Wednesday, June 4, 2008

NRL parity: Why the Salary Cap is a flawed system.

Whenever parity or clubs being under financial pressure is discussed, the NRL talking heads (led by Dennis Fitzgerald) rehash the same arguments. Raise the salary cap. Lower the salary cap. As chief executives or media personalities, this appears to show minimal imagination and economic nous for people in the high profile roles that they enjoy. First I intend to show the flaws in the current structure, and then I aim to outline a counter strategy designed at providing some parity in the game. Unlike most of my posts, there will be an element of seriousness.

Anyway, to the current system. Lets look at the finalists for the past five years. Many of the games talking heads make a lot of the fact that of the 16 teams currently playing in the NRL, only the Gold Coast, in their second year of playing - have made the finals at least once in the past 5 seasons. This does not account for the fact that South Sydney, Cronulla and the Tigers have made just one appearance, compared to the 5 trips made by Melbourne and Brisbane. What is a far more revealing indicator of a lack of parity, look at the average table positions for the 16 teams over the past five years.

Melbourne: 3.6
Brisbane & Canterbury: 5
North QLD, Parramatta, St George, Sydney: 7
Manly: 8
Penrith, Canberra, NZ, Tigers: 9
Cronulla, Newcastle: 10
Souths: 11
Gold Coast: 12.

Taking Gold Coast out of the equation, the differential between the top and the bottom is astounding for a game that preaches parity and assures that the salary cap has created this. Moreover, we can conclude that the notion of many teams making the finals is a flawed manner to grade the current system in terms of parity. It is clear that average/below average teams can make the final 8. Looking at the results from the 1v8 and 2v7 finals in the past five years gives us:

Top seed wins: 9
Bottom seed wins: 1
Average Winning Margin by top seed: 20.3

So, the only upset in this round was by the red-hot Cowboys in 2004. The average winning margin at greater than 20 points makes this clear that the notion of a finals appearance is no measure of parity.

So what to do about parity???

There are a number of complementary regulations that I would advocate in order to achieve parity or competitive balance. Lets start with the removal of the salary cap in favour of a "soft cap."

The Soft Cap:

Spend what you want!! At least in theory. You have a lot of financial resources at your club. Fine. Spend away. However, once you reach some salary figure, you pay a tax on your payroll. Say you have a cap of $2M. Spend $4M and you pay 50% of your excess payroll into a fund that gets distributed amongst poorer clubs. This ensures that clubs with limited resources stay viable. Also means that if you want to spend your way to a premiership, it hurts a lot more. The abolition of the salary cap as a hard cap allows players to be paid a figure closer to their market value. Yes, this figure is distorted by a tax. However, the distortion is less than under a price ceiling.

Free agent compensation:

Lets start with a basic and obvious change. No midseason deals on free-agents-to-be. The club that owns the rights to a player, controls that player until the end of the season. Letting a player sign elsewhere halfway through a season has no parrelels in the sporting world.

Onto the notion of free agent compensation. If you control your player until the end of the year, you should get something for him if he leaves. This is a response to the widely held view that clubs see their own developed prospects leave for other clubs after the club spends a lot of time and money on their development.

At the moment, it can be argued that clubs are actually being offered a disincentive to develop their juniors. This would need to be addressed.

Under the Compensation scenario, if a club loses one of its free agents to another club, that club is compensated by picking up a player from the signing club (outside the signing clubs top 25). Again, this compensates the club for the resources spent on developing a young player. Obviously, tiers of free agents would need to be agreed upon. For example, a club that signs a mediocre free agent would have to only offer a restricted list of juniors/reserve graders to choose from. Otherwise, second tier players would be disadvantaged. However, signing a marquee free agent would expose your best youngsters. This would shift the demand for free agents leftwards - so whilst players would feel that the abolition of the salary cap would pay them market value - the combination of leftward shift (due to the tax) and the further shift (due to the opportunity cost of signing players) could actually depress players wages!!!

The final complementary policy that would need to be worked in would be a draft of junior players. Much of the dominance of Melbourne and Brisbane can be put down to their ability to sign young players. A draft that worked in reverse order of standings (similar to the AFL model) would benefit the parity debate greatly.


JB said...

Like the idea of a soft cap, but the other thing would be to encourage teams to spend the salary cap. It would be good to see what clubs are paying what each year in salaries to compare but, I don't think Canerra or Penrith go anywhere near the salary cap compared to the likes of the Storm, Brisbane and Rosters.

A better, but more consuming method for measuring parity would be to look at the average winning margin each round over the last 5 years.

Not sold on your free agent compensation especially the signing policy, for one it restricts the losing club to a player from the books at the winning club which is less than ideal. Furthermore, a manager wants to build a team, i.e. bring in what it needs and drop what it doesn't. Your system means that a manager can't control what it drops. Or more to the point it can't control what it is willing to give up for the new singing.

The problem at hand is the "loss" clubs bear for 'training up a player'. The best way to address this I would suggest is that of a transfer system. Players can break ther contracts for a transfer fee to the original club and furthermore the original club has a quasi option to resign a player at the end of a contract for the existing salary. If a new club wants to sign the player at the end of the contract they have to pay out the option value to the original club. The option itself wouldn't have any obligation for the player to stay at the original club nor at any set price. It would only serve as a mechanism for clubs to be compensated for the 'training up'. It could be set at say 1 years salary differential. i.e. if SBW is paid 600k pa now and goes to another club for 650k pa, the new club has to pay the bulldogs 50k. The Bulldogs can then sign whoever they want from wherever.

This tranfer system would provide the most protection for those players that have developed the most at a club. The highest jumps in player salary would be expected to be associated with young players starting to make a name for themselves (i.e Chris Bailey at Newcastle or Heighengton at the Tigers). Therefore, providing the most protection for a clubs promising young players.

Professor Chaos said...

Yeah, but the players will be outside the clubs top 25 - that is a young player (hopefully very talented) that will not taste NRL in the coming year.

It adds an opportunity cost to the salary decision.

As to the transfer mechanism, I have never understood its appeal. What does the club receive other than cash?? Cash is not the problem for a team like Canberra - rather that it is an unattractive destination.

I am getting right into the Sports ec literature at the moment. I might put a series together.

Of course, broken up by dick jokes.

JB said...

As a manager I would rather recieve a transfer payment then gain a player (on the roster or not)that wasn't my first pick and I would rather know what it costs me to sign a player then some financial figure plus a youth player.

Just reread your idea - its tomfoolery I say, very fourth grade schoolyard team selection -you can take one of my players but then I get to take one of yours.

Plenty of opportunity cost in the roster already, transfer simply compensates clubs for up training - the point of this excercise, as well as increasing the cost to those teams who buy in players rather than develop them.

Two points, A) enough cash makes any destination look good; B)Other than cash??? Me thinks that you would pick the booby prize just for shits and giggles, I mean do you want the new club to throw in a set of steak knives? a BJ?

Professor Chaos said...

The player picked up by the team that loses a marquee player would be a VERY SOLID young player. Someone who si not going to contribute now, rather in the next few years.

The rationale is that by signing a top player, you in effect mortgage some of your future success - this benefits teasms who are unlikely to succeed now, but more focussed into the future.

There is a temporal element - signing team adds some present success, at the cost of future success. And vice Versa. What does this stop?? Dynasties and consistently poor teams.

A transfer fee transfers money, but given that the costs of developing a player are high and are accrued now, the benefit is discounted substantially.

JB said...

Present v Future success??? Whats to stop the team signing more players in the future, and thus negating the future cost of signing today. Especially when the success today pays off in terms of sponsorship and club prestige in the future which can afford a team to more money to sign the stars and at a rate less than other clubs.

The benefit of developing a player is derived in the future ture enough, but under the transfer arangement they recieve the benefit on transfer, under your arrangement they don't recieve any benefit until they develop another young player. That is to say that your arangement pushes the benefit of development further into the future, and thus discounting even further, as well as undertaking more uncertainty (especially injury) as to the outcome as the new young player develops. And indeed under your arangement after swaping a developed player for an undeveloped player, there is still no guarantee that the new undeveloped player once trained up by the club will not then sign to go some where else.

Your idea here is novel,just not pragmatic, I like the soft cap approach but would need to model what would be the most desirable tax rate. I'm not sold on a draft system.

Also, another method of measuring competition would be to look at the spread (distribution) within the table at the end of the year.

Professor Chaos said...

My question to you is how do bad teams become good teams under the current NRL model?

At the moment, teams with:
1) The best recruitment policies
2) The least dead cap space

Are the successful ones.

Your criticisms I think are sparked by your affinity with football(soccer). In a league such as the EPL, the aim of the game is to share revenue. And the transfer system is designed to do that.

Somewhat disingenuous though it may be, the EPL is in the absolute rare case that revenue (combined for all clubs) is maximised by having a competition that is not close. Having juggernaut clubs like Man U and Chelsea that can earn money through their exploits in the Champions league is the best money spinner imaginable.

The transfer system is ingeneous in that league as it trickles down the money from those juggernauts to the rest of the league. To put it gently: 'We have a saying in my country - the coyote of the desert likes to eat the heart of the young and the blood drips down to his children for breakfast, lunch and dinner and only the ribs will be broken.'

Revenue is maximised in the NRL (and everywhere else) by having a close competition. A transfer system does not translate as well. Maybe my idea doesn't float your boat, but even at its exclusion an amateur draft makes sense. Clubs with higher payrolls forfeit draft picks??

JB said...

Best recriting/development leads to dynasties due in part to economies of scale, i.e. once the rght formula is developed then it is as easy to identify and develop one player as it is a squad of players.

Buying in star players may improve a clubs finishing position but team dynamics and quality of lesser known players will undermine a preimership.

As such the best way for a strugling club to get better or even for a team to do well is through its development of players. Titans are the best example of this. They are doing well not only because of their star recruits (Prince and Bailey) but also because Cartwright has been able to dramaticly improve players such as Lafranchi, Minichello and Meyers.

The best way a strugling club can improve is through coaching and ultimately player development. Case and point change of coach at Roosters last year.

How can the institutions change so as to accomodate this? Will first would be to give greater incentives for clubs to develop players ala a transfer arangement, second, a disincentive for clubs to poach developed players ala a transfer arangement.

The implementation of a transfer system in the NRL would differ to that of the EPL in that a salary cap would still remain. So that rich clubs can't dominate and continue to dominate based on their revenue. A transfer system in the NRL would be on a lot smaller scale than that of the EPL (like I said it would only be derived from the increase in base salary of the player).

A draft system would only undermine the determination of a club to develop its own youth players and pick them up on the draft. Furthermore, one or even two star drafts in the NRL wouldn't turn a club around dramaticly nor would it ensure that they stay at that club after one or two years playing in the NRL. The draft works better in the AFL then it would in the NRL because there is a greater reluctance of players to leave their clubs (although this is decreasing).

I would argue that within the comp at the moment the top 4 teams (Storm,Manly,Brisbane and Roosters) have a very similar squad on paper. With all teams feeling the pinch of the salary cap, their current players are and will leave ultimately dismantling their dynasties. Souths who are strugling have a better team on paper than many in the comp, but better players aren't needed at souths - the same could be said about the dragons in previous years. Titans, Tigers, Cronulla, Penrith and Canberra are hitting above their weight division because of the coaching staff at these clubs. Cartwright, Sheens, Stewart, Elliott and Henry are the real stars of our game and if they stay at their respective clubs then you can expect these teams to continue to build and get better into the future. Those teams really in trouble are those without a strong coaching/development staff and are lacking the finances to pay for star recruits. What can be done for them? Incentives to develop players is the most effective, with cash redistribution the next life line for these clubs. But should the NRL be propping up financially irresponsible clubs?

JB said...

My major gripe in all of this is why should the Storm be penalised because they have the best recruiting staff? a mile. A footy club is more than just the players on the field. If anyone thinks that the Storm have the best squad because of what they're offering their players then that's a joke. Manly on paper don't look that flash either but yes, they recruit well. If the Storm recruit better by identifying young talent on the verge of being a superstar rather than paying big bucks for a "half-back" who's been playing hooker for the Roosters for 5 years then Souths can suck my balls quite frankly. I believe that the future of the NRL doesn't include sides who have made stupid decisions so let dog eat dog and let's move on. The Storm picked up Inglis and Folau early. Any other side could have done so and probably offered a better environment for these guys but they fiddled with their balls instead. So fuck you all. Everyone craps on about how much they hate this Melbourne dominance but you know what, I love it. Because of how they've done it. And I'm a mad Roosters fan. If the Chooks don't win the comp, I hope the Storm do. Suck my balls.

Professor Chaos said...

Wow... You have some hostility in you JB.

And You're a Roosters fan now?

Beyond that,
I have no issue with the Storm being dominant at the moment. Kudos to them for their solid recruiting system.

My issue is only, that even once a team determines what the right things to do are and then goes ahead and tries to do them - there is no mechanism in place for them to make any progress.

We suck... do we buy free agents?
a) as a struggling club, we have to overpay. We may not get the key guys that we need.
Okay then, do we try and strenghten our recruiting?
b) Again, player managers will steer their young players towards successful clubs. Also, feeder regions are important.

A draft ensures that the best young players go to the clubs that need them the most.

JB said...

A draft will only ensure that strong youth players go to struggling clubs for one year, and to be honest that's not enough and will only work to allow young talent some time in first grade to show off their skills, increase their salary and move on. Clubs need a mechanism in place so as to be able to develop an entire team of players not one player they picked up on the draft.

I have every faith that Melbourne, similar to Brisbane in previous years will be able to lose several key players but be able to remain competitive, rebuild and within in a few years be challenging the title again. Why? Because of the clubs development abilities. That is the bottom line, like the captain charading as me stated its dog eat dog. If a club wants to be better it needs better policies not better players.