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What is a Salary Cap?

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, and exactly what it could mean for them.

Definition

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 cap is well-known in the industry and professionals can earn salaries up until that number but not earn more than the number. The 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.

In Sports

America’s major sports leagues, such as the National Football League, the National Basketball Association, and Major League Baseball are all subjected to salary caps. In sports, the salary cap refers to how much a team can spend on its players according to USA Today. For example, in 2017, the NFL salary cap was $167 million. Certain positions in sports, such as a quarterback in football or a point forward in basketball, have the highest salary caps. 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.

In Government

The United States government works on a pay schedule system; this is a system where salaries are calculated based on position, security clearance, and 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.

In Business

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; however, 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.