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Salary cap is best long-term system for MLB

By Joel Litvin

The core issues dividing Major League Baseball and the Major League Baseball Players Association are familiar to anyone who has observed labor disputes in the major U.S. sports leagues over the past 30 years. The players want to ensure that they receive an equitable share of the revenue generated by their performance on the field. They also want to play for teams that are more concerned with winning than attaining high draft positions.

For their part, MLB owners want a player compensation system that promotes competitive balance and doesn’t favor deep-pocketed, large-market teams. They also seek to pay out a percentage of revenue that enables them to make a profit and promotes investment in the game for the benefit of teams, players, and fans.

In 1983, the NBA and the National Basketball Players Association came up with an innovative system for accomplishing the goals of both sides — the salary cap, which in various forms now governs player compensation in the NBA, NFL, and NHL. Under a pure cap system, all teams are subject to a uniform limit, and floor, on payrolls that are calculated based upon league revenue. As a result, the best-managed teams succeed, regardless of their resources, which achieves a competitive meritocracy that gives fans in all markets hope that if their team makes smart personnel decisions, it can compete for a championship.

From the player perspective, the beauty of the cap system — perhaps better named the salary cap/revenue sharing system — is that it delivers the players a guaranteed share of the league’s revenue, so as the league’s fortunes improve, player compensation increases in lockstep. If the league achieves a windfall from gambling revenue, say, the owners are not free to pocket all the proceeds; instead they have to pay the players their agreed-upon share (roughly 50% based on the current labor agreements of the three leagues with caps).

This model is such a good deal for players that the idea actually originated on the player side of the table. Ed Garvey, then executive director of the football players’ union, proposed in 1982 that the NFL pay the players 55% of league revenue in exchange for a wage scale. The NFL rejected the proposal, only to embrace the concept years later.

The players also benefit from the salary floor that is part of a cap system — this addresses the players’ concern about teams stripping their rosters as part of rebuilding strategies that make them uncompetitive. The salary floor requires all teams to maintain competitive payrolls. 

So if a cap system is such a good idea, why hasn’t either side proposed it? From the player side, the MLBPA has a long history of opposing a salary cap because it limits what players can earn on the free market. But the experience of the other leagues has shown that the players’ quid pro quo for agreeing to a cap — a guaranteed share of league revenue — has enabled their salaries to keep pace with league revenue growth, whereas MLB player salaries are reportedly falling behind baseball’s top-line growth. It appears that the free market has been less advantageous to players than the mandated spending on payrolls that is driven by the cap system.

From the owners’ perspective, after losing the World Series in 1994 because of their demand for a cap, they seem to have grown comfortable with a system where, unlike in other sports, teams are free to allocate any share of league revenue they wish to player salaries. (Of course, MLB teams also pay substantial amounts to support the minor league baseball system, far more than the player development costs in the other leagues.) However, a cap would give the owners protection against a scenario where salaries begin to outpace revenue, squeezing the teams’ bottom lines. In addition, uncapped payrolls have led to competitive imbalances that Commissioner Rob Manfred has identified as a top priority in this round of bargaining. 

Caps aren’t perfect. While they address critical economic and competitive matters facing a league, attention must also be paid to distributive issues of how each side’s share of the pie is allocated among its respective constituents. Minimum and maximum individual player salaries can help ensure a fair split of the player share among individual players. And a robust revenue-sharing plan can help ameliorate the pressure felt by low-revenue teams to reach payrolls driven by league-average team revenue. These details can require difficult negotiations not just between players and owners but among members of each side. However, with a cap in place, both sides at least know that the foundational issues of competitive balance and the fair division of industry revenue between players and owners have largely been addressed. 

Moreover, as partners in the success of their collective business, the two sides have an added incentive to work with each other. For example, when NBA players are asked by the league to wear mics during games, they know that saying yes will make the games more attractive to fans, which in turn drives ratings and, ultimately, rights fees, half of which go to the players. This alignment of interests benefits not just the players and owners but also fans, sponsors, TV partners, the media, and the game as a whole.

There is little chance that, despite the advantages of a salary cap system, either MLB or the MLBPA will propose it. However, it may well be the best way to address the concerns both the players and the owners have about baseball’s current economic and competitive structure. 

Joel Litvin is a consultant, a lecturer in Columbia University’s sports management program, and the co-founder and operator of a nonprofit. He serves on the boards of the Naismith Basketball Hall of Fame, MSG Entertainment, and USA Climbing. He spent 27 years with the NBA, most recently as president of league operations until 2015. 

Questions about OPED guidelines or letters to the editor? Email editor Jake Kyler at jkyler@sportsbusinessjournal.com

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