The Major League Soccer Designated Player rules are some of the most confusing for fans, and with the recent blockbuster signings in Toronto that landed Jermain Defoe and Michael Bradley involving tens of millions of dollars, it is a great time to brush up on the seemingly ever-changing DP rules.
Major League Soccer has a salary cap payroll system that limits the amount of money clubs can spend on their payrolls on an annual basis. When David Beckham was convinced to play for the LA Galaxy in 2007, they decided on the concept of "Designated Players" to allow controlled expansion above the salary cap to allow major signings to come to MLS even with our relatively low salary cap. MLS decided that each team would get two of the Designated Player slots where only a fixed portion of their salary would count against the cap.
This number has varied over the years, but for the 2013 season it was $368,750. This means that even if you pay a player $1 million/year, only $368,750 counts against the cap. If you give that same player a raise to $2 million/year, you still only count $368,750. The salary cap for the 2013 season is $2.95 million, and only the first twenty roster spots count towards the $2.95 million cap, so there is clearly still room to fill out a team if you have three designated players.
Each team was awarded two DP slots, but a team could purchase a third DP slot for $250,000. The league would then distribute that $250,000 equally to the teams that have not purchased a third slot. As of right now, it looks as only the LA Galaxy, Seattle Sounders, and Toronto FC have purchased a third DP slot
Starting in 2012, the concept of a "Young Designated Player" was added. If players were young enough, then their maximum cap hit would be even smaller. If 20 years old or younger, then it is $150,000. 21-23 years of age carries a hit of $200,000. You may be thinking that most players would never pay someone under the age of 23 hundreds of thousands of dollars in salary, but if a team pays a transfer fee for a player, that amount is divided equally over the length of the contract.
The Dynamo have two designated players, Oscar Boniek Garcia and Alexander Lopez. Garcia's guaranteed salary for 2013 was only $161,250, but his transfer fee pushed him over the $368,750 threshold. The same goes for the Young DP Lopez, who had a 2013 salary of $212,000. Lopez is 21 years old, so his cap hit is limited to $200,000 for two more years.
Teams can use allocation funds, which are money credits (or as I affectionately refer to them as: Garber Bucks) given by MLS to the teams that can use them to reduce the cap hit of salaries. If you wanted to sign a player that made $400,000/year, you could use $100,000 in allocation funds to buy his cap hit down to $300,000, which would make that player not a Designated Player anymore.
Major League Soccer is likely headed to a change in most of these rules following the 2014 season due to a new Collective Bargaining Agreement (CBA) coming, and a new TV broadcast deal that is rumored to be more than double the current amount and would almost certainly provide each team with at minimum $1 million/year in additional revenue. Rumors of a fourth DP spot and certainly a significant rise in the salary cap is coming soon.
The Designated Player rule can easily be regarded as a huge success as it has allowed big names and big salaries to come into the league while keeping remarkable parity. Big spending has not resulted in big success, so most teams, like the Houston Dynamo have been cautious to unload millions per season on big names. The Dynamo were mostly burned by the performance of their first DP, Luis Angel Landin, back in 2009/2010, so you can understand the caution. The 2013 playoffs provided a great example that huge salaries don't equal success as the final four teams, Real Salt Lake, Sporting Kansas City, Houston Dynamo and the Portland Timbers had only the 10th, 11th, 13th and 14th highest team salaries out of the 19 teams in the league.
For a list of current Designated Players, check out the Wikipedia article here: http://en.wikipedia.org/wiki/Designated_Player_Rule