Monday, September 05, 2005

NBA Salary Cap Issues

It has been an interesting off-season in the NBA and the player movement I've seen so far confirms some of the problems I've noticed with the salary cap system over the years. Loosely speaking, the NBA salary cap works as follows:
  • All teams have a "soft" salary cap that is set annually based on league revenue.
  • A team exceeding the cap basically cannot sign free agents to contracts, with some exceptions.
  • Each team has a mid-level exception worth about $5 million (the avg. annual player salary) that it can use to sign one or more players even when it is above the cap.
  • With some caveats, a team can always re-sign its own players at any salary, even when it is above the cap. (This is called the Larry Bird rule.)
  • A team exceeding the cap significantly beyond a "luxury-tax" threshold, has to pay a dollar-for-dollar luxury tax on the amount by which it exceeds the threshold.
  • The luxury tax collected is redistributed across all teams using an elaborate formula that favors teams under the cap.
The ostensible goal of this elaborate system is to ensure parity among all teams, denying the advantages that big-money teams in large markets would otherwise have in hoarding talent. There is no denying that the rules have helped smaller teams be competitive -- one need look no further than the last few years where San Antonio and Detroit dominated while the big-spending Knicks and Lakers were crippled -- but there have been a number of negative effects as well. I list some of them below:
  • The Sterling strategy: While most teams are in the business of trying to assemble the best team they can given the limitations of the cap, some owners such as the L.A. Clippers' Donald Sterling have figured out an alternative path to profitability that has little to do with winning: put together a mediocre team at a low price and wait for luxury tax payments from the other teams to boost revenue. Notable examples: L.A. Clippers, New Orleans Hornets.
  • Cap-less hell: One of the consequences of a soft cap is that most of the teams are over the cap, and need to be so in order to stay competitive. The consequence, of course, is that these teams have to go through hell in order to improve via free agency. Often, the only way to improve is to rely on trades that bring in highly overpriced talent that some other team is willing to get rid of to obtain cap relief. Of course, if the talent doesn't work out, the team is stuck in hell even longer. Notable example: New York Knicks.
  • Rich-get-richer syndrome: One of the consequences of Cap-less hell is that very few good teams are capable of handing out big contracts to free agents. The consequence is that the non-superstar free agents, perhaps starting on the downhill side of their careers, are starved of any meaningful contract offers. And given a choice between going to a bad team for no money and going to a good team for no money, they choose the latter. The consequence: the really good teams keep getting better via these underpriced free agents, while the bad teams just stay bad. Notable examples: L.A. Lakers (Karl Malone and Gary Payton, 2003), Detroit Pistons (Rasheed Wallace, etc., 2004), San Antonio Spurs (Michael Finley, Nick van Exel, 2005)
  • Inequitable salary distribution: Related to the rich-get-richer syndrome is the fact that players do not get paid in accordance with their abilities. Since there is a loose "limit" on the total amount of money that goes to players, the fact that one player is being overpaid today means that another player is going to be underpaid tomorrow for no fault of his.
The ideal solution would be to release the limit on player salaries but to transfer the loss burden to exactly those teams that ended up overpaying their players. I am not sure how this would be done but perhaps the elimination of the salary cap combined with a much steeper luxury tax might be a start.


Anonymous Anonymous said...

Should there be a Salary Cap in Football?
Personally I think there should be! It’s just getting to be stupid money in football at the top of the premiership!
It’s always the same teams at the top proving that football success is based purely on money which ruins the idea of it being a sport! They’ve done it in rugby, basketball, hockey and American football and it makes the sports more competitive and better to watch!
I do a little Spread Betting from time to time and most matches don’t hold much surprise who is going to win, its boring! I want to see a team at the bottom pulling off an amazing season beating last seasons winners in a close fought battle!
Make things fair! It shouldn’t be about money!
All there is all that money in the premiership and barely any of it stays in the UK so it’s not even helping the economy!
From my Spread Betting, if I ever win big (which is never, I’m unlucky) it’s still nothing compared to the average premiership players weekly wage!
This Rant was brought to you by Spread Betting Spike. 

4/15/2008 7:20 AM  

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