive about $50 million from

local television broadcasters, while

some of the small-market teams get just

a few million dollars for their rights.

As a result, the owners decided to

share some of their local revenues, but

only if the players accepted a salary

cap. So the salary cap issue reemerged

in 1994, rather oddly tied to revenue

sharing among the owners themselves.

The owners also proposed to share

Table 4. Football actual expenditures,

1994-961

Green Bay ...................

Tampa Bay ..................

Cincinnati ....................

Pittsburgh ....................

Minnesota ....................

Atlanta .........................

Seattle .........................

Houston .......................

San Diego ...................

Philadelphia .................

Indianapolis .................

Chicago .......................

Baltimore .....................

Arizona ........................

Washington .................

Detroit..........................

St. Louis ......................

Denver .........................

Miami ...........................

Kansas City .................

San Francisco .............

New Orleans ...............

New York Jets ..............

Oakland .......................

New York Giants ..........

Buffalo .........................

New England ...............

Jacksonville .................

Carolina .......................

Dallas ..........................

Team

Actual

expenditures

(millions)

$37.5

 37.7

 38.5

 39.0

 39.1

39.5

39.6

 40.0

40.7

 40.8

 41.2

41.3

41.3

 41.3

 41.6

 41.6

42.1

42.1

42.2

 42.9

43.2

44.7

44.7

45.1

45.4

 46.0

 46.3

 47.1

 47.4

 49.8

1

 The average salary cap for the three

year period was $37.5 million. The proration

of signing bonuses over the contract term

raises compensation above the salary cap. 2

 In the 1997 season, Houston moved to

Tennessee.

SOURCE: National Football League

Players Association

2
9 Compensation and Working Conditions Spring 1998

their revenues with the players, 50-50.

Depending on the players’ share under the 50-50 split, no team could have

a payroll of more than 110 percent or

less than 84 percent of the average

payroll for all teams.9 The Major

League Baseball Players Association

(MLBPA) rejected the salary cap and

other major proposals. This set the

stage for a strike that began on August 12, 1994 and lasted for 232

days—the longest strike ever in professional sports .

Shortly after the strike began the

owners shifted their position from a

salary cap to that of a luxury tax. The

idea was to tax a club’s payroll if the

total payroll exceeded a certain limit.

The MLBPA viewed this proposal as

a salary cap in disguise, because clubs

would resist signing free agents if in

addition to higher payrolls they would

have to pay a tax as well. Still, the

union didn’t totally reject the idea and

various proposals were exchanged in

the next several months.

In the end, the union accepted a

modified version of the luxury tax.

The tax is levied on team payrolls exceeding $51 million in 1997, $55 million in 1998, and $58.9 million in

1999. The tax rate is 35 percent in

1997 and 1998 and 34 percent in 1999.

No luxury tax is levied for 2000, and

the players can elect to extend the

agreement to 2001 without a tax. The

tax revenues go into a pool together

with monies from a new 2.5 percent

tax on player salaries plus some local

broadcast revenues from wealthy

clubs. The pool is then distributed to

13 small-market teams.

Final luxury tax compilations are

made on December 20 for each year

the tax is in effect. It appears that several teams will be taxed at the 35 percent rate on payrolls above $51 million. Thus, the Yankees with a payroll

in 1997 of about $61 million, would

pay about $3.5 million in tax. This is

not expected to deter salary growth.

Shortly after the agreement was

reached, the Florida Marlins committed $89.1 million to sign 6 free agents,

the biggest spending spree in baseball

history; and in 1 week in December

1996, 14 clubs committed a total of

$216 million to 28 free agents.

The luxury tax system is so new in

baseball that it will be some time before its impact can be evaluated. The

early returns indicate that it is having

little if any effect on average player

salaries, which increased by 23.2 percent in 1997. (See table 5.) On the

other hand, it is interesting to note that

the highest paying clubs in baseball

in 1996 and 1997 (the Yankees and

the Baltimore Orioles) both reduced

their payrolls, from $67 million to $61

million for the Yankees, and $62 million to $58 million for the Orioles.10

There was greater compression toward

the median salary as teams with lower

payrolls generally increased salaries.

This was apparently the result of anticipated distributions to these clubs

from the revenue sharing pool. Also,

the percentage of payroll to total revenue for baseball as a whole fell from

63 percent in 1996 to 59 percent in

1997.11

Hockey

In contrast to football, which for

years had rancorous labor relations

and then found peace, hockey went in

the opposite direction. Until 1992

hockey had never had a work stoppage

and enjoyed many years of relatively

placid negotiations. But the tide

turned with a l992 strike and 1994-

95 lockout. The latter, an especially

long and difficult dispute, was caused

by disagreement over what was labeled a salary cap issue.

The 1992 strike lasted only 10 days.

Ostensibly, it was due to an attempt

by the National Hockey League Players Association (NHLPA) to reduce the

number of rounds of the player draft

and achieve greater opportunities for

free agency. In reality, the strike was

caused more by a changing of the

guard at the union. Shortly before the

strike, Bob Goodenow had taken over

from Alan Eagleson, who for years

maintained a paternalistic relationship

with the league. Goodenow, whose

style is more confrontational, wanted

to convey to the league the message

that the union could play rough.

Unfortunately for the union, the

NHL had also recently taken on a new

leader, when Gary Bettman came over

from the NBA. The reader will recall

that Bettman was the father of the first

salary cap in basketball and it was a

concept that he thought might apply

to hockey, albeit in a different way.

Hockey, like other sports, is plagued

with the big-market, small-market dichotomy, which is exacerbated by the

relative paucity of television money

available to the NHL. The union had

stung Bettman and the owners in 1992,

interrupting the latter part of the season. Real negotiation by the owners

Table 5. Major league baseball average salaries 1984-97

1984 ........................................................ $329,408 -

1985 ........................................................ 371,157 12.7

1986 ........................................................ 412,520 11.1

1987 ........................................................ 412,454 (1)

1988 ........................................................ 438,729 6.4

1989 ........................................................ 497,254 13.3

1990 ........................................................ 597,537 20.2

1991 ........................................................ 851,492 42.5

1992 ........................................................ 1,028,667 20.2

1993 ........................................................ 1,116,353 8.5

1994 ........................................................ 1,168,263 4.6

1995 ........................................................ 1,110,766 -4.9

1996 ........................................................ 1,119,981 .8

1997 ........................................................ 1,380,000 23.2

1

 Less than 0.5 percent

2 Due to players strike in 1994-95, actual salary was less.

SOURCE: Major League Baseball Players Association

Year Average salary Percentage change

2

2
 Compensation and Working Conditions Spring 1998 10

to replace the collective bargaining

agreement that expired in September

l993 was therefore minimal. The union

nonetheless agreed to play the 1993-

94 season without a contract. Its patience wore thin, however, when the

owners continued to drag their feet.

Fearful of another strike late in the

season, the owners took the preemptive action of a lockout.

The lockout wiped out 468 games

over 103 days, and is the second longest work stoppage in sports. It cost a

typical team about $5 million and

came at a time when hockey was enjoying unprecedented popularity.12

The settlement came late in the season, after it appeared that all was lost.

The salary cap was labeled as the

main issue in the conflict, but apart

from applying to rookie salaries, the

big issue was really a luxury or payroll tax, similar to the focal point of

the 1994-95 baseball strike. The idea

was to require high-spending teams to

contribute to revenue sharing by being taxed on payrolls exceeding certain limits. This is, in a sense, a potential limitation to spending on player

salaries but it is a penalty rather than

a cap. Teams have no limit on how

much they can spend. Although the

union made counterproposals on the

payroll tax, the lockout ended with the

owners dropping the issue.

This is not to suggest that the owners came away empty handed. For the

first time in sports a union sustained a

clear defeat at the bargaining table and

suffered material retrenchment in

power under the collective bargaining

agreement. The league gained a cap

on rookie salaries at $850,000 in 1995,

rising to $1,075,000 in 2000. Where

the union lost most was on free agency.

Players age 25 to 31 can still become

free agents, but the system of compensation was increased so that teams that

sign free agents experience severe penalties in loss of draft choices. While

players under the previous agreement

could become unrestricted free agents

at age 30, they had to wait until age

32 for the 1994-95 through 1996-97

seasons, and age 31 after that.

Average salaries in the NHL are

shown in table 6. From 1991-96, salaries rose at a particularly rapid rate.

The owners’ attempt to slow salary

growth was a major cause of the 1994-

95 lockout. Although the NHLPA’s

power was trimmed as a result of the

lockout, salaries have continued their

steady rise. This is mainly due to

improvement in the overall economic

health of the game. Some weak franchises in Winnipeg and Hartford have

relocated to better markets in Phoenix, Arizona and Raleigh, North

Carolina, respectively. The national

network television contract with Fox

has also boosted league revenues.

Expansion will add four new teams:

Nashville, Tennessee in 1998-99, Atlanta, Georgia and Columbus, Ohio

in 1999-2000, and Minneapolis-St.

Paul, Minnesota in 2000-2001. The

new franchises will each pay an $80

million entry fee, $30 million more

than the Anaheim Mighty Ducks and

Florida Panthers paid in the last expansion of 1993. This added money

will fuel future salary increases, but

future labor conflict has been contained by agreement between the

league and union to extend the collective bargaining agreement through

September 15, 2004.

Conclusion

Basketball and football have general salary caps, while baseball has a

payroll tax, a kind of cousin to the

salary cap that penalizes teams that

spend over a certain amount on players’ salaries. Hockey has a salary cap

for rookies, and no other limits.

Rookie salaries are also separately

capped in basketball and football. Although hockey does not have either a

salary cap or payroll tax for veteran

players, its free agency system is relatively weak. Because free agency is

viewed as a quid pro quo for forms of

salary restraint, hockey may not need

anything other than the constraints

provided by the labor market.

The findings in this article do not

suggest that there is a significant difference between a soft salary cap and

a payroll tax as far as placing limits

on salary growth is concerned. If a

salary cap were enforced as a hard cap,

the difference might be greater because

this would be a firm and direct limit.

Economists know that programs for

controlling wages and prices at the

national level, sometimes called incomes policies, are not particularly

effective. The same might be said of

industrial wage and spending controls

in sports. Player salaries are mostly

determined by market conditions, such

as attendance, television revenues,

luxury boxes, licensing revenues,

league expansion, and stadium deals.

Salary caps and payroll taxes may

seem beneficial to owners, but their

effects appear to be more symbolic and

cosmetic than fundamental.

This is not to diminish the salary

cap and payroll tax as bargaining issues. Considering the 1994-95 strike

and lockout in baseball and hockey,

Table 6. Hockey average salaries, 1986-87 through 1996-97

1986-87 .............................................

1987-88 .............................................

1988-89 .............................................

1989-90 .............................................

1990-91 .............................................

1991-92 .............................................

1992-93 .............................................

1993-94 .............................................

1994-95 .............................................

1995-96 .............................................

1996-97 .............................................

Season Average salary Percentage change

$173,000

 184,000

 201,000

 232,000

 263,000

 369,000

 463,000

 558,000

 733,000

 892,000

 981,000

 -

 6.4

 9.2

 15.4

 13.4

 40.3

 25.5

 20.5

 31.4

 21.7

 10.0

SOURCE: 1986-87 through 1995-96, National Hockey League; 1996-97, National Hockey League

Players Association
11 Compensation and Working Conditions Spring 1998

where these issues took center stage,

the matters are of paramount imporACKNOWLEDGMENT: The author is grateful to M. J. Duberstein of the National Football

League Players Association and Doyle R. Pryor

of the Major League Baseball Players Association for providing research data; to Jacqueline

A. Gadt and Eugene H. Becker of the Bureau of

Labor Statistics for their editorial insights; and

to Professor Claude Jeanrenaud of the University of Neuchatel and Professor Stefan Kesenne

of the University of Antwerp for the inspiration

to pursue the topic. 1 Robertson v. National Basketball Association, 389 F. Supp. 867 (1975).

2

 The dynamics of the negotiations and the

resulting agreement are detailed in Paul D.

Staudohar, Playing for Dollars: Labor Relations

in the Sports Business (Ithaca, NY: Cornell University Press, 1996), pp. 117-121. 3 Wood v. National Basketball Association,

809 F. 2d 954 (1987). 4

 Roger G. Noll, “Professional Basketball:

Economic and Business Perspectives,” The Business of Professional Sports, ed. by Paul D.

Staudohar and James A. Mangan (Urbana, IL:

University of Illinois Press, 1991), p. 38. 5 Powell v. National Football League, 930 F.

2d 1293 (1989). 6

 This case is discussed in Paul D. Staudohar,

“McNeil and Football’s Antitrust Quagmire,”

Journal of Sport and Social Issues, Vol. 16, No.

2, December 1992, pp. 103-110.

—ENDNOTES—

7

 Michael Silver, “Cut Loose,” Inside the NFL,

Sports Illustrated, June 9, 1997, p. 99. 8

 Paul D. Staudohar, “Baseball Labor Relations: The Lockout of 1990,” Monthly Labor

Review, Vol. 113, No. 10, October 1990, p. 33. 9

 Paul D. Staudohar, “The Baseball Strike of

1994-95,” Monthly Labor Review, Vol. 120, No.

3, March 1997, p. 24. 10 Ross Newhan, “Yankees Find High Salaries Are Taxing,” Los Angeles Times, April 13,

1997, p. C4. 11 Ibid. 12 John Helyar, “Newly Cool NHL Skates on

Some Thin Ice,” Wall Street Journal, January 19,

1996, p. B8.

tance. However, now that the battles

have been fought over these issues, one

would hope to see longer periods of

labor-management peace.