By Paul Kerin
MELBOURNE Storm's NRL salary cap breaches were inexcusable - given that a cap exists. But sporting leagues shouldn't impose caps at all. Clubs and leagues usually justify caps (and other restraints on players plying their trade) with claims that they promote ''competitive balance'' and help poorer clubs survive. But the first is unlikely and the second isn't necessarily a good idea.
Let's face it, clubs are vested interests. While they claim caps are good for fans and the game, caps also restrain a club's biggest expense - player payments. Does club support for salary caps reflect altruism towards fans or self-interest? One indicator that it's the latter is the fact that only player payments are capped - not non-player football expenditure (like coaching and fitness costs). Yet the whole point of both types of expenditure is to improve on-field performance.
Last year the AFL's salary cap was $9.6 million a club, but club non-player expenditures averaged $5.8 million. Clubs want to restrain spending on players, but be free to spend whatever they like on other resources. If we have caps at all, they should be on total football expenditure - but if they were, clubs probably wouldn't think caps were a good idea after all.
Competitive balance - in which clubs have similar chances of winning games and premierships - per se is good, as it makes games and seasons more exciting and fans benefit. It stimulates match attendance, club membership and television viewership, thereby raising club revenue from fans, sponsors and broadcasters. But caps probably hurt competitive balance, not help it.
True, competitive balance has improved in the AFL and NRL since they introduced caps (in 1985 and 1990, respectively). But other changes over that time - particularly enormous growth in broadcasting revenue - probably improved balance despite caps.
Last year, football expenditure for AFL clubs totalled $246.6 million. Distributions to clubs from the AFL Commission (largely funded from $160 million in broadcasting revenue) covered more than half this expenditure. As most of the distributions are split equally between clubs (and the remainder skewed towards poorer clubs), broadcasting's growing importance was probably main reason why balance improved.
But broadcasting revenue didn't grow because caps improved balance - broadcasting revenue growth is a worldwide phenomenon that leagues with no caps (like European soccer) also enjoy; pay TV's introduction in Australia also raised the value of broadcasting rights substantially.
If caps help poor clubs stay in the game, they also perpetuate competitive imbalance by impeding adjustments that would ultimately improve balance and financial viability.
If Melbourne can't support 10 AFL clubs without caps, then poorer clubs could move or exit. But many interstate clubs would love to replace them and would be more viable. Survival of the fittest works in nature and in business. In sport, it works at the player level; if we let it work at the club level, it would raise the overall quality of on-field performances.
Caps also distort spending between player and non-player resources. As player payments are constrained, clubs try to improve on-field performance by spending more on other resources. Unsurprisingly, non-player expenditure in AFL clubs grew 11 per cent a year over the past five years - more than twice as fast as player payments. If caps were abolished, clubs would reallocate expenditure towards players and cut the non-player spend. On-field performances would improve as clubs would be free to allocate expenditure in whatever way maximised performance.
Caps also harm balance because richer clubs (with higher membership numbers and non-football revenue) spend more on non-player resources. Last year, non-player expenditures of the four highest-spending AFL clubs averaged $7.2 million - over 70 per cent more than the four lowest spenders.
And caps provide strong incentives to ''cheat''. Storm's breaches shouldn't surprise us. While clubs have a collective incentive to want caps (lower player payments), each also has an incentive to ''cheat'' the cap. If one club cheats and others don't, it's more likely to win a premiership. Therefore, clubs don't trust their rivals to honour caps - which makes them more likely to cheat. No wonder former Storm boss Brian Waldren said ''everyone does it''.
Even if they don't, each club has reason to think they might - turning perception into reality.
Monitoring and enforcement of club compliance is difficult and costly, particularly the detection of third-party payments. The probability of getting caught is therefore low, but the expected benefit is high (cheats probably won't be caught for years, if at all). These are precisely the conditions that generate high ''cheat'' incentive.
As the AFL can afford to spend more on monitoring and enforcing compliance than the NRL, we might expect AFL clubs to cheat less. While the AFL has detected major cap breaches - Essendon (in 1999) and Carlton (in 2000), no major breaches have occurred (or at least been detected) since it improved monitoring and enforcement efforts.
Statistically, the NRL has greater competitive balance than the AFL. Maybe that's because NRL clubs had (at least until Melbourne Storm's punishment) stronger incentives to breach salary caps, and players greater freedom to ply their trade.
While caps don't improve balance, they do generate costs. Monitoring and enforcement costs leagues a lot and also imposes compliance costs on clubs and players. Abolishing caps would free up substantial resources for clubs and players, which would improve overall on-field performance.
Caps also harm competitive balance because they give rich, high-performing clubs greater incentives to cheat. Poor clubs can't afford to spend more than the cap anyway. The perceived benefit from cheating is higher for clubs whose on-field performance puts them within striking distance of a premiership; cheating is less likely to lift struggling clubs' on-field performances enough to win a premiership - unless they hugely overspend, which makes detection more likely.
It is therefore not surprising that the most notorious cap breachers in both the AFL (Essendon, Carlton) and NRL - Bulldogs (2002), Warriors (2005) and Storm (2006-10) - were relatively well-off and won premierships or were within striking distance around the time(s) they cheated.
Fans like close games between high-performing teams. As caps probably impede both competitive balance and on-field performance - they actually reduce fans' enjoyment and hence club revenue.
Perhaps, worst of all, capping declared player payments encourages players to condone club cheating - and possibly even become criminals (accessories to fraud) - as it is the only way to get paid what they're worth. Leagues should help players become better citizens; caps risk doing the opposite. For the sake of fans, players and the game, caps should be abolished.
Paul Kerin is professorial fellow, Melbourne Business School.