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Wednesday, February 25, 2009
Salary caps, payroll caps, and revenue sharing
Suppose that MLB imposed a payroll cap that is three times that of the previous season’s league average payroll. Would that be bad for anyone? Since no one has a payroll that high, then, no, it would not be bad. What if the cap was 20% higher? Well, then yes, the players would think it’s bad. Suppose that MLB imposed a salary cap that is 50% of the payroll cap. Would the players care? Since the top-end is around 30%, then no, they wouldn’t care. If the salary cap is 10% of the payroll cap, then yes, the (best) players wouldn’t like it. Suppose that MLB gave 80% of their revenues to player compensation. Well, the players would love it.
The idea of caps and revenue sharing does not, by itself mean it’s bad for the players. Indeed, as NHL players are finding, it may actually be a good thing. Young players are earning almost as much as free agents. Owners are forced to distribute a certain amount of money, in effect, having a profit cap for themselves.
So, it is very possible to construct a scenario where players will be more than happy with a payroll cap, salary cap, and revenue sharing. Indeed, if I was an owner, I would not do this. We can almost surmise that the spending practices of the GMs over the last two or three years is evidence of restraint in spending on undeserving players. As long as owners keep hiring GMs who can value a player like he would any other asset class, then it is the players, not the owners, who will be begging for a cap.
The player plan has been to presume as if GMs were behaving as if players were holding guns to their heads. One by one, as GMs eyes open to the reality that you can spend lavishly on great players, and control spending on players who don’t deserve it as much, players realize that their guns are not loaded.
The one downside to revenue sharing is that there is disincentive on the teams’ local operations. If for example 100% of revenue is shared (say to share all the revenue equally after all expenses are paid), then there is little incentive for the Phillies to have promotional days. So, you have to find the right balance from the teams’ point-of-view to share revenues so that they can continue with the overall league-level revenue growth, and at the same time, share enough revenue so that all teams can bid on the same players.
The NHL may have an ideal model.
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