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09-27-2003, 10:25 PM
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Wetcoaster
 
Join Date: Sep 2003
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A Salary Cap Primer

"If they [the owners] want to pay us, they must be making money, it's not up to us to say: 'No, don't give us that much money.' " - Vincent Damphousse.

"Be careful what you ask for you just might get it." - Wetcoaster

Many are braying for a salary cap without faintest clue of what it is and what it entails.

It is complex and takes some time to wrap your mind around the concepts. Fortunately there was a consultant and statistician in Washington, DC, Matt Witting, who did an incredibly detailed and exhaustive in-depth study comparing the salary capped NFL and NBA to the capless MLB and NHL in February 2003. His figures, charts and analysis reveal some very interesting things. They also explode a number of popular myths about salary caps and their effects on competition and the movement of players.

There is a lot of simplistic bashing of the NHLPA and the players. It takes place IMHO because the players' salaries are visible. Crank up the NHLPA website and others and you can see what each player makes. Salary disclosure was one of the best things Bob Goodenow pushed so that teams could not trade on player ignorance in negotiations as had been the past practise but it is a two-edged sword. However try and find out what owners make off the game - good luck.

Most team owners run a series of companies, usually private, with the hockey operations in one company while revenue generation from hockey related operations are held elsewhere. The NHLPA has challenged the owners to open up all the books and prove their contention that the game is not economically viable. The owners have steadfastly refused the request.

If you intend to institute a salary cap as in the NFL or NBA, the first requirement is complete financial disclosure by ownership (as was done in those leagues) as there has to be some form of revenue equalization and establishment of a formula which forms the cap. Any other approach is pure salary suppression and done only on the backs of the players.

The NHL owners refusal to disclose leads me to conclude what they are looking to do is cap salaries without revenue sharing. In other words the entire burden will fall on the players and ownership is free to do what it wishes. This was actually done in the last CBA where the NHLPA agreed to salary restrictions for new players entering the NHL. The maximum salary was set at $1.175 million for 2002 and bonuses were restricted. If you want to see this check out Article 9 of the CBA "Entry level Compensation". The CBA can be found at:
http://www-ix.oit.umass.edu/~splaw488/NHL_CBA.htm
or http://letsgopens.com/nhl_cba.php

It simply is not going to happen this way for established players. In restricting entry level compensation the NHLPA in effect gave away rights for players who were not yet even part of the association - cynical yes but a very good bargaining chip. Besides who was going to complain.

When salary controls are proposed they are supposed to accomplish all or at least most of the following:
-keep team salaries down
-keep individual player salaries at a reasonable levels
-keep ticket prices increases under control
-reduce the difference between "haves" and "have-nots" and
-increase competition on ice league-wide.

Salary caps are not the be-all and end-all and do not necessarily work as intended and they have side effects. For example under the NFL cap system trades of any skilled player is virtually impossible. Just think no more trade deadline fun in the NHL. The "Law of Unintended Consequences" has dogged the salary cap systems in the NBA and NFL

As I noted above many fans fail to realize that the NHL already has a salary cap in place. The maximum entry-level compensation for players under the age of 25 is dealt with under Article 9 of the NHL CBA which limits the maximum yearly compensation for rookies to just over $1.25 million in salary and 50% of that in signing, reporting and roster bonuses for 2002. It went up another $50,000 this year. Rookie contracts are also deemed to be two-way deals under the CBA.

A general salary cap for other players without the NHL owners agreeing to revenue sharing will be a non-starter. The NHLPA will never agree and do not forget the players have their agents and their own legal and finacial advisers who keep them informed of the effects and ramifications of any changes in the CBA. This is not the 1950's when you can give Gordie Howe a team jacket to keep him happy.

The NBA and NFL caps are based on calculating league-wide revenue from most basketball/football sources and revenue streams to generate a figure against which an allowable salary ceiling for each team is calculated. If you have ever read the CBA's for the NBA or NFL (and I have) you will realize they are two of the most complicated and convoluted labour relations documents ever produced. Teams employ an army of legal and accounting consultants on a full-time basis to assist them in conducting their business and in negotiating contracts. It takes three weeks in the NBA to figure out if you can make a trade.

The NHL owners have consistently refused to consider revenue sharing and will not disclose how much money is being made from all hockey related enterprises. In most cases the hockey operation, i.e. the team is run under one set of books while other income is generated through other companies. The NHLPA has challenged the owners to open the books so a true picture of the financial system can be seen. The owners have refused.

Quite rightly the players resist being the only side making the financial sacrifice. Historically in the NHL the owners r@ped and pillaged the players before the advent of the NHLPA. Probably the single most important move by the NHLPA was Goodenow publishing individual salaries and making contracts public. In the past players were forbidden from discussing salary on pain of suspension or being blackballed. It led to such things as Gordie Howe in his heyday being only the fourth or fifth highest paid player on the Wings while he was the best player in the league.

There are various forms of salary control.

The NBA cap which Bettman helped design and implement is a "soft" cap. The teams must disclose their Basketball Related Income ("BRI") which includes revenue from tickets, advertising, local concession and souvenir sales, local media and other league, team and arena income streams. The current NBA cap for each team is 55% of the total BRI for the league. Only two teams (Detroit and LA Clippers) were under the cap - the other 28 teams were over. There is also a luxury tax in the NBA. However there are so many exceptions and loopholes the cap is more honoured in the breach rather than compliance. Since most exceptions relate to the star players and their higher salaries, the cap has virtually no effect on the players for whom the cap was intended in the first place but it does hurt the journeymen.

The NFL has what is referred to as a "hard" cap. Again league revenue is calculated in much the same way as the NBA but it is called Defined Gross Revenues ("DGR"). There are virtually no exceptions - hence it is a "hard" cap. The cap is set at 63% - higher than the NBA but remember that football rosters are much larger.

Also you often hear of huge long term NFL deals. However if a player is cut, his contract ends. So if he has 5 years left on a $5 million per year 7 year contract once he is released, the team is no longer obligated to pay. This differs from the NHL where contracts are guaranteed and if you want to end a contract you must pay out the remainder at 2/3 or negotiate a buy-out. This is the Pierre Turgeon situation in Dallas.

Of course many star NFL'ers (and their agents) know this and they sign deals with huge signing bonuses. Under the NFL system teams can then average out the bonus over the term of the contract for the purposes of calculating the team's yearly cap number.

So taking the example above a player may sign a $35 million contract with a 7 year term. His salary is $2 million per year and he has $21 million dollar signing bonus in his pocket. Essentially he has a $23 million guaranteed contract. The team is not charged $23 million in the first year under its cap but rather is permitted to spread out the total contract over the total term so it is only charged $5 million per year against its cap. However if the player is released, traded or injured the entire signing bonus (or its remainder) now becomes part of the team's next year cap. For example our player blows out his knee and retires. Now the cap room is lessened by $19 million dollars and you must still try to replace the player. Many NFL teams have run into this problem. Also do you think there is any way this player is going to be traded?

Mark Witting in his extremely detailed study of salary caps has concluded a number of things. If a cap is in place there is less of a gap between the "haves and "have nots" and the wealth distribution is more even. That is not surprising since that is the starting point for a salary cap.

However he found that in the NFL the competitive balance difference pre- and post cap was negligible and had done nothing for league wide parity.

In the NBA the cap was instituted (according to the league) to protect smaller market teams and increase their competitiveness. It has not worked as in 18 years the 4 largest markets have won 14 titles while in the previous 18 years (pre-cap) the 4 largest market team only won 5 titles.

He finds that baseball with no salary cap has excellent competitive balance across the league and that the NHL has been its most competitive in the last 20 years looking at each decade since 1926-27.

After his detailed calculations and analysis he concludes:

" The two leagues (NHL and MLB) without caps and significant revenue sharing seem to produce more balanced competition than the leagues with cost-of-labour restrictions over the last 8 years. In addition, we saw that the restrictions did little if anything to improve competition in the NFL and may have actually hurt the NBA's pursuit of parity."

How about player salaries? He found as follows:

"Just like in un-capped sports, salary caps don't strongly influence the escalation of player salaries. Players perceived as stars are being paid tremendous sums in all four sports (hockey least of all) while the salaries and job status of the low end and mid range players are adjusted to compensate."

On trades he finds:
"Salary caps were not set up to decrease the ability of teams to better themselves for the post-season/future through trades, but they have had that effect in both the NBA and NFL."

How about the effect of salary caps in rebuilding a team:

"(NFL) teams are often encumbered with "dead money", payable to players no longer on the roster but still counting against the cap. Teams with significant dead money can't afford to sign as many experienced/quality players and suffer for it. The descent into salary cap hell is often caused by a team doing everything possible to win in one season by knowingly compromising the future. The team and fans are then forced to pay for a short period of prosperity with what can be a long stretch of mediocrity or worse. This peculiar phenomenon is not found in baseball or hockey, although it is appearing occasionally in the NBA."

The moral - be careful what you ask for you just might get it.

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