Fixing Major League Baseball: Does MLB Need a Salary Cap?

In the last installment, which you can read here, we established that the current Competitive Balance Tax system in Major League Baseball is ineffective. This conclusion left us with several questions, including “should it be replaced?” This article will work to address this question by looking at examples of leagues without a salary cap and seeing if they set a strong example for or against a salary cap in MLB.

 

Looking at the Other Leagues

 

Unlike the other three major North American sports, Major League Baseball has never had a salary cap, instead choosing to operate with a CBT. However, they’re not the only major professional sports league without one; most prominent North American esports and European association football operate without salary caps. While some might argue that they’re examples of successful leagues without a salary cap—proof that MLB doesn’t need one—both have strong and clear reasons why they don’t operate with a cap to date, none of which apply to Major League Baseball.

 

Esports

 

With respect to esports: first, we have to recognize that we’re talking about an industry that encompasses a number of different leagues across many different video game titles, so using the all-encompassing term “esports” is similar to grouping together all traditional sports under one banner. There are two primary reasons why no esports currently have a salary cap system: recency and complexity.

Part of the reason there is no collective bargaining in any esports is how quickly the industry has come to prominence. While, yes, esports have existed since the 1990s, they have experienced an explosion in popularity over the last decade. To put the sport’s infancy into perspective, the League of Legends Championship Series, the top League of Legends professional league in North America, arose just 7 years ago. Whereas the youngest of the four major North American professional sports leagues, the NBA, was founded in 1946. When a league is brand new, it is still unclear what needs would have to be addressed in collective bargaining, which delays the entire bargaining process and with it, the idea of a salary cap.

But it’s also more involved than just a recency issue: with esports, unlike traditional sports, there are three parties that would need to come to an agreement in collective bargaining– players, teams, and game developers- which muddies the movement towards collective bargaining. These factors clearly aren’t at play in MLB, as there are no “founders of MLB” who need to be included in the agreements, as evidenced by the fact that they’ve agreed to many CBAs with the players. However, with salaries rising across the esports industry and a majority of teams operating at a loss, many esports leagues could be likely looking at the formation of players’ unions and salary caps within the next few years.

 

Association Football

 

With respect to European association football as a whole, the issue is far more complex. Whereas MLB, the NBA, the NFL, the NHL, and even top esports leagues, are unique in their prominence and competition level in their respective sports, the English Premier League (UK), La Liga (Spain), Serie A (Italy), and similar various national association football leagues are in direct competition with one another for talent. If any of these leagues were to introduce a salary cap, it would significantly hamper the ability of their clubs to compete for prominent international talent.

So the answer then seems obvious: create a universal salary cap across all European leagues, right? There are a number of problems with that, starting with currency. European football is divided primarily into two currencies: the Euro and the pound sterling (UK). The fluctuating exchange rates would make the administration of a salary cap difficult.

So how does the NHL have a cap with 7 Canadian franchises and 24 American ones? How does MLB operate with a Canadian team in addition to 29 MLB teams? Well, all NHL and MLB teams have agreed to use the U.S. dollar for payroll, something it is unlikely Britain would ever agree to do, as they’ve spent recent years fighting hard against the Euro. Additionally, each European country has a different tax system, opening the door to massive inequality between high tax nations, such as Belgium, from attracting high-priced players, particularly when a member of the top French league, AS Monaco, plays in a locality with no income tax whatsoever. While each state in the United States has a somewhat differing tax structure, they’re similar enough to be functional, as are the systems in the United States and Canada.

There are additional issues within each system. The English football league system, in and of itself, consists of four levels where teams can be promoted or relegated to higher or lower levels based on their success or failure. Naturally, the popularity, attendance, revenue, and spending are higher at each subsequent level, as the competition level is higher. How do you create a salary cap system across all four levels when the makeup of each level is so vastly different? It would be like creating a cap system for both MLB and MiLB but if MiLB were separate and in competition with all the other levels of minor league baseball.

As a matter of fact, the issue is coming to a head as we speak: last month, the English Football League, which organizes the lower three levels of association football, passed a salary cap measure for the lower two leagues: League Two (the lowest of the four levels) is limited to £1.5 million ($1.95M USD) per year, League One to £2.5 million ($3.3M USD) per year. Interestingly though, the cap operates more like a CBT, as teams who go over will have to pay a fine to the teams who are in compliance.

All is not fine and dandy in England, however, as the union that represents English footballers is claiming they weren’t properly consulted on the cap’s enactment and plan to arbitrate the issue with the league. The resolution of this matter is not particularly clear. While it seems that the issues that the top leagues face- primarily international competition for players- shouldn’t affect the lower leagues as much, it is still an issue they have to deal with and a salary cap will hurt their ability to spend on foreign talent and make competitive pushes to higher levels.

It should be noted that MLS has a salary cap, but because it is almost universally seen as a lesser level of competition than the European leagues, its salary cap is unrelated to its ability to pry top talent from the rest of the world. Typically, the decision for an elite player to come to MLS is more about coming to America than anything else.

 

Bridging the Gap

 

There actually is a variation of a salary cap in European association football, however, in the form of the Financial Fair Play Regulations. Since 2013, if any UEFA (Union of European Football Associations) club spends more than 70% of its revenue on player salary, it triggers a financial investigation where clubs have to provide information on how they intend to remain financially viable or they could face drastic repercussions from UEFA.

While one may initially think this is an attempt at parity, the FFP regs were not implemented for parity purposes. Rather, they were introduced to meet the third prong from our salary cap benchmarks- to ensure that clubs weren’t spending unreasonable amounts on player salary, thus preserving the long-term financial health of the sport.

As we touched on last week, Major League Baseball has a somewhat similar system to Financial Fair Play called the debt service rules, under which an MLB team is generally not allowed to hold debt equal to twelve times its annual earnings minus expenses (it used to be 10x but was modified under the 2012 CBA to create a complex accounting formula). But even in 2011, when the LA Times reported that nine of thirty teams were not in compliance with these rules, it received little attention and was swept under the rug by then-Commissioner Bud Selig and then-Executive Vice President of Labor Relations and now Commissioner- Rob Manfred. However, in the Sports Business Daily article linked above, Dodgers CFO Tucker Kain stated that the team would comply with the debt service rules, suggesting that this rule actually does get followed in MLB, unlike the LA Times report suggests.

The MLB CBA gives the Commissioner significant powers to both remedy and punish non-compliance with the debt service rules, but seeing as we’ve never really seen discipline stem from them, one can argue the rules lack some teeth. The same is not true of the FFP regs.

Since FFP’s enactment, a major club has already been punished: in February of this year, Manchester City, one of the top clubs in England, was banned from all UEFA competition for two years and fined 30 million Euro ($35.4M USD) for overstating their sponsorship revenue to appear under the 70% wage to revenue ratio. To put that into perspective, imagine the Yankees or the Dodgers getting a two-year playoff ban on top of a $35M fine. Not for cheating on the field. Not for betting on your team. Just for spending more than you’re supposed to. A somewhat similar issue cost John Coppolella his job, so we know MLB takes this seriously in certain areas.

Ultimately, Manchester City’s ban was overturned by a third-party arbitration court, who rejected the sponsorship inflation issue but still found that Manchester City obstructed UEFA’s investigation and accordingly upheld a €10 million ($11.8M USD) penalty against City.

 

 

Conclusion

 

In summary, eSports and European football do not have salary caps, but each has unique reasons to not have one that do not apply to MLB, and thus they cannot be used as examples of why MLB doesn’t need a cap. We’ve shown that the CBT is ineffective and with esports and European association football not translatable examples of why MLB doesn’t need a salary cap, it’s becoming quite clear that MLB needs a salary cap. Several questions remain: What does a salary cap system would look like? How does a salary floor actually operate? These questions and more will be answered next week.

 

Photo courtesy of Arturo Pardavila III (https://www.flickr.com/people/63704136@N00) | Adapted by Justin Paradis (@freshmeatcomm on Twitter)