How to Navigate a Monetary Minefield: Your Guide to Major Sports Cap Situations

JEC CHICAGO — What’s your favorite sport to watch? Football? Basketball? Hockey? We all love to watch the players, and we all love to see them on new teams. After all, why not? It’s always fun to watch a sports league evolve and follow a changing environment. But have you ever wondered why it always seems like some teams can get many of these coveted players and others seem to struggle to get anywhere near enough? Well as teams collect players, they lose money that they can spend on other players, with the amount of money they have in total being called the salary cap. But it’s really not that simple.

How is it Calculated?

The salary cap is a concept used to even the playing field between teams in a sports league, with sports such as basketball, football, and even hockey using the concept. The salary cap, in the case of the aforementioned sports, is often derived from the overall revenue made by the respective sports league from the previous year.

For example, in 2020, the National Football League, or the NFL made 12 billion dollars, with a big part of this coming from refreshments, merchandise, broadcasting deals, sponsorships, etc. This figure is multiplied by an agreed-upon value set by the CBA (Collective Bargaining Agreement). This value is determined by the players and the sporting league that sets rules for contracts, income, and other monetary policy. Using our NFL example, we multiply the 12 billion dollars by 51.5% giving us roughly a little above 6 billion dollars. And for our second to last step in the equation, we subtract our number of 6.185 billion from the potential benefits the NFL gives to the players which includes but is not limited to: insurance, medical assistance, accident coverage, flexible spending etc (Ford 2020). This amount for 2020 was set at a .185 billion. Subtracting this, we get 6 billion, which in real terms is the amount of money that all the 32 teams have to spend on players. Dividing this by 32 (the amount of teams in the NFL), we get about 175 million, or the current amount of 2021, as deduced by OverTheCap (OverTheCap 2021). Now this number, assuming no players were on each team, would be distributed around the needs of the team, which leads us to the next topic. So now that we have all the components of our formula, we can put it all together. The 12 billion dollar revenue is multiplied by the 51.5% value from the CBA, then we subtract .185 billion, and take our result of that and divide it by 33, giving us the 175 million dollar figure that General Managers know all too well.

How do Contracts Work?

Everytime a contract is made in the league, it is given an overall worth. For example, in the NHL, Patrick Kane of the Chicago Blackhawks currently has a contract of 8 years that is worth 84 million dollars, (Sportrac 2021). But the 84 million isn’t just paid all at once, nor is it all made up of the player’s total salary. It’s often made up of two components: signing bonuses and annual salaries. An annual salary is exactly what it sounds like — what the player makes annually. But a signing bonus is the same, but it’s distributed throughout the duration of the contract. See, when someone signs the contract, they get a signing bonus, but the bonus is given in equal increments throughout the duration of the contract, so sort of like the annual salary. So in our example, Patrick Kane’s signing bonus was 44 million while his average salary was spaced out to counterbalance the signing bonus, with a higher signing bonus leading to a lower annual salary. But, every year of his contract, the overall combination of his salary and signing bonus should equal his cap hit, which is 10.5 million.

Now you also might be wondering what a cap hit is. A cap hit is essentially the maximum amount of a player’s total earnings per year. So a player could have a cap hit of 10.5 million and that would mean, at a max, you would pay them 10.5 million a year and not a penny more.

This system is only specific to the NHL. For the NBA and NFL, teams are allowed to adjust cap hits by altering the amount a player is paid per year, often bulking up the wealth in certain years of the contract to better suit whether the team wants to be competitive now or in the future.

So What’s the Minefield?

The minefield consists of what major league sports teams have to do to ensure their team is competitive against other teams, now and in the future.

So in the NFL or NBA, they often have to decide to load a contract with cash at a certain point or to spread it out. And at the end of the day, these decisions all come when a player is signed. The conundrum often draws huge interest since the signing of players is essential for teams to compete. And, to add onto it, professional sports is a minefield of injuries, making it so that if a player were to get injured, their contract might allow them to get paid while they can’t even play, making it a lost opportunity of cash for the team’s management.

But the one thing that I’m sure all sports fans can agree on is that professional athletes are certainly the reason the world goes round — after all, what is life without your favorite pastime?