Definition of Salary Cap

What does the term "salary cap" mean in the world of sports? What is the definition of the term "salary cap"?

A salary cap is when a ceiling is implemented on spending in a professional sports league. There can be a maximum spending ceiling for a player, a maximum spending ceiling for an entire team, or sometimes both.

In North America, three of the four major sports leagues (NFL, NBA, NHL and MLB) use a salary cap.

The NFL has the most owner-friendly Collective Bargaining Agreement, so there is no surprise that they have a hard salary cap. A "hard salary cap" means that teams can not spend over a certain amount of money per year, or else they will face consequences (financial consequences or draft picks).





In the 2018 year, for instance, NFL teams had to operate within a hard salary cap of $177.2 million, meaning that they could not spend over this amount.

The NHL (National Hockey League) is the other major North American sports league that employs a hard cap. NHL owners locked out players for an entire year in 2004-05, and this led to the league implementing a hard salary cap, which remains in existence today. The NHL's hard salary cap is directly linked to the amount of revenues that the league's franchises take in every year.

The NBA (National Basketball Association) doesn't have a hard salary cap - instead, they employ a soft cap plus luxury tax system. This means that teams are allowed to spend above the cap in order to retain their own players, though teams will be forced to pay a "luxury tax" if they spend over a certain threshold. Teams that repeatedly spend above the tax threshold will be labelled as "repeat offenders", and they will be forced to pay a higher amount of tax. These luxury tax revenues are collected by the league and redistributed to the league's lower revenue clubs.

Finally, Major League Baseball does not use a salary cap at all. Instead, they rely solely on a luxury tax system, where teams with higher payrolls pay luxury taxes that are redistributed to smaller market teams. This has led to a considerable amount of criticism over the years, as paying luxury taxes is simply a cost of doing business for the bigger market teams, and smaller market teams have essentially no chance of winning a title.

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Major League Soccer employs something of a salary cap, though "designated players" only contribute a fixed amount to the cap.

In 2018, for instance, Sebastian Giovinco of Toronto FC received a total of over $7 million in total compensation, though only a small fraction of this number counted towards the cap.

European football clubs are not subject to any sort of a salary cap, though they must operate within the confines of the "Fair Play Regulations" which seek to ensure that teams are not spending more than what they earn. This is done to prevent teams from getting themselves into precarious financial situations, as well as to prevent rich owners from spending much more than what their teams are bringing in.

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The main reasons for salary caps - parity amongst teams and cost certainty for owners.