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Salary Cap Management – Financial Planning and Analysis
A “salary cap” is an agreed-upon limit for player compensation on teams within an organized league, such as the NFL. Salary cap "management" involves applying the principles and practices of accounting to a very specific budgetary challenge: setting salaries and benefits for the players on a team's roster.
But the reach and impact is much greater: Salary cap management helps define a team's global business plan in aspects as wide-ranging as cash-flow planning, ticket pricing and sales management, marketing and media strategies, sponsor partnerships and execution, corporate business planning and even capital investing and debt management. It is not a management tool as much as it is a single metric – albeit a very large one – in establishing a full “financial statement” view of team operations.
So how does a salary cap work? Here are some of the key elements:
- A salary cap is specific to a single season. In the case of the NFL, it is an established limit for the entire roster for each team, where the team is able to manage the allocation of those funds among individual players as they wish.
- The compensation includes salary, which is earned during the regular season on a weekly basis, as well as other incentives and signing bonuses that can be earned throughout the entire league year.
- The salary cap primarily functions to put a limit on spending with the goal of creating more equity among competing teams in the league. This limits the ability of some larger teams in larger markets from outbidding smaller teams on top talent, which would clearly skew the competitive advantage on the field.
The goal is to create a league where all participants have a comparable investment in their rosters and, therefore, a more equal chance of competing on the field, which makes the competition more compelling and more marketable. Tickets don’t sell if the game isn’t exciting.
Additionally, the salary cap now requires minimum levels of spending over a multi-year period so that teams are expected to spend, on average over time, a comparable amount as all other teams in the league. There are two reasons for this:
- It prevents some teams from avoiding making roster investments while still benefiting from league-wide revenue sharing and other benefits.
- It also limits teams, at least theoretically, from having wild swings in their spending and establishes a more consistent investment over time, creating a more stable and sustainable level of spending.
Two other factors also come into play:
- The NFL's new Collective Bargaining Agreement (CBA) sets a league-wide floor, which means all 32 teams, as a whole, are required to spend a minimum amount. If the league fails to spend the minimum, the difference will be assessed by the league and distributed to the appropriate players.
- There is also a minimum salary based on a player’s accrued seasons. This means that, in order for a team to field a full roster of 53 players, there is a minimum distribution to all players. This somewhat limits the team’s ability to unfairly allocate the salary cap to only marquee players. Still, the gap between the minimum salary and the amounts earned by those top players can be surprisingly wide.
Contrary to what many believe, a salary cap is not related to only “salary” or cash spending. It is, in fact, an accounting treatment, with very specific rules that are applied to all of the player contract elements similar to the way GAAP (Generally Accepted Accounting Principals) are applied to external financial information.
Applying these rules effectively achieves the traditional business goal of spreading costs over time in a way that approximates the value of the transaction. In this case, the "cost" is player compensation and the "value of the transaction" is represented by the revenues earned from ticket sales and sponsorships.