The Potential Benefit of a Salary Cap for MLB Players

Let’s begin by acknowledging the obvious: the entire premise of this piece is probably absurd. Considering that the Major League Baseball Players Association’s top priority over the last several decades has been to resist the implementation of a salary cap, it is highly unlikely that the players will reverse course and seriously consider agreeing to a cap on team payroll anytime soon. Opposition to the very notion of a salary cap is simply too deeply ingrained in the union’s culture.

But even if the players are unlikely to agree to a salary cap in the foreseeable future, there is a legitimate case to be made that they should at least consider the possibility during their upcoming collective bargaining negotiations with Major League Baseball.

Indeed, in many respects, the players have been subject to a de facto salary cap for quite some time without receiving any of the accompanying benefits.

As I’ve noted in several pieces this year, MLB players have seen their share of the league’s overall revenues drop substantially over the last 10 to 15 years. Depending on how you calculate it, the percentage of league revenues going to the players has fallen anywhere from 13% to 16% since 2002 or 2003.

And as I’ve previously explained, there are a variety of reasons why the players’ share of MLB revenues has declined over this time period: teams have gotten smarter about doling out lucrative, long-term contracts to players on the wrong side of 30; there is little economic motive for teams to spend a significant portion of their newfound television revenues on player salaries; and revenue sharing and the luxury tax have further reduced the incentive for the largest market teams to increase their payrolls.

Taken together, this means that while the MLBPA may be able to incrementally increase the players’ share of league revenues by adjusting MLB’s revenue sharing and luxury tax framework, the only way that the union can ensure that its membership will receive a guaranteed percentage of the league’s revenues in the future is to seek some form of salary floor.

By establishing a baseline amount that every team must spend on player payroll each season, and by linking that floor to MLB’s overall league revenues, the union could ensure that its players will receive a consistent minimum percentage of the league’s growing profits.

For example, in the National Basketball Association, each team’s player payroll must be no less than 90% of the league’s salary cap (which itself is calculated based on a percentage of league revenues). So in 2015-16, with the NBA’s salary cap set at $70 million per team, each club must spend at least $63 million on player salaries. By adopting a similar approach, MLB players could thus ensure that they receive a guaranteed percentage of the league’s revenues.

Despite this potential benefit, the MLBPA has nevertheless historically opposed any suggestion of a salary floor, believing that it would serve as a precursor to an eventual salary cap. Indeed, MLB owners would likely reject any attempt to establish a fixed minimum share of league revenues for the players without simultaneously creating some sort of corresponding limit on the overall percentage of revenues that can be spent on player salaries. So because securing a salary floor would also almost certainly entail the union agreeing to some form of a salary cap, the issue is probably a non-starter from the players’ perspective.

In reality, however, even though the MLBPA would never admit it, the union has already effectively agreed to a form of a salary cap: the luxury tax.

As I noted back in May, because baseball’s luxury tax threshold has not risen at anywhere near the same rate as the sport’s revenues in recent years – and because the players have agreed to a series of increasingly stiff penalties for teams that do exceed the payroll limit – the luxury tax currently imposes a real check on MLB teams’ payrolls. With the recent exception of the Dodgers – who are themselves reportedly becoming much more budget conscious this offseason – MLB teams have become quite reluctant to let their payrolls substantially surpass the current $189 million luxury tax threshold.

Thus, for all intents and purposes, the overwhelming majority of MLB teams are currently operating as if they are subject to a $189 million salary cap, while none of the few teams that have surpassed the luxury tax threshold have been willing to significantly exceed the mark for more than a short period of time.

Of course, the MLBPA would undoubtedly argue that there is a significant difference between a luxury tax and a salary cap. The distinction is really just semantics, though.

Both a luxury tax and a salary cap fundamentally serve the same purpose: deterring teams from spending more than a specified amount on payroll. The question is just how rigidly that limit is enforced. And while it is true that a salary cap typically imposes stricter restrictions on team spending than does a luxury tax, this is not always the case.

Take the NBA again, for example. Although the league has a salary cap, NBA teams can – and often do – exceed the limit, sometimes by a significant margin. Those that do are forced to pay a luxury tax, similar to the one employed in MLB.

The biggest difference between the NBA and MLB, then, isn’t the fact that the former has a salary cap while the latter does not. Instead, the primary difference between the two leagues’ economic models is that by agreeing to a “salary cap,” NBA players in turn receive a guaranteed percentage of the league’s revenues, while MLB players do not.

This difference has significant financial implications. Because NBA players receive a fixed share of their league’s revenues, they will receive a considerable windfall when the NBA’s massive new national television contracts go into effect next season. Conversely, because MLB teams are not required to share a fixed percentage of their revenues with the players, MLB payrolls have not grown nearly as quickly in recent years as one might have expected in light of the enormous influx of television money that has been flowing into the sport.

So from the MLBPA’s perspective, there would appear to be little reason not to at least consider pursuing a salary floor, as the luxury tax is already subjecting players to most of the negatives of a salary cap without providing any of the accompanying benefits.

Now sure, if the players could get the owners to agree to both substantially raise the luxury tax threshold and significantly lower the penalties for exceeding the limit – making the luxury tax a much less restrictive system for teams – then that might very well prove to be a more attractive solution. But getting the owners to sign off on such a proposal is unlikely, potentially requiring the sort of prolonged work stoppage that the players have been unwilling to endure over the last two decades. Even then, a less restrictive luxury tax would not ensure that the players will receive a proportional share of the league’s growing revenues in the future.

That all having been said, it is worth noting that even if the players were to secure a fixed share of MLB’s revenues, that shift would itself create a new set of bargaining challenges for the union. In order to receive a meaningful percentage of league revenues, the players would have to reach some sort of consensus with the league as to how its revenue ought to be calculated. Reaching a satisfactory agreement on this point has proven to be a challenge for NBA players, as the league’s current definition of “basketball-related income” – from which the players’ share of revenues is determined – provides a number of loopholes for its teams to exploit.

And to be sure, depending on how a salary floor was implemented, it could potentially have significant implications not only for the manner in which revenue is distributed among the players, but also for how teams operate in the future. Without an accompanying, significant increase in the league minimum salary, for instance, a salary floor could – at least initially – shift an even larger percentage of payroll dollars to veterans at the expense of younger players, as some teams could be forced to quickly spend lots money on lower and middle-tier free agents in order to surpass the minimum team salary threshold. As a result, some teams may be forced to make decisions that aren’t the most economically efficient, simply to guarantee that their payrolls will be above the league minimum.

Upon further examination, these sorts of implications might very well deter the players’ union from pursuing a salary floor. Still, it is becoming increasingly apparent that the MLBPA’s traditional, steadfast opposition to a salary cap is no longer ensuring that the union’s membership will receive a steady, proportional share of the sport’s revenues. The question, then, is how far the union is willing to go to adjust to its changing economic circumstances.

Nathaniel Grow is an Associate Professor of Business Law and Ethics and the Yormark Family Director of the Sports Industry Workshop at Indiana University's Kelley School of Business. He is the author of Baseball on Trial: The Origin of Baseball's Antitrust Exemption, as well as a number of sports-related law review articles. You can follow him on Twitter @NathanielGrow. The views expressed are solely those of the author and do not express the views or opinions of Indiana University.

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8 years ago

Can there be a salary floor tax? Any team under the threshold of let’s say 80,000,000 pays a tax of 50% of the difference. That way if a team is at 60 mil, the next 20mil would only effectively cost them 10.

8 years ago
Reply to  NJ

Call it the Parsimony Penalty.

Deja Vu
8 years ago
Reply to  Sabertooth

Didn’t…didn’t we just do this?

Deja Who?
8 years ago
Reply to  Deja Vu

Didn’t…didn’t we just do this?

8 years ago
Reply to  NJ

Didn’t the Marlins receive quite a bit of criticism for their low payroll in light of revenue sharing? Was there any official penalty imposed by MLB?

8 years ago
Reply to  Albatross

Loria has demonstrated, repeatedly, that he’s completely immune to mere “criticism.” I can’t find it now but I remember reading that the Commissioner’s Office was supposed to be imposing some kind of penalty but if it happened it clearly wasn’t anything significant.

8 years ago
Reply to  joser

Found it. Relevant paras:

Additionally, under the new CBA’s revenue sharing agreement, the commissioner may consider imposing penalties for teams who do not use those proceeds to specifically improve club performance. This means Loria and Samson may not be able to satisfy major debt obligations, like the one the team owes to pay for their part of the stadium, using revenue sharing proceeds that the Marlins will benefit from in years to come.[16]

The convoluted MLB revenue sharing provisions in the CBA include adjustments in revenue sharing based on a stated “performance factor” of each individual club. In 2012, the Marlins ranked 26th in performance factor and will be slotted 20th for the upcoming 2013 season.[17] What this means is the Marlins will continue to reap the benefits of revenue sharing under the new CBA where protective provisions fail to exist when team executives and owners unload massive salary obligations in trades such as the one that Loria and Samson recently pulled off.

So, basically: nope.

(FWIW, [16] links back to Fangraphs, specifically this article by Mr. Grow’s predecessor at the Fangraphs Business/Law desk, Wendy Thurm.)

8 years ago
Reply to  joser

Given that pretty much all intra-league business stays behind closed doors, I’d say the answer is: “we don’t know”. The Marlins did go out and make a big splash in free agency right after that, so whether they were penalized or not, they did jump into line and start spending.

8 years ago
Reply to  Albatross

Revenue sharing money is supposed to be spent on baseball operations, but MLB’s rules are unclear as to whether that has to be spent on the MLB payroll or whether the club can count all its expenditures like draft signing bonuses, minor leagues, etc. The Marlins skated by on that technicality for years, as did the Pirates for a few seasons.

8 years ago
Reply to  NJ

This is a great idea, only 100% of what money is not spent on players per the floor needs to go to revenue sharing. This will stop teams from making extra profits by deliberately fielding cheap and crappy teams.