Salary Caps

Posted on in Todd Talks by Todd Johnson

When I hear the term salary cap, I think of professional baseball or football. One of these sports leagues (the NFL) has a salary cap, and another does not (MLB). Other leagues of course have caps as well. You can even have what is called a "soft cap" like the NBA or a "hard cap" like the NFL.

A soft cap means the team can exceed the cap number and still compete for a championship. The consequence of surpassing the cap is usually some sort of fine the team owner or owners pay. In the NBA, the fine is called a "luxury tax." But, in the case of a hard cap, there are few or no exceptions for going over the cap and still being allowed to compete. Sports leagues are hardly the only place you see caps on salaries. In other industries, such as manufacturing for example, you might see a cap on the salary range for individual positions as opposed to a cap on the entire organization.

It's obvious that most employees would be against any type of salary cap, because it would limit their earning potential. In baseball, where there is no cap, the market sets salaries. When you're good at your job, owners fight over you via a paycheck. Los Angeles Dodgers pitcher Clayton Kershaw is the highest paid player in baseball. His BASE salary for 2017 is $33 million, with a signing bonus of just a touch over $3.5 million. If he were available to seek employment by other teams right now (he can't, because he's under contract), he would probably receive a significant raise. By contrast, the highest paid NFL player in 2017 is Tony Romo. Since the NFL has a hard cap, Romo makes significantly less money ($24.7 million) than Kershaw. Although the NFL earns higher gross revenues than MLB, its players make less money because of the cap.

The idea behind a salary cap in certain professional sports is to level the playing field. A league's owners don't want an owner with deep pockets locking up all the talent and other teams never being able to compete. This would make for bad television ratings and poor stadium attendance, because fans (consumers) would tire of the same teams always winning. However, due to the relative parity that exists in MLB, which has no cap, and the fact that a handful of NFL teams seem to repeat their success year after year in a league where a cap and other factors are supposed to render dynasties a thing of the past, an argument can be made that salary caps don't work.

In the world outside of professional sports, employment contracts are not as prevalent, and neither are salary caps, but they do exist. Let's say you work at a factory as a quality control inspector. We'll say for the sake of argument that this position has a salary range of $50K-$70K a year. Once you hit that $70K threshold, you might be promoted to quality manager, which has a higher salary range, so that you can still receive a raise. Or, you might be stuck making the same amount until your current salary range is adjusted for inflation or some other reason. This is where companies might start losing good employees and caps can lose their luster.

Salary caps have their pros and cons for businesses and employees. If an employee is outstanding, he or she should be compensated accordingly. Usually, if a company isn't prepared to compensate its employees in relation to their value, employees eventually will seek jobs with an employer that will.

But, imagine if all businesses had the same caps that they had to follow. How would one employer set itself apart from others to recruit and keep great employees? It's simple really: offer better benefits and perks! Wouldn't it be great to work somewhere that offered free daycare? As a parent of two young children, I would love that opportunity. You can bet I wouldn't be leaving that job unless a better deal was available somewhere else. Given the costs of daycare though, it would be hard to top that. How about free gym memberships, access to a good cafeteria, free health insurance, bonuses, vacation awards or discount programs?

The more I think about it, the more I like the idea of a cap.