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Salary Caps in the United States: How they work and their effect on the compensation of sports professionals

Aug 15, 2018 | Economic Environment

What are Salary Caps, where do we see them and how do they work?

Salary caps are a tool utilized by various leagues, mainly in the United States, to promote competitive balance and assure that teams within a league are able to compete with each other. The issue of competitive imbalance is something that leagues have long been trying to resolve and in altering this issue, leagues have introduced various forms of salary caps that we’ll observe throughout this article. Despite what many people believe, salary caps are not essentially limits on team or player salaries. They set a band for both the upper and lower salary limits to payrolls for each team within a league. They take different forms according to the league, based on the league’s goals, and they can be categorized as soft or hard salary caps depending on how drastic they are. Salary caps are found in nearly all the major leagues in the United states including the NFL, NBA, NHL and MLS but not in Major League Baseball.

In the following table, you will find information on each individual league’s salary caps accompanied by any exemptions that might come with them:


2017/18 Salary Cap

(Million USD)

2018/19 Salary Cap

(Million USD)


Hard/Soft Cap

 NFL $167 $177.2 No material exemption – Salary caps set firm limits. Hard Cap
NBA $99 $108 Yes. Main exemptions are:

1)      Rookie exemption – A team can sign a rookie to their first contract even if it’s above the salary cap limit.

2)      Mid – level exemption – A team can sign one player at the league’s average salary even if it’s above the salary cap limit.

3)      ‘Larry Bird’ exemption – A team can re-sign a player it already has on its roster even if it’s over the salary cap limit.

Soft Cap
 NHL $75 $78-82 No material exemption – Salary caps set firm limits. Hard Cap
 MLS $3.845 $4.035 Yes. Main exemptions are:

1)      Designated player rule – Allows an MLS team to sign up to three players that will be considered outside the team’s salary cap. This rule is also known as the ‘David Beckham Rule’.

Soft Cap


Luxury Tax:

With regards to the MLB, instead of using salary caps, the league has imposed a luxury tax also known as ‘Yankees tax’. The way luxury tax works is that when a team exceeds a certain cap, it has to pay tax to the League for the amount that it has exceeded the cap for. As any other tax system, there are different tax brackets and as a team spends more above the cap, they pay higher taxes. About 75% of the money collected by these taxes go to players’ benefits and the rest go to an industry development fund.

Do salary caps really serve their purpose? Do they increase competition?

Undoubtedly, salary caps have had an impact in reducing competitive imbalance between teams but it’s highly arguable as to the extent they’ve achieved that. In certain leagues such as the NBA and the MLS, whose salary caps are filled with exemptions, they have done little to prevent the concentration of talent in a few teams. Considering the recent trades of the Golden State Warriors and the formation of a super-star team composed of all-star players, it seems that imposing salary caps and then giving lots of exceptions undermines the salary caps themselves and reduces their effectiveness. On the contrary, leagues such as the NFL and the NHL that implement hard salary caps are more effective in preventing teams to buy their way to the top by massively spending on acquiring super-stars.

Nevertheless, Salary caps by themselves cannot and will never be able to alone tackle the issue of competitive imbalance amongst teams. In simple words, salary caps, together with the revenue sharing system, the drafting system as well as other systems put in place, are able to reduce competitive imbalance but will never be able to fully remove it. By themselves, salary caps are a step amongst different measures taken to promote competition and, in that sense, they do promote competition.

How do salary caps affect the compensation of sports professionals?

Salary caps do not have any real effect on the compensation of elite sports professionals since teams can allocate the largest part of their allowable payroll funds towards the acquisition of such players.  However, for lower-tier sports professionals these salary caps do have an impact, in the sense that lower-tier players have to share in terms of salary what’s left after the fat salaries of star players!

Another effect of the salary cap is the release of many higher-salaries veteran players to other teams once their production starts to decline from the elite level.  Therefore, mature sports professionals playing in the United States, should take this into account during their financial planning process.

For more information on Salary Caps and Competitive Balance in the United States, and their effect on the compensation of sports professionals you can get in touch with us at [email protected] .