Exam 2 Flashcards
- Distinguish between general skills and specific skills (in terms of human capital). Understanding how the skills are obtained and how they impact pay.
General Skills – A skill that is very basic. Fundamentals of the sport, rules of the sport, etc.
i. The minor leagues
ii. You pay for this
Specific Skills – Learning a specific system within the sport
i. Your employer pays for this
- Understand marginal revenue product and the profit maximizing point between MRP and wage rates.
a. MRP = MR * MP
b. MRP is the foundation of what everyone is paid
c. An employer will hire you when the wage rate (MC) = MR
- What are the three main problems with determining ones MRP?
a. What is the output of the player?
b. Statistics –> output
c. Value of the output
- Refresh your understanding of monopsonies.
a. Single buyer in a market structure
b. The player is the single seller of their talent (Monopsony)
c. The league is the single buyer of the players talent
d. This is why there are unions, help make sure the single buyers (the league) pay players fairly
e. Monopoly + monopsony = bilateral monopoly
i. Optimal level is based on negotiations
What gives the leagues monopsony powers?
Leagues have a monopsony because
i. There are no competing leagues
ii. Free agency
Started because of the
reserve clause
iii. Reserve clause
Deemed illegal
The reserve clause states that you may not pay for any other team unless you get traded
If you decide to not sign the contract, the league would blacklist you- Why are sports unions considered hybrid unions?
a. Craft union – Focuses on a craft such as plumber, electrician, etc. (Skill based)
b. Industry union – Focuses on a specific industry such as UAW
c. Hybrid union – Sport labor unions. Takes from both craft and industrial unions
- Wins produced formula
a. Per 48 minutes = (Points + Offensive rebounds + (.5 * defensive rebounds) + (.5 * blocks) + (.5 * assists) + steals) – (turnovers + fg attempts + (.5 * free throw attempts) + (.5 * personal fouls)) = WINS * 1.65 MILLION = MRP
- Be able to describe what a salary cap is and how it promotes competitive balance.
a. Salary caps are neither a salary limit nor a cap
b. They set a band on salaries: both upper and lower limits to payrolls (not individual salaries)
c. Take qualifying revenue (QR) of league
Not all revenue “qualifies”
Definition varies from league to league
- How does the salary cap promote competitive balance?
a. It keeps spending within certain limits leading to no team with the absolute best players
- In the NFL, what is the player’s share of ‘average revenue’?
a. 42% of all revenue
i. Of that 42%, 55% of broadcasting revenue, 45% of licensing, 40% of local revenue (parking, concession, etc)
- In the NFL, what is the minimum the league must spend? What is the minimum each team must spend?
a. Of the 42%, each team must spend 89% of the total cap and the league must spend 95%
- What is a credited season in the NFL
a. Must be on the 52-man roster and play in at least 3 games
- Under what conditions could a player not earn a credited season?
i. Exempt Commissioners Permission List
ii. Reserve/Physically Unable Perform List
iii. Practice squad
iv. Injured Reserve
- How are player minimum salaries in the NFL determined?
a. The number of credited seasons
- What impact does injured reserve have on the player and the team?
a. They are typically out for the remainder of the season
b. Not on the 52-man roster
c. You can be cut and signed by another team
d. Salary still counts towards the cap
e. IR-Return designation – allowed to come back after being on IR
- What are split contracts and how do they impact the cap?
a. Your contracts are set at a certain level, then when you get hurt it drops to a lower level
Players try to avoid split contracts
Typically used on young unproven players (late draft picks)
Veterans will sign splits to prove they can stay healthy
You cannot sign a split contract if you’ve had 6 or more accrued seasons (6 credited games)
- How does deferred compensation impact the salary cap (what is it and how do players and teams benefit)
a. Players receive salary for services rendered in previous seasons
b. A team and player can agree to defer any type of compensation
c. Teams are legally obligated to pay deferred compensation
d. Money counts toward the cap in the year it’s secured
e. The cap hit is the PV of the amount being differed
- What cap relief can a team get for signing a qualified veteran player?
a. They can sign ‘qualified contracts’
They will get paid their minimum and the cap hit will be based on a two year level
b. Paid in cash at the minimum salary based on their experience
- In the NFL, what is the Top 51 Rule?
a. An offseason rule
b. Teams can expand their roster size from 52 to 90
c. Helps teams accommodate 90 salaries
The top 51 contracts in the offseason count towards the cap
- In the NFL, what is the rookie salary cap?
a. A cap within the salary cap
b. Teams must set aside funds to pay newly drafted players.
c. This is not additional money to spend, all rookie salaries count toward the cap.
d. Actually, the calculation is kept secret
- How does the Top 51 rule impact the draft?
a. Assume team has $6,046,013 to spend on rookies
b. Team has 6 draft picks: 6, 37, 70, 104, 224, and 225.
c. The #6 pick will cost $3,002,182 against the cap.
d. However, once signed, he will bump out the number 51 player, who had a base salary of $510,000.
e. Thus effective cap cost is $2,492,182
- In the NFL, what is meant by ‘black-loading’ contracts?
a. The big money is paid near the end of the contract
- In the NFL, what is the 30% rule?
a. The contract/year cannot increase by more than 30% each year
- In the NFL, distinguish between likely to be earned incentives and not likely to be earned incentives. Understand how each impacts the cap.
a. Likely to be earned – included in the cap
Achieved it in the last season
b. Unlikely to be earned – not included in the cap
Did not achieve it in the last season
- If a team submits an offer for a restricted free-agent, how does that impact the cap?
a. The amount gets transferred to the new team
- What is dead money and how does it impact the cap?
a. The cap hit from a player being cut from the team that still has money left in the contract
- In the NFL, explain the Barry Sanders Rule
a. Prevents players from signing a huge contract, collecting the signing bonus, then retiring
b. If you retire soon after signing a contract, you must pay back some of the bonus
- In the NHL, explain the relationship between league revenue and the salary cap.
a. The cap is based on league revenue
b. When League Revenue is below $2.2 billion = 54%.
When League Revenue is between $2.2 billion and $2.4 billion = 55%
When League Revenue is between $2.4 billion and $2.7 billion = 56%
When League Revenue is exceeds $2.7 billion = 57%
- Be able to define the salary cap ceiling and salary cap floor
a. Salary cap ceiling
Maximum a team must spend
Varies year to year. Dependent on previous seasons revenue.
No player may earn more than: 20% of that team’s cap
b. Salary cap floor
Minimum a team must spend
Varies year to year. Dependent on previous seasons revenue.
- In the NHL, how much can a team exceed the cap to pay performance bonuses?
a. Performance bonuses
i. 7.5% of the cap can be spent on the performance bonuses
- How does long-term injured reserve impact the salary cap?
a. It gets some relief
- When does a team take a full cap hit vs. a discounted cap hit?
a. Full cap – If you play more than 50 games
b. Discounted cap hit – If they play in less than 50 games
- Be able to calculate a discounted cap hit.
a. (Accrued games * cap hit) / number of games
- What is a buried contract and how is the cap hit calculated?
a. When players on a one-way contract are demoted to the AHL
- In MLB, what are the tax rates for offenders?
a. 1st time – 20%
b. 2nd time – 30%
c. 3rd time and above – 50%
- In MLB, what are ‘surcharges’ and why were they included in the new CBA?
a. A charge in addition to the tax if a team goes over the threshold
i. Two tiers
1. $20 million-$40 million over = 12%
a. $30 million over means you are $10 million into the threshold so you will be taxed 12% on that $10 million
2. $40 million + over = 1st time offender – 42.5% and 2nd time offender – 45%
- In MLB, if a team exceeds the luxury tax by $40 million, what happens?
a. If you are $45 million over, 20 million is taxed 12% and the other 25 million is taxed at either 42.5% or 45% based on # of offenses
- Be able to calculate the luxury tax for a team (typically an Excel contract)
a. 2017 dodgers payroll = $244 M
b. 2017 threshold = $195 M
c. 5X offender
d. What is the luxury tax
i. $49 M over so…
1. Dodger tax
a. 2.4 M @ 12% * 20M
b. 9 M @ 45% * 9 M
2. Yankee tax
a. 24.5 M @ 50% * 49M
- How is the NBA salary cap calculated?
a. Cap is based on Basketball Related Income (BRI)
Long list of items.
Also includes a business that the league, league entity or team has at least 50% ownership stake.
b. Cap is set between 44.7% of the projected BRI
League and players associate negotiate projected BRI during July Moratorium.
Subtract benefits
- How much of the cap must the teams spend?
a. The teams must spend 90% of the cap
Of that 90%, 50% of than number is guaranteed to be returned to the players
- How are the minimum salaries determined in the NBA?
a. Based on the number of years in the NBA
The more years you play, the higher your minimum and the longer of a deal you can sign
- How are the maximum salaries determined in the NBA?
a. 6 Years or fewer (pro) max = 25% of salary cap or $9 million (greater of)
b. 7-9 years (pro) = 30% of cap or $11 million (greater of)
c. 10+ years (pro) = 35% of cap or $14 million (greater of)
- What is the Derrick Rose Rule?
a. A team can designate a certain player who has less than 6 years played to move up to the second tier as a maximum (7-9 years pro)
i. Requirements:
1. Play in two all-star games or
2. Named all-NBA twice or
3. Voted MVP
i. Bird exception
Must be your own free-agent and on team roster for at least 3 seasons. Max contract length is 5 years.
ii. Early Bird
Must be your own free-agent and on team roster for at least 2 seasons. Max contract length is 2-4 years. Max contract is limited to 175% of previous season or league maximum
iii. Non-Bird exception
Must be your own free-agent and on team roster for at least 1 season. Max contract length is 4 years. Contracted limited to 120% of previous years contract
i. MLE Non-taxpayer
Team must be below the apron and stay below the apron. Max contract is $8,641,000 with max contract length of 4 years.
ii. Taxpayer (Mid-Level Exceptions)
Above the apron. Max contract is $5,337,000M/yr with max contract length of three years.
iii. Room level
a. Available to teams far enough below the cap that they do not qualify for other exceptions.
b. Max salary is $4.328 (17-18)
c. Cannot be used if biannual or any other MLE is used.
d. Once used, biannual or any other MLE cannot be used.
2. All categories can be used on multiple players
3. Can be used every year
a. Biannual exception
Team must be below the apron and stay below the apron. Max contract is $3,382,000/yr
Minimum Salary Exception
Minimum salary with contracts limited to 2 years. Can be above or below apron, you just can’t use it to exceed the apron.
d. Disabled Player exception
i. Sign a replacement player up to 50% of the injured players salary
ii. Team has to petition the league for this exception
e. Reinstatement exception
i. Player resigned by existing team up to his previous salary level.
- Explain the luxury tax and how it’s calculated.
i. Set at approximately 53.51% of BRI (changes every year)
ii. Teams pay a tax that increases for every $5 million over the cap
iii. A team $15 million over the cap must pay a $45 million tax
- What are the two types of free agents?
a. Restricted – The team has the first right of refusal
i. Based on accrued seasons (3 necessary)
b. Un-restricted – You can sign with any team
- Explain the invariance principle.
a. Resources will go to where they are valued the most, invariant of any other factor
Teams will pay a player more than the others because they value him the most
- Define the statutory labor exemption
a. If you have a CBA, you cannot go to the courts. CBA’s are exempt from anti-trust law
- What is the Rozelle Rule?
a. Since the gentleman’s agreement broke down, if a team signs another team’s free agent, they must compensate the team that that player came from
b. Turned the Rozelle rule into a trade
c. The commissioner decided what the compensation was
- What is the Plan B rule?
a. Result of the Rozelle Rule failing
b. Each team can pick 37 players and protect them (team has first right of refusal)
- What is an ‘accrued season’ in the NFL?
a. Must play in at least 6 regular season games
b. Need at least 3 accrued seasons to be considered for RFA
- What are the four different tender options in the NFL?
a. The first-round tender
b. The second-round tender
c. The original round tender
d. First right of refusal
a. The first-round tender
i. If another team signs your UFA, (team opted not to match it) you get a first-round draft pick
ii. Usually very good players
b. The second-round tender
i. If another team signs your UFA, (team opted not to match it) you get a second-round draft pick
c. The original round tender
i. If another team signs your UFA, (team opted not to match it) you get draft pick in the round of the player signed
d. First right of refusal
i. You don’t have to give the player up
- Why wouldn’t an NFL team attach first round tender to every contract?
a. Because it would be harder to sign that player because teams don’t want to give up a first-round pick
b. They cost millions of dollars to put them into a contract
- When does a player qualify for UFA?
a. Their contract is expiring, and they have 4 or more accrued seasons
b. If an UFA signs after July 22nd, the player must be traded, not signed
c. If an UFA signs after week 10, they cannot play for the remainder of the season
Unless the team did not give them a tender/tag
- What are compensatory free agents?
a. If you lose more free agents than you gained, you get a pick in the draft
b. Rounds 3-7 is when the compensatory picks come into play
c. Max of 4 compensatory picks/draft
- What are exclusive rights free agents?
a. No more than two accrued seasons
b. Player can only sign with their existing team
What are the three franchise tags in the NFL?
i. Inclusive franchise tag
ii. Exclusive franchise tag
iii. Transition tag
i. Inclusive franchise tag
- Most common tag
- Your team is giving you a 1 year tender offer (120% of previous year)
- Can receive offers from other teams
- Pay is to be the average of the top 5 players at your position. Or 120% of your previous salary; whichever is higher
- If the player refuses the offer, they must give up 2 1st round picks
ii. Exclusive franchise tag
- Pay is to be the average of the top 5 players at your position. Or 120% of your previous salary; whichever is higher
- Cannot receive other offers
- If the player refuses the offer, they must give up 1 1st round picks
iii. Transition tag
- Very similar to the non-exclusive but the pay received is the average of the top 10 players at that position
b. How many times can a team apply each tag in a season?
i. Once
- What are the 6-groups of free agents in the NHL?
a. Group 1 - Entry level
b. Group 2 - Restricted free agents
c. Group 3 - Unrestricted free agents
d. Group 4 - Defected restricted free agents
e. Group 5 – N/A
f. Group 6 – 25 years old and played for 3 years
a. Group 1 - Entry level
i. Players that were drafted
ii. Can sign 2-3-year contracts based on age (younger = longer contract)
iii. If a player is drafted, but not signed, they will be an UFA. When they do sign, they move directly to group 1
b. Group 2 - Restricted free agents
i. Team must submit a qualifying offer to keep a player from becoming an UFA
ii. 1-3-year contracts based on age (younger = longer contracts)
c. Group 3 - Unrestricted free agents
i. Must be under the 27 or 7
Once you become 27 years old or 7 years in the league, you become an UFA
d. Group 4 - Defected restricted free agents
i. If a team goes to another country to play, if they come back to the NHL, their contract comes back to the team that they left
e. Group 5 – N/A
i. All of group 3 will capture these players
f. Group 6 – 25 years old and played for 3 years
i. Less than 80 games played
- When does an NHL player become eligible for salary arbitration?
a. Must be in the NHL for 4 years
- What are the rules of restricted free agency in the NBA?
a. You must be drafted in the first round
b. 1 year contracts (rookie contracts)
c. Money is based on draft position
- In the NBA, when can a restricted free agent become an unrestricted free agent?
a. Restricted You must be drafted in the first round 1 year contracts (rookie contracts) Money is based on draft position All after 4 years
b. Unrestricted
2nd/3rd become an UFA
1. The second season if they don’t get an extension to a rookie contract
2. Otherwise it is the third year
- Distinguish between 25-man roster and 40-man roster
a. 25-man roster – MLB team
b. 40-man roster – MLB team + some minor leaguers + some temporary away from team players
Benefit is that you must be a part of the 40-man roster before the 25-man roster/ and you are protected from the rule 5 draft
- Rule 5 draft
you can be drafted by just about any team for roughly $50k/year and the player must be placed on the 25-man roster. At the end of the season, the original team may buy the player back for $25k/year
- How does a player earn a service year?
a. 1 service day – One day on the 25-man roster
b. Service year – 172 service days
- What are the three categories of free agents in MLB.
a. Pre-arbitration
b. Players eligible for salary arbitration
c. Free agents
- When does a player qualify for pre-arbitration?
a. Signed a league minimum contract
b. After 3 years they must either be on the 40-man roster or eligible for the rule 5 draft
- When does a player qualify for salary arbitration?
a. Over 3 service years
i. Super 2
b. A player with more than two but less than three can qualify for arbitration as a “super 2”
86 service days, must be in the top 17% in playing time,
- How does final offer arbitration work?
a. The arbitrator picks the final salary between what the team and player offers
- When does a player qualify as an UFA in MLB?
a. 6 service years
- In the context of UFA, what is a qualifying offer and why would teams submit such an offer?
a. Teams would submit a qualifying offer so they can receive some compensation from the other team in draft picks if that player goes elsewhere
b. 1 year deal
- What are the two types of drafts in the NFL?
Reverse order
Supplemental
a. Reverse order
in reverse order of win percent and draft picks can be traded
Supplemental
b. Players who have exhausted their college eligibility or unable to attend college (disciplinary reasons) qualified for this draft
- What are compensatory picks? How is the value of the picks determined?
a. They happen during the reverse order
b. Rounds 3-7
c. Teams earn a compensatory pick by losing more free agents than you gained
d. The round of the pick is based on how big of a contract they signed with the new team and how well they performed
- What is the supplemental draft and what players qualify?
a. Typically held in July
b. Players who have exhausted their college eligibility or unable to attend college (disciplinary reasons) qualified for this draft
c. Notable names: Cris Carter, Brian Bosworth, Bernie Kosar (gamed the system)
d. Players cannot bypass the regular draft to qualify for supplemental draft (Kosar rule)
e. Teams do not have to participate in this draft
f. Teams are divided into three groups based on wins
- What type of draft does the NHL have (lottery, reverse order or mix)?
a. Lottery
- When is a player eligible for the NHL draft?
a. At 18 years old for American player
b. At 20 years old for international players
- How is the order determined?
a. 14 teams that didn’t make the playoffs enter the lottery where these teams will be ordered based on the last years points
b. Then draw names to establish the first three spots
c. After this, it is in reverse order based on previous season points
- What type of draft does the NBA have (lottery, reverse order, or mix)?
a. Lottery
- When is a player eligible for the NBA draft?
a. Either 19 years old for American players or one NBA season after high school
b. International players have to be 22 years old
- How is the draft order determined?
a. The 14 teams that don’t make the playoffs enter the draft and based on your W/L, you have a certain percentage of getting the first pick
- What changes will occur starting in 2019 with the NBA draft?
a. The last 3 teams will have an equal chance of getting the first pick (14%)
- When the Rule 4 draft held and how many rounds?
a. Held in June
b. Has 40 rounds
- How is the draft order determined (MLB)?
a. Based on previous season
b. Tie-breaker: win-loss record from year prior
c. First 10 picks are fixed no matter what happened in free agency.
d. Other teams are subject to losing or gaining picks based on free agency activity
- What is the goal of the competitive balance draft
a. To give the smaller market/revenue teams a chance at the better players
- How many rounds is the competitive balance draft and when are these rounds held?
a. Two rounds: A and B
b. Round A is after 1st round
c. Round B is after 2nd round
- What teams qualify for the competitive balance draft?
a. Team must fall in bottom 10 in revenue and market size
b. MLB uses a formula that factors in revenue and winning
- What are slot values and how are those values determined? How is the bonus pool calculated?
a. The first 10 rounds are assigned a slot value
i. The higher the pick, the higher the slot value
ii. If you add up all of the slot values for each of your draft picks, you get the bonus pool
b. Bonus pool = salary limitations
i. Each team will have a different bonus pool sizes based on their draft picks
ii. If they go over less than 5%, they pay a tax
iii. If they go over by more than 5%, they pay a tax and lose their first round pick
- What is the purpose of having slot values?
a. Again, to limit the purchasing power of the larger market teams
- When it comes to measuring competitive balance, what are the three main areas of debate?
a. In season or playoffs
How are we going to measure success? Regular season or playoffs?
All relative based on each team
b. How do we characterize market size?
Applies the most to baseball
c. Policies
The teams don’t keep all of their revenue
- How does diminishing returns promote competitive balance?
a. As you add players to the roster, what they contribute goes down. This naturally promotes competitive balance. Prevents stockpiling of talent
- Under what conditions can you use the standard deviation coefficient to measure competitive balance across multiple seasons?
a. If there are the same number of teams
b. If there are the same number of games
Weather doesn’t have much of an effect
c. No significant changes to the CBA
d. No significant changes to the rules
Significant changes are things like the NBA adding the 3 pt. line, not extending the PAT length
- Why can’t you use the standard deviation to compare across different leagues ( e.g. NFL vs. NBA)
a. NFL has 16 games and MLB has 162, how do you compare them
- What is the binomial distribution and how does it apply to measuring competitive balance?
a. There are only two possible outcomes (T/F, heads/tails, etc.)
b. As the number of attempts increase, you gravitate towards the mean
c. The greater the number of games, the greater competitive balance
d. The worst competitive balance league is the NBA
HHI
a. Measures market structure
i. Looks at total output of an industry and then looks individually how much each firm contributes
b. HHI = 1, then one team wins every championship
c. Measures also, how competitive teams are in the playoffs
