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The Joe Sheehan Newsletter: Payroll Cap
Vol. 16, No. 146
January 28, 2025
Over the weekend, new Orioles owner David Rubenstein continued his year of being disappointing by coming out in favor of a payroll cap in MLB. While in Davos at the World Economic Forum -- the people who own baseball teams are the kind of people who go to Davos -- Rubenstein told Yahoo Finance, "I wish it would be the case that we would have a salary cap in baseball the way other sports do.”
On Monday, The Athletic’s Evan Drellich published a profile of Rob Manfred. Buried in there was a quote from Steve Greenberg, former deputy commissioner under Fay Vincent and current power broker with Allen and Co., in which he said the quiet part out loud: “The perception around baseball is that without a salary cap, its [franchise] values will lag behind, at least behind the NFL and the NBA, and that’s been the case.”
Fans, who as a class would just as soon see players play for the minimum wage and wash their own uniforms, have been clamoring for a payroll cap in baseball for years. That clamor reached a peak last week when two-thirds of respondents to an MLB Trade Rumors poll indicated they would trade the 2027 MLB season for a payroll cap in the years to follow.
A salary cap -- what I call a payroll cap and what is more accurately described as a payroll band -- is the Holy Grail for owners in major sports leagues. It’s an agreement to only spend so much on talent, to limit teams’ competition for players. In the NFL, NBA and NHL, the owners have the upper hand on largely impotent players’ unions, and can all but dictate terms of those leagues’ bargaining agreements. That MLB does not have a cap is mostly a reflection of its union, even in a lessened state, still being intact rather than broken by scabs and lockouts. The quotes above make a point that I and many others have made for years: Payroll caps are big wins for owners and losses for players.
The way caps work is that the league and players agree on how the league’s revenue is to be divided. In today’s NFL, the players get 48% of revenue, the owners 52%. (Risk of brain damage is less equally split.) That 48% share is divided among the 32 teams and becomes the cap figure. In 2024, that was $255 million per team. NFL cap rules are complicated and outside the scope of this newsletter, but team payroll must land in a very narrow range. Every team must spend, over a four-year period, 89% of the total cap amount; if a team does not, it has to pay the difference between what it did spend and that bottom number. (This doesn’t happen.) At the league level, everyone must spend 95% of the total figure accounted for.
In 2024, NFL cap payrolls ranged from $217 million to $261 million. That’s a range from 85% to 102% of the $255 million cap figure. In 2023, with a $225 million cap, team payrolls ranged from $200 million to $232 million, or 89% to 103%. You get the picture. It’s a cap and a floor and the two are very close to one another.
The NBA, which has a softer payroll cap -- loosely akin to MLB’s tax system -- and an individual salary cap, is likewise complicated. Players are guaranteed 51% of the league’s basketball-related income. By rule, the cap is $141 million and the floor $127 million. Those figures would represent a range of 95% to 105%. In practice, those figures are fiction. NBA payrolls this year range from $127 million to $237 million. Twenty-nine of the league’s 30 teams are over the nominal cap, which means you don’t really have a cap. The average NBA payroll is $180 million, which means that the payroll range is from 71% to 131% of the league average. Changes in the most recent CBA are designed to make the cap harder, but those will take years to have an effect.
What do those ranges look like in MLB? Last year, MLB teams paid $5 billion to players, an average of $166 million per team. (This is cash payroll as calculated by Sportrac. The conclusions won’t change if you use tax payrolls.) Team payrolls ranged from $315 million at the top to $62 million at the bottom. MLB imposes significant penalties for exceeding tax thresholds, but there are no mechanisms to prop up the lower end. Do the same math as we did for the NFL and NBA, and you find that the range of MLB payrolls runs from 37% to 189%.
Let’s break up this big block of text with a chart.
Ranges (top and bottom payrolls as a percentage of the average)
Top Average Bottom
MLB 189% $166M 37%
NFL 102% $255M 85%
NBA 131% $180M 71%
Now, that right-hand column, the low end of spending, may jump out at you. There has been a vocal call for, at the least, a payroll floor in MLB, to raise the spending of the cheapest teams. That sentiment is well-intentioned but pointless. Caps and floors have gone hand in hand in every system; you won’t have one without the other. If you’re calling for a payroll floor, you’re calling for a payroll cap. Again, all these systems are more accurately described as payroll bands.
The NFL system is the one that gets the most praise from fans and media, in part because the NFL is perceived to have the most competitive balance in our major sports. It doesn’t. This is well-covered ground. The erroneous perception of higher competitive balance is mostly about playing a 17-game season, which is too short for teams to fall out of contention for long and allows for wild swings from year to year based on injuries, fortune, and the impact of drafted players. To the extent NFL parity exists, it’s not due to a payroll cap, it’s just math. If MLB played a 17-game season, 24 teams would be in contention after 15 of them and we’d have even more playoff turnover.
With that said, let me focus on the NFL system, as it is the one most believe MLB should emulate. If MLB had the NFL’s payroll band, it would have a $166 million cap and require every team’s payroll to fall between $141 million and $168 million. There were two MLB teams last year with payrolls in that range. (Even the NBA’s range of 71-131% would capture just 11 of MLB’s 30 teams.) As a practical matter, shoehorning MLB teams into a narrow payroll band, even gradually, would be an enormous lift. In the short term, you’d be asking some teams to cut their payrolls by half and others to double them.
That’s not the largest barrier, however.
There are steep differences between how teams in the NFL and MLB make their money. The NFL gets two-thirds of its dollars (as of 2023) from national contracts -- linear television, mostly, but also streaming and other sources. MLB gets just 26% of its money that way. The NFL doesn’t have small markets and large markets, it has one market: the United States of America. Teams play in 30 TV studios scattered about the country, a couple of them shared, and they can be located anywhere because teams just don’t have to sell many tickets. The Cowboys sold 837,000 tickets in 2024, the most in the NFL...and fewer than every single MLB team.
There’s a persistent myth that MLB doesn’t share local revenue, but it does. It shares, in fact, more local revenue than NFL teams do. In the NFL, 34% of ticket revenue gets pooled and distributed equally. Teams get a reported $25 million apiece from that program. In MLB, teams put 48% of local revenue, net of stadium expenses, into a pool, then distributes that pool back to teams equally. The MLB system explicitly acknowledges there is more potential revenue in larger cities than in small ones and is designed to address that.
If you take nothing else from today’s piece, take this: MLB shares more local revenue than the NFL does. The difference in the two systems is entirely about revenue sources.
The actual figures are guarded closely, but estimates are that at the extremes -- think the Yankees and Brewers -- teams are losing or gaining $80 million a year from this system. (Those figures are likely to rise in the new post-RSN landscape.) The net transfers, and again, we don’t have perfect information, are along the lines of $500 million a year from high-revenue to low-revenue teams. Contrary to those who believe MLB ignores the matter of local-revenue gaps, MLB teams transfer a billion dollars every two years to address it. Without a payroll band, however, those payments have simply guaranteed profits for small-market owners regardless of how well their team performs. Revenue sharing serves as a strong incentive to not even try to win.
If you forced MLB teams into an NFL-like payroll band, that would only solve part of the problem. Per Forbes, there were three MLB teams that didn’t have even $300 million in revenue in 2023 (before local revenue sharing), and nine others that were below $325 million. Revenue sharing will add to that figure for many teams, but if you ask the Marlins, who even after revenue sharing brought in maybe $325 million in 2023, to consistently meet a $141 million cash payroll, things are going to be tight in some years. A team’s player payroll over the long term should be about 50% of revenue. Teams do have fixed non-payroll expenses, even if they tend to exaggerate them and work hard to keep the details private. Teams in large markets will have down stretches without revenue sharing to fall back on, or lose lucrative TV deals. The White Sox brought in just $288 million in 2023, per Forbes, and that may be a peak until 2027 or so.
If you loosened payroll requirements to that NBA range, it would be easier for teams to get over a ~$115 million threshold, but to what end? The most likely scenario is that teams currently below the line would cluster at it, and teams above the line might even drift down toward it. At the other end of the spectrum, teams that print money now would simply keep more of it, because they would not be allowed to compete for talent with that money.
A cap system works in the NFL because of how revenue is distributed. Most revenue is national, there just isn’t that much difference in local revenues, and even those differences are muted by light revenue sharing. The Cowboys are out on an island; the other 31 NFL teams earned amounts ranging from $495 million to just $729 million, just 1.5x. Take out the Yankees similarly, and MLB teams ranged from $241 million to $549 million -- well more than 2x from top to bottom.
People like Rubenstein and Greenberg keep asking for a limit on payroll, but they avoid any discussion about mechanics. To make even the wide-version payroll band in MLB work, you’d have to have the Yankees, Dodgers, Mets and their brethren give even more of their money to the Pirates, Brewers, and A’s than they are now. To make a narrow band work, it would take an increase in revenue sharing that, I believe, would break the game. As I wrote in December, I think we’re getting close to that point even without a payroll band system. The Yankees need somebody to play against, but they don’t necessarily need 29 somebodies, not at a cost of $100 million a year.
An MLB payroll cap would likely come with positive changes for some players. The minimum salary would rise to pay young players more like how they’re paid in capped leagues. We could see shorter times to free agency, as the owners would be less concerned about restricting the market for talent. The players are, depending on how you calculate this, probably taking home a smaller percentage of revenue than their NBA and NFL peers right now, and that would likely change. (I don’t think that should be the sole measure of a labor system’s fairness, but many do.) You can craft an argument that a capped system has benefits for some MLB players, especially given that the current, outdated rule set has been exploited by teams over the last two decades.
The thing is, you can make those positive changes, such as raising the minimum salary or shortening the time to free agency, independent of a payroll cap. Those are long overdue adjustments to a rule set that is based on the arc of baseball players’ careers in the 1970s.
The barrier to implementation of a cap system, though, isn’t sweetening the deal for the players. It’s the owners whose teams are already carrying the league. The fight over their money is the one that has to be resolved before MLB can even consider a payroll band.
