Review of Environment, Energy and Economics - Re3 The Impact of Salary Cap Violations in the NRL
 

 

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May
08
2014
 
The Impact of Salary Cap Violations in the NRL
by Thomas Longden
Economics - Articles
 

A salary cap has been in place in one of Australia’s most popular professional sports since 1990. Since 2001 there have been multiple cases where rugby league teams were found to have notably violated the salary cap. Separate incidents were found to have occurred at the Canterbury Bulldogs, the New Zealand Warriors and the Melbourne Storm. In recent research, these salary cap breach amounts have been attributed to an improved home team win record in the case of the Melbourne Storm and the Canterbury Bulldogs. This article discusses recent work conducted by Longden and Kannard (2014) to calculate the impact of these salary cap violations. 

Keywords: Sports economics, Salary cap, Rugby league

JEL classification: J31, C23

Suggested citation: Longden, Thomas, The Impact of Salary Cap Violations in the NRL (May 8, 2014). Review of Environment, Energy and Economics (Re3), http://dx.doi.org/10.7711/feemre3.2014.05.001

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Introduction
Between 2001 and 2010 three rugby league teams were found to have intentionally violated the salary cap in one of Australia’s most popular professional sports. Each case of salary cap violation occurred during a mutually exclusive time period and the extent of the violations ranged from $300,000 to just over 1 million Australian Dollars (AUD). As a percent of the salary cap, the violations ranged from 8% to 26% of the salary cap in the period the violation occurred. 

The most recent case of salary cap violation by the Melbourne Storm culminated in penalties that included the stripping of two premierships (competition wins), having to pay back $1.1 million AUD prize money and being fined $500,000 AUD. Longden and Kannard (2014) find that the increased probability of a home team win for the Melbourne Storm to be between 6.4% and 10.6% for an additional $1 million AUD of salary cap violations, when the team specific variables have been accounted for and teams are almost evenly matched in terms of quality. Without team specific variables, the probability of a home team win for the Melbourne Storm has been estimated to increase by between 16.8% and 27% for an additional $1 million AUD of salary cap violations, when the level of salary cap violations have been accounted for, teams are almost evenly matched in terms of quality and team specific variables have not been accounted for.

Major Salary Cap Violations in the NRL
Table 1 reviews the timing of major salary cap violations between 2000 and 2012. Notable events included within Table 1 include three periods where teams were found to have violated the salary cap to a notable extent for a sustained period. Also included in Table 1 are the amounts with which each team was found to have breached the salary cap.

Table 1 - Salary Cap Violations



Probability of Home Team Win

Of interest at this point are key findings for each team that notably violated the salary cap. Figure 1 shows the home team win percentage in comparison to estimates for the probability of a home team win based on whether the salary cap violation has been accounted for using a dummy variable (Dum. Var.) or through the application of the violation level in AUD (Viol. Lvl.).

Figure 1 - Probability of Home Team Win – Impact of Salary Cap Violations – 2001 to 2012



In the case of the Canterbury Bulldogs, the home win percentage has shown a great amount of variation across the period between 2001 and 2012. It should be noted that the salary cap infringements and the issue of matching contract payments to player quality is an issue for 2004. After the salary cap violations came to light many of the players took pay cuts to stay together and satisfy the salary cap with a similar squad of players (Walter, 2002; Mascord, Masters and Magnay, 2002). 

The results in Longden and Kannard (2014) show that the salary cap variables for the Canterbury Bulldogs (both as dummy variables and as the level of the breach) are statistically significant. This implies that competitive advantage was gained from the salary cap breaches. However, as seen in Figure 1, the breaches do not explain the peaks in 2002 and 2004. Nevertheless, Longden and Kannard (2014) find that the increase in the probability of a home team win for the Canterbury Bulldogs was between 12.2% and 13.8% for an additional $1 million AUD of salary cap violations, when the team specific variables have been accounted for and teams were almost evenly matched in terms of quality.

In the case of the New Zealand Warriors, 2004 and 2005 were the periods where the team was found to have been violating the salary cap and, surprisingly, this coincides with a decrease in the probability of a home team win. This period also coincided with a new management. The new management actually discovered the breaches relating to seasons 2004 and 2005. Overall, the poor performance of the New Zealand Warriors during the breach period may also be associated with a change in coach in 2005, the previous management and the internal environment within a club in financial trouble. At the end of 2004 notable signings were made, including an Australian representative and the New Zealand national team captain. New management and a new head coach at the club led to increased success between the 2005 and 2008 seasons.

The case of the Melbourne Storm is an interesting one as they have been the most successful club in the period between 2001 and 2012. The win percentage of home matches reflects this with a home win rate of over 70% having been sustained in the 2003, 2004 and the post-2006 period. 

The breach amounts reported by the Salary Cap Auditor within NRL (2011) are insufficient in tracking the success which occurred within 2006 and 2007. However, rather than concluding that this is due to a greater extent of salary cap violations than that reported by the Salary Cap Auditor, even though it was admitted by Ian Schubert that this may be the case, Longden and Kannard (2014) note that this leads to the question of whether the player contracts in this period adequately reflected the talent within the team. Indeed, talent identification and the contract offered to new debutants or untapped talent is an interesting consideration when discussing the NRL salary cap and what occurred at the Melbourne Storm.

The importance of the utilisation of regression analysis is important here as the probability of home team wins for the Melbourne Storm are likely to be driven by an unshared home ground, a talented coach, the discovery of a number of talented players at a young age, a captain who is known to be instrumental in the success of the teams he plays in (including the Australian and Queensland representative teams), and other auxiliary factors, such as training facilities and player development infrastructures. Nevertheless, even upon accounting for team specific factors, such as keeping a core player group intact, an additional $1 million AUD of salary cap violations by the Melbourne Storm would have increased the probability of a home team win by between 6.4% and 10.6%. Without these team specific factors the estimate lies between 16.8% and 27%.

Conclusion

The results of Longden and Kannard (2014) shows that the success of the Melbourne Storm between 2006 and 2010 was not solely based on circumventing the salary cap and was also based on the identification of talented players and the ability to keep a certain player group together. Nevertheless, significant competitive advantage has been found even when team specific factors, including the number of matches played by a certain player group, have been accounted for. It is of interest that the Salary Cap Auditor indentified three phases of the ‘salary cap rorting’, these being between 2005 and 2007, 2008 and then a final phase which commenced in 2008. These phases are consistent with the success of 2007, large breach amounts after 2007 and the challenge of keeping Premiership winning players together in the period after 2007. Indeed, rather than insufficient valuation of the breaches by the Salary Cap Auditor, the results raise questions on how the salary cap functions with respect to the identification and valuation of player talent. Indeed, the significant success in the period before 2007 predated the largest salary cap violations, but closely aligns with the amount of games played by a core playing group identified in Longden and Kannard (2014). The discussion surrounding Figure 4 of Longden and Kannard (2014) highlights this crucial issue and the timing of the breaches in comparison to home team wins.

References 

Longden, T. and Kannard, G. (2014) ‘Rugby League in Australia between 2001 and 2012: an analysis of home advantage and salary cap violations’, FEEM Working Paper 53.2014.

Mascord, S.,  Masters, R., and Magnay, J. (2002) ‘Baying for more Bulldog blood’, Sydney Morning Herald, 26 August 2002. Accessed on 10 March 2014.

NRL (2011) ‘Report of Salary Cap Auditor into Melbourne Storm Salary Cap Breaches’.

Walter, B. (2002) ‘A salary cap breach by any other name’, Sydney Morning Herald, 27 August 2002. Accessed on 10 March 2014.



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Thomas Longden, Associate researcher, Fondazione Eni Enrico Mattei 
   
 
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