Saturday, April 24, 2010

Time to ditch the Salary Cap

The fallout continues from the latest Australian rugby league salary cap breach which has seen champions Melbourne Storm hit with the largest punishment in the code’s history. The Storm were stripped of their 2007 and 2009 premierships, not allowed to compete for points this season, forced to return $1.1m in prize money and fined $500,000. Their breaches included $1.7m in salary over five years for the News Ltd owned team. News Ltd CEO John Hartigan has distanced himself from the fraud and former Club boss and now rugby Melbourne Rebels boss Brian Waldron has fallen on his sword as the supposed “architect” of the rorts. (photo:Getty)

However there are a lot of questions unanswered. As many commentators have pointed out, the case brings into question ownership of Australian sporting teams. There are also obvious conflicts of interest between News Ltd as owners and media reporting on the issue. It seems difficult to believe that senior administrators such as Hartigan are as innocent as they portray themselves especially as News have admitted it does not have a “satisfactory explanation” as to what the players’ agents knew and when.

But questions much also be asked about the efficacy of the salary cap system itself. None of this would have occurred if there was no salary cap and it has been of dubious benefit in keeping the competition open and clubs from falling into financial ruin. The salary cap is an American import. In the US sports administrators first brought in salary caps in the 1980s to avoid the ruinous escalation of player salaries and competitive imbalance leading to boring games. The positives also include the ability of smaller clubs able to keep their star players.

But some experts have viewed salary caps as a collusive resort by clubs to maximise league revenues by controlling labour costs at the expense of less competitive balance within the league. Although European football also has dangers of competitive imbalance and financial instability it never followed the American example. As the University of Zurich noted in a 2008 paper, The labour relations approach employed by the hermetic American major leagues is not feasible within the European association-governed football pyramid. Another key difference is European clubs are treated as win-maximisers and not as profit-maximisers in sports economics literature: Kesenne and Jeanrenaud argue the most important divergence between the USA and Europe is that American clubs are business-type companies seeking to make profits, whereas the only aim of most European clubs so far is to be successful on the field. However in recent years UEFA and the clubs have begun exploring options due to the general perception that competitive balance in European club football is declining and a large number of clubs are accumulating ever-increasing debt.

Like European football clubs, Australian sporting clubs were also considered win-maximisers for most of their existence. Matters began to change in the late 1980s as first Australian Rules and then Rugby League began to move to national competitions. In 1987 the then Victorian Football League (renamed to AFL in 1990) brought in the cap as the Brisbane Bears and West Coast Eagles joined the competition. Up to then the biggest Melbourne clubs Carlton, Essendon and Collingwood had dominated the competition and the salary cap was seen as an equalisation policy (as well as a means of ensuring the poorer Melbourne clubs would survive in a national setting).

The then NSW Rugby League competition (renamed NRL in 1995) also brought in a salary cap in 1990 after the Brisbane Broncos, Newcastle Knights and Canberra Raiders had taken the league beyond the Sydney suburbs. Unlike the AFL however, the NRL has to deal with the problem of players leaving to play in lucrative overseas markets but the league believes this is an acceptable price to stop richer clubs dominating. The problem is, however, it does not completely stop that domination. In the last 12 years, Melbourne and Brisbane have won three times each – and it is no coincidence both clubs are owned by News Ltd.

The fact remains that in both AFL and NRL codes the history of the cap has been most honoured in the breach. The new Sydney Swans breached the VFL cap in the very first season and were fined $20,000 for doubling the cap. In NRL there have been 13 known breaches in 20 years involving multiple clubs. In AFL there have been at least 16 breaches in the 23 years of its existence and there have also been breaches in the next level down including most recently in the South Australian SANFL when Norwood was fined $50,000 and excluded for 12 months from registering any players outside its promotional boundary zone after a serious breach of the 2008 cap.

Like many good ideas, the salary cap is one prone to the law of unintended consequences. As sport becomes big business, its owners and controllers will stop at nothing to achieve success. It is all too easy to avoid scrutiny and the Storm debacle was only uncovered by accident. In my view, it is time to remove the cap. It won’t affect lower income clubs who can barely reach the cap ceilings now and it will drive more honest behaviour in the big clubs and patrons will get to judge exactly how much their stars are earning. As in every other occupation, the market should be best judge of salaries not the administrators.

1 comment:

Fuzz said...

Not a bad read. If we're talking ideas on how to not see this happen again instead of removing the cap altogether I'd rather see the introduction of a 'soft cap' that the NBA uses.
In simple terms there's a set salary cap but clubs are allowed to exceed it if they like.
There is a penalty for the excess though known as the 'Luxury Tax' whereby for every dollar the club spends on contracts over the salary cap they pay a dollar in 'Luxury Tax' to the league.
The league administrators then distribute those monies at the end of the season to grass roots projects and clubs who didn't exceed the cap.
It allows for clubs who can afford to exceed the cap to do so but with the 100% tax they can't simply buy titles and with the redistribution they're also forced the contribute to the health of the game as a whole.