To cap or not to cap salaries in the world of sport?

Around the world, countless people look forward to watching their favourite sports teams take the field on ‘match day’. The popularity of sport for entertainment and social cohesion across the world is a large reason why it is one of the most widespread forms of entertainment available to the public.

The popularity of sport has often blurred the lines of the purpose of the organisation. Does a sports team exist to generate profits (like a conventional private sector business) or does it exist to provide maximum value (in the form of on-field performance) for the fans?

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Some academic papers have postulated that increased profits reduce performance, as less is spent on the resources that drive the team eg: players, training facilities.

This suggests that the goals of the owners of the teams (profits) and the goals of the fans (strong on-field performance) may be in competition with each other.

This is not dissimilar to the shareholder capitalism versus stakeholder capitalism debate over companies’ purpose that has taken the world by storm in recent years.

Read: Exec salaries: Will a cut boost morale?

One of the largest, if not the largest, costs to a sports team is the players’ salary bill. Christiano Ronaldo was the first team sports star on the Forbes top 100 celebrity earners of 2019, raking in approximately $105 million (all revenue sources included). Seeing a figure like this being earned by one player, within a single year, makes one question whether this is in fact justifiable. A large part of why Ronaldo, Lionel Messi and Neymar da Silva Santos Júnior occupied spots four, five and seven respectively on the Forbes top 100 celebrity earners of 2019, is a result of the nature of the market within which they operate.

Viable markets

Football/soccer is a global sport, which presents players with multiple, financially-viable markets (England, Italy, France, Germany and many others) where they can apply their trade. As a result, the top talent can demand a price that is high enough to ensure that only the most lucrative teams can bid for their services.

This ‘tournament theory’ behaviour ensures that this market operates in an auction type environment, with the player often being attracted by the highest bidder with the deepest purse – the theory in personnel economics used to describe certain situations where wage differences are based not on marginal productivity, but instead upon relative differences between the individuals.

In contrast to this, a sport such as American football is predominantly played in one country (the US) and this country has a global monopoly on financial resources and talent within the sporting code. The National Football League (NFL), a professional American football league consisting of 32 teams, has the power to make global changes to the game as its market share of the global game is so large that for all intents and purposes “the NFL is the game”.

NFL vs EPL

One of these rules that the NFL has imposed on the league is a salary cap which sets the maximum amount that a team can spend on players per season. This salary cap is currently set at $198.2 million. The team that spent the most on players spent the full $198.2 million. The team that spent the least spent $112 million. This results in a ratio of 1.77 when dividing the highest salary bill by the lowest salary bill.

In contrast the English Premier League (EPL) is the top level of the English football league system. Contested by 20 clubs, it operates on a system of promotion and relegation within the English Football Leagues – the ratio between the highest and lowest salary bill in the league was 25.5 since the salary bill is not capped. This differential between the two leagues is a direct consequence of remuneration regime being used within each league (capped or uncapped).

The table below illustrates the ratio of the salary bill and the ratio of the club value between the highest and lowest teams in each league.

EPL (Soccer) NFL (Football)
Salary bill 25.5 1.77
Club value 12.35 2.85

The table above indicates that in terms of financial resources and remuneration practices, the NFL teams are significantly more homogenous (smaller ranges of salary bill and club value) compared with the teams in the EPL (large ranges). The table below investigates the impact of this on the competitiveness of each league.

The rank of each team’s position in terms of the salary bill, club value and end position on the league’s points log at the end of the regular season (2019/20) have been compared. The results of testing these results via a two-way correlation calculation yields the following results:

EPL Team Rank NFL Team Rank
Salary bill 0.7 0.45
Club value 0.81 0.26

* Values range from 0 (no correlation) to 1 (perfect positive correlation)

The way to interpret the correlation coefficient is that the closer the value is to 1, the stronger the relationship is with performance. In other words if a team has a high correlation between salary bill and performance the coefficient will be closer to 1. The table indicates that when comparing the link between the salary bill, the club value and on-field performance there is a much stronger positive correlation within the EPL compared with the NFL.

In other words, the size of salary bill and the value of the club are much better predictors of the team’s on-field season performance within the EPL compared with the NFL.

This suggests that greater equity in the spread of financial resources and a hard cap on remuneration practices within the league promotes the competitiveness of the league (makes it harder to predict a winner based on financial parameters). There are multiple outside influences to consider as well such as Fifa financial fair play rules and the NFL draft, but the evidence presented suggests that equity promotes competition.

Read: Rich Americans plow their fortunes into European soccer bargains

It would seem that if the EPL wanted a more competitive league, not based on financial strength, then all they need to do is follow the lead of the NFL? Unfortunately this not true.

The NFL has the monopoly on the global American football game and therefore there is no other league to compete with for talent. This is not true of the EPL, which competes with multiple lucrative soccer leagues around the world. If the EPL was to implement a salary cap, the top talent would be attracted to other leagues that do not have a salary cap. This may lead to the league being more competitive internally, but would reduce the league’s global standing due to fewer world class players being attracted to the EPL.

If a wage cap was to be introduced into soccer this would have to be done by Fifa on a global scale or else the top players will simply flow to the most lucrative leagues.

Is this any different to the world of business?

Executive pay has been in the spotlight for many years while stakeholders debate whether executive pay is justifiable or not. Many calls have been made for companies to be more ‘wage gap conscious’ when setting the remuneration packages of senior executives.

These calls are noble from a societal point of view, however, the organisation that is being asked to do this will face a similar problem to that of the EPL teams if they introduced a salary cap: talent would flow to the most lucrative offer if all other companies remain uncapped.

This suggests that similar to how Fifa would be required to intervene if a salary cap was to be implemented in the global soccer leagues, centralised or global norms/standards would be required in business to avoid talent moving to the most lucrative offer available both in a country or in other countries (if other companies remained uncapped).

Read: Naspers CEO bags R276m in annual remuneration

The nature of the labour market and ‘war for talent’ make it a delicate balancing act for organisations to be able to appease the calls for more ‘capped’ executive pay internally while remaining externally competitive in the ‘uncapped’ labour market.

Bryden Morton is executive director at 21st Century.

Listen to Nompu Siziba’s interview with Tyrone Jansen, associate director of human capital at Deloitte Africa:

Source: moneyweb.co.za