Are Salary Caps a Problem?

By Moran, Alan | Review - Institute of Public Affairs, June 2010 | Go to article overview

Are Salary Caps a Problem?


Moran, Alan, Review - Institute of Public Affairs


After the Melbourne Storm scandal, is it time for the NRL to revisit the salary cap?

IPA Deregulation Director Alan Moran says yes, but IPA Research Fellow Richard Allsop disagrees.

YES

The finding that Melbourne Storm secretly paid its players more than the National Rugby League rules permitted has highlighted the nature of salary capping in Australia. Introduced by the AFL in 1987, there have been dozens of fines for infringements and clubs faced additional penalties on draft picks.

The AFL's salary capping is accompanied by other controls that make it far more draconian than others. The definitions of salaries are very tight (in 2005, St Kilda were fined $40,000 because a sponsor, Microsoft, provided players with Xbox consoles). Players are not allowed to choose their initial club and they require their club's permission to move elsewhere. In addition, the AFL controls which players may be registered and allocates a priority order for new draftees and the clubs that may choose them.

The case for a salary cap rests on creating a degree of equality within the competition. Many people argue that we need to avoid a situation whereby the only possible winners are an echelon of leading teams as in English soccer. Others point out that the World Game has become so as a result of the openness of the market for players and the ability of managers to gather promising combinations of players to obtain the excellence that attracts fans. And the fact that sustained success in England (and other countries) has been largely confined to a hierarchy of teams has not diminished the game's popularity.

Taken at its basics, salary capping in sports competitions is an agreement by a group of businesses to narrow the arena of competition. It does so largely by suppressing the wages of key employees. It is like all the nation's banks forming a cartel and agreeing that they will limit the salaries of all their front line managers and analysts. Such an agreement would boost the banks' profits or allow revenue to be diverted to beneficiaries other than the key players.

In most areas of commerce a restraint of competition of this nature would be illegal - unless in the (unlikely) event that the Australian Competition and Consumer Commission (ACCC) grants an authorisation. The ACCC would be conflicted in hearing such a case since its Chairman, Graeme Samuel, was instrumental in creating the AFL's trade-restricting cartel.

Salary capping is often associated with moral righteousness. Many people think that young sportsmen are overpaid getting $500,000 a year for kicking a ball around.

But, as with other categories of workers, placing a cap on sportsmen's high earnings brings adverse repercussions. It means some reduction in talented people choosing the profession. Given the earnings that the most successful young sportsmen can command, even with a salary cap, this might sound unlikely. However, only the real superstars obtain the million dollar payouts and no young man can predict that he will emerge in that bracket. Moreover, life at the top is only a five year window and there is a very high chance of injuries cutting that short, while reaching the required peak and holding oneself there is likely to bring longer term health issues.

Forcing down the front line employees' wages means money is diverted to other areas of spending like administration, travel, ground quality, promotion, training and so on. Such increased expenditure is likely to be less effective than spending money on attracting and rewarding the players who will give fans the excellent performances they pay to watch.

Forty years ago English soccer had a salary cap, equivalent to about twice the average worker's earnings. The English salary cap was eliminated when the cartel of soccer clubs that imposed it was confronted by another cartel, professional footballers, who saw themselves as being swind led by it. …

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