The term “salary cap” is generally only heard when a major American sports team is striking against it. However, this is a common practice in several professional industries, including business and government. Those who may apply for a position that utilizes a salary cap will need to understand:
- how it works
- its benefits and drawbacks
- what it could mean for them
What is a Salary Cap?
A salary cap, which is also known as a wage cap, is a rule that is written out in a contract or otherwise legally stated that places a limit on how much an employee can earn. This means that the salary cap is well-known in the industry. Professionals can earn salaries up until that number but not earn more than the number. The salary cap is different based on the industry where it is used and may be subjected to raises. All salary caps are enforced by the government or other professional organizations.
Salary Caps in Pro Sports
In sports, the salary cap refers to how much a team can spend on its players according to USA Today. Salary caps were created to limit financial risk and preserve the financial integrity of the league. It also prevents teams with higher revenue from signing all of the top players. It limits how much each team can spend on player salaries including:
- base salaries
- signing bonuses
- roster bonuses
- other performance incentives
Many of America’s major sports leagues are subject to salary caps including:
- National Football League
- National Basketball Association
- National Hockey League
In fact, Major League Baseball is the only men’s professional sports league in North America without a hard salary cap. Teams must follow salary cap rules in order to avoid major sanctions. Penalties for breaking the rules deter organizations from breaking the cap.
The salary cap in pro sports is adjusted from year to year. In 2023, an NFL team’s salary cap was $224.8 million. The NHL average team payroll for the 2022-23 season was $82.5 million. The team salary cap is typically announced at the beginning of the league year.
The NFL Salary Cap Explained
The salary cap, along with its rules and regulations is set by the NFL collective bargaining agreement (CBA). This agreement is between the NFL players and the league. So, how is the NFL’s salary cap calculated? The NFL salary cap is calculated by dividing a percentage of revenues into three categories including:
- League Media revenue
- NFL Ventures/Post season revenue
- Local revenue
That number is divided by 32 (the number of teams in the league). In 2022, the CBA specified that players should get 48% of revenue sharing profits. Their revenue share equaled the 2022 base salary cap of $208.2 million.
Do teams need to spend all their money each year? Teams typically hold money back as a strategy to help manage their finances. This is called salary cap space. Salary cap space is the difference between the salary cap and the total salaries of the team’s players under contract. The team can use this money to:
- sign new players
- re-sign existing players
- make trades
This unused cap space can be carried over from one season to the next. There is some degree of strategy involved in cap space. Teams that have a higher salary cap space can afford higher priced free agents or offer more lucrative contracts to their best players.
Is There a Salary Cap for Individual Athletes?
There is no salary cap for professional athletes. Teams are willing to pay a higher salary to acquire top athletes. Certain positions in sports, such as a quarterback in football or a point forward in basketball, demand the highest salaries. In 2023, Patrick Mahomes had the highest QB cap hit which was just shy of $40 million. Because sports teams are often competing for valuable players, the cap is enforced to ensure that no one team can outspend their rivals to create an unstoppable and expensive team.
The United States government works on a pay schedule system; this is a system where salaries are calculated based on:
- security clearance
- whether someone is working in a position that fits the general schedule or the executive schedule
Because all pay grades come with set entry-level and exit-level salaries, all government employees are subject to a wage cap. This includes all positions, including President of the United States. Like many other areas that utilize the cap, the government can and does raise the limit depending on inflation and a variety of other factors.
Some businesses may utilize a cap; this is generally only reserved for executive and C-level positions. While this is not enforced across the board, many organizations place a limit on salaries to ensure that employees are paid fairly and proportional to their duties and responsibilities. In some cases, salary caps include the amount of money that a professional can make even from bonus forms of compensation. Most business professions do not have a set cap so it is unlikely that a professional will come across this problem. It is advised that prior to signing a contract or entering into a work agreement with a company that potential employees inquire about the practice.
Related Resource: Top 6 Online PhD in Sport Management
Benefits and Drawbacks
Salary caps have both benefits and drawbacks regardless of the field a person is in. Because salary caps are set for certain positions, it also ensures that there is a salary floor; that is, the minimum salary amount that a person can earn. This provides professionals with fair pay, giving them the chance to have a set living wage while earning promotions. Caps also ensure that a business, whether it is a sports team or a working organization, has a set budget that it does not exceed in terms of human resources.
The drawbacks are the flip side of the benefits; capping wages encourages professionals to seek better opportunities elsewhere, including overseas. It can also sometimes create a sense of distrust between employees and employers, especially if the organization is doing very well and the employees are not seeing the profits trickle down to them.
Salary caps continue to be a major topic of contention, particularly in the sports world. While it does have its drawbacks in every sector where it is used, there are some benefits as well. Everyone should know what a salary cap is and how it might affect them, especially if they are entering an industry where the practice is common.