The NFL Salary Cap and an Incentive to Not Win

Many sports fans see salary caps as avenues via which "small market" teams can compete with large market teams.  There are two problems with this thinking.  First, if teams maximize profits the value of a player to a team in a profit-maximizing world is his contribution to team revenue which is, in turn, dependent on two things:  his his contribution to winning and fan willingness to pay for winning.  A cap on salaries, payrolls, etc. does not change the value of individual players.  It just constrains what they can be paid monetarily in any given year. 

Shrewd management and salary cap loopholes allow teams to find ways around salary caps so that players can be paid a sum close to their value, whatever form the "payment" might take.  Deferred payments, anyone?

And then there's always the hardness of the cap - or lack thereof - which can also be manipulated by shrewd management.  Via Skip at TSE comes this gem in the NFL:

At the end of a season, if performance bonuses previously included in a Team's Team Salary but not actually earned exceed performance bonuses actually earned but not previously included in Team Salary, an amount shall be added to the Team's Salary Cap for the next League Year equaling the amount, if any, by which such overage exceeds the Team's Room under the Salary Cap at the end of a season.

This dizzylingy obtuse regulation is unwittingly having a profound effect on the NFL's economic landscape.

The level playing field the NFL's salary cap supposedly created?

It's a myth.

Because of a variety of complicated tricks that savvy NFL team officials have figured out, teams can manipulate their salary cap to the point where their cap figure winds up millions of dollars higher than the teams they're competing with.

And it's not all about writing contracts to create cap room.  Skip writes:

If you write player contracts with incentive bonuses that are likely to be met (i.e. with application, effort and good fortune), you create cap room for next season. Paid bonuses -- normally a happy, desirable outcome of incentives -- reduce allowable spending in the following year. Enter crafty management, and incentive clauses purposefully designed to not be attained. And coaching decisions to ensure this result when cap room next year is more valued than your best effort now. I detect a slight whiff of rent dissipation: the cap creates rent for the owners, and the accountants dissipate it.

Taylor and Trogdon (T&T) wrote about the evidence of tanking in the NBA to improve draft status.  The NFL's cap manipulation game provides an incentive for teams to not put forth full effort to win games.

Suppose your best player has will earn a bonus if he plays in the last game of the season and his team will win if he plays.  If the value of additional cap room next year is greater than the value of winning the game, then there is an incentive to "rest" the player.  Granted this is not an incentive to intentionally lose as documented by T&T, but it is an incentive not to win.

Comments

[JasonQ]

That's a fairly simplistic way to look at the rule. The rule is designed to give players the chance to earn money that is more commensurate with their performance. Guidelines for the bonuses are strictly for statisical performance, not playing time, conduct, or anything else. A team makes a provision in a contract that will give a player a bonus if he reaches a statistical benchmark next year that he reached in the last year. Teams have to account for that bonus in their salary cap during the year. So if the bonus isn't paid, then they get the cap space refunded into next year's cap.

There are two moving parts that you don't account for: 1. incentives have to be reachable, 2. players would have to augment their contracts every year.

1. Since the incentive is based on something that was previously reached, then it's possible that the player can reach it again. Teams will try to gamble and put in these clauses, but there is the very real possibility that the player will earn the bonus. That tends to keep the bonus reasonable.

2. Most players signing deals of significant value, sign them for over 4 years. In order to include incentive based bonuses, they would have to redo the deal every year. Players and agents aren't going to do that without a signing bonus, which would negate the payoff of the cap refund somewhat.

So, theoretically a team could play well one year, redo contracts of everyone who did well, and then make sure through coaching, and tanking, that the players did not play enough to reach the levels for incentives. But a team would never sacrifice success in a year before the season began to do that. And remember, each team is not an island unto itself. If a team attempted this, the other 31 owners would quickly move in with fines and penalties.