Definition of Salary Cap

What does the term "salary cap" mean as it applies to the world of sports? What is meant by the term "salary cap"?

In sports, a "salary cap" is a preset limit on the amount of money that teams can spend on player salaries over the course of one year.

Definition of Salary Cap - Financial Dictionary - MLB, NFL, NHL and NBA logosThere are two forms of salary caps - a "hard cap" and a "soft cap".

A "hard cap", which is used by leagues such as the NFL and NHL, means that teams can not spend above a certain amount or else they will be subject to potentially severe sanctions. In the NHL, for instance, if teams spend above the cap, they will be subject to fines of up to $5 million, forfeiture of draft picks and even forfeiture of games. In the 2011-12 season, the National Hockey League had a hard cap of $64.3 million.

A "soft cap", on the other hand, is when teams are allowed to spend above a certain amount if they are willing to incur a financial penalty (usually known as a "luxury tax"). Both Major League Baseball (MLB) and the National Basketball Association (NBA) employ "soft caps" with luxury taxes. If you spend above a certain amount in both leagues, you will be forced to pay a luxury tax, with this luxury tax money being distributed to teams in smaller markets. The New York Yankees, for instance, spend far above the "soft cap" every year in Major League Baseball, with the luxury tax money that they spend being distributed to smaller revenue teams such as the Pittsburgh Pirates and Miami Marlins.

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