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Friday, August 04, 2006

By Grabthar's Salary!

Backin15 asked for an explanation of the Air New Zealand Cup’s salary cap situation, and who am I to deny him. For those of you, who have read my salary cap rants in the past, don’t worry. I will keep this strictly mostly factual.

The basic level of the salary cap is this: each of the 14 Air New Zealand Cup Provincial Unions will be allowed to spend up to $2 million on player salaries and other benefits in any given year. “Other benefits” is going to be the tough one. We’ll get on to that later.

Otago and Counties - two teams who won't anywhere near the capThat $2M cap is fairly large for most unions. I doubt if teams like the Magpies, the Turbos or the Makos get anywhere near it. Or even teams like Waikato or Otago for that matter. The height of the cap may have been dictated by living costs in centres like Wellington and Auckland. In fact only Auckland and Canterbury have farmed out expensive players to their Super 14 franchise partners (like Chris Jack going to the Tasman Makos).

As a quick aside unions haven’t seemed to have figured out that you can pretty much get your Super 14 players from anywhere, like Crusaders flanker Tanerau Latimer who plays for Bay of Plenty in the Air New Zealand Cup.

Here are the people the NZRU put in charge of the cap. Craig Neil, former Assistant Auditor-General for the Office of the Auditor-General, has been appointed Salary Cap Manager and former NZRU Player Management Advisor Cameron Good takes on the role of Salary Cap Advisor.

The cap’s final barrier was the Commerce Commission. This was done because the cap is technically anti-commerce. The Commerce Commission approved the cap, subject to the following conditions which were imposed to “increase the certainty of the salary cap delivering the benefits advanced by the Rugby Union” (i.e. making money).

  • The salary cap will last for six years.
  • The NZRU must monitor and enforce compliance with the salary cap framework. This will include putting in place anti-avoidance clauses and ensuring they are complied with.
  • The NZRU must ensure that no remuneration is excluded from salary cap calculations.
  • The NZRU must evaluate the effectiveness of the salary cap in a review after five years.

Man, that is the only time I would’ve wanted to work at the Commerce Commission.

Here is an interesting piece form the Commission’s ruling:

The Commission analysed four years of viewing figures and found that closely
contested games were not necessarily more popular with the public. However, the
Commission found that the quality of players in a match did affect the match’s

The whole thing is here if you want to read it (256 pages, pdf).

So let’s talk about those “other benefits”. First they DO include All Black and other NZRU salaries (NZ Maori, Sevens etc). They also MUST cover (according to the Commerce Commission) any payments from outside agencies.

So if local businesses get together and pay a player $6M to come and play for the team then that would have to count. If the major sponsor decides to give each player a car (Ford example), then the price of the car counts against the cap. If the club gives a player $5 to go and buy a pie from the tuck shop, that counts against the salary cap.

Interestingly, the NZRU also proposed a player transfer system at the same time as the cap. This was pulled until the end of the 2007 Super 14. In it a Heartland Division team that loses a player to the Air New Zealand Cup would receive between $10,000 and $20,000 in fees. For players transferred between Air NZ Cup teams there would be no fee. What would this mean? Smaller unions in the Air NZ Cup would get screwed, isn’t that what it always meant.

Where to from here? Smarter unions I hope. Places like Tasman immediately advertised themselves to Canterbury as a place to “hide” their expensive players which was kind of smart. The down side of this is that those expensive players won’t play that many games (this weekend may be one of the few times we see Chris Jack in a Makos uniform) while being a blackhole on your cap.

I hope we’ll see some NFL style contracts. I don’t mean multi-million dollar figures but rather pro-rated money. An example might help:

Let’s say Tasman decides it wants to get a decent player (one that it won’t have to give up to the All Blacks) but they do not want to lose him to another union in a couple of years. So (for example) it goes for Mose Tuiali’i. Tasman offers him a five year $2M contract. This amounts to an average salary of $400,000 per year. But to keep Mose around you offer him this: $100,000 in the first year, $250,000 in the second etc until his last year has a very large salary.

Also in favour of the unions, they, like any employer, can renegotiate the contract. So in Year 4 just before the big payout, Tasman might negotiate a new contract and Mose has to start again. (Most NFL players never get to their big payout year). Unions can then acquire multiple players of good talent by staggering a lot of these kinds of contacts.

But why would Mose join the Makos if he’s only going to get $100,000 in his first year and there’s a high likelihood he won’t get his big payout? Because Tasman is going to give him a whopping great $1M signing bonus, that’s why. This is paid to Mose in his first year in a lump sum (so he will earn $1.1M) but (and this is an important “but”) the $1M amount is spread out evenly across the 5 years of his contract (i.e. $200,000 per year). So in his first year with the Makos, Mose earns $1.1M but has a “cap hit” of $0.3M, in his second year he earns $0.25M but has a cap hit of $0.45M and so on.

If the player is traded (which should be able to happen in rugby but no one does it) the remaining amount of the bonus goes on the salary cap. So if Mose was traded to Wellington in his third year, Wellington would shoulder the remainder of his contract (except the bonus) but Tasman would incur a $1.6M hit on their cap that year. OUCH! This is an incentive not to drop your players too early.

Putting off your payments unfortunately does lead to the ominous “Cap Crash”. However, this can give the competition a cyclical feel.

I also feel unions like Bay of Plenty should be advertising to players (of sub-All Black talent) that their $400,000 contract will go further in places like Tauranga or the Mount than in Auckland or Wellington.

But that’s me, and I don’t run a union…yet.

1 comment:

backin15 said...

Hayden, thanks mate. This is comprehensive and comprehensible - I don't think I'll need to read the Comm Commission report.

Interesting that close games aren't necessarily the most watched but that games with the best players are - interesting to see whether there's a correlation between the two factors (not another request for you to do difficult research I swear).

The AFL draft and salary cap might be modelled on the NFL, I'm not sure about this, but from what you've said it works similarly in terms of trading.

It's a slightly different point I realise, but the goal of all of these systems and mechanism has to be to make the provincial competition a quality competition that complements the S14 and improves NZ's playing stock. If salary caps mean high concentrations of great players in a few teams and one sided games, I think NZ rugby will suffer in the long run.

Thanks again for this post - I'll link to it for anyone who's reading my blog but not yet reading yours (I think you've got a stack more traffic than me though).