By Phil Gregory
In recent days the excellent David Conn of the Guardian has published an article on the fallout of the Commons Inquiry into Football Governance’s inquiry and the FA’s subsequent reply to that document. As longer-term readers may recall, I submitted a report to the committee and was cited in their final report on the topic of topic of the financial gulf between the top flight and the Premier League.
In that area, I argued that the reason for financial insanity in the Football and Premier League is because there is no incentive towards good financial practice. Clubs feel they must spend on transfers and wages in order to secure the best players: failure to do so would impinge their prospects of promotion to the Premier League. Thus a club who runs up a substantial wage bill that it cannot afford in the long run has in theory a better chance of getting promoted, and promotion would enable them to cover the enormous wage bill. The end result is that clubs go for a “double or nothing” approach, where you have to overspend to have a feasible chance of getting promoted and should you secure promotion, you can pay the bills anyway. Well, unless you are Hull City.
The problem is exacerbated by parachute payments. Relegated clubs get a stack of money (£48m over four years, with £16m each of the first two years) to soften the blow of the reduced revenue available in the Championship. The problem is this further exacerbated the overspending in the Football League: parachute payments ensure that the relegated sides’ wage bills are much higher than they would otherwise be, and so other Championship sides spend money they don’t have to be attractive to a similar calibre of player.
While there are other issues that I raised in my submission, this is the key one. Light touch regulation will simply not work given the incentives demonstrated above. A free market is normally the way to do things: if the price of bread rises dramatically, individuals have the freedom to set up bakeries in recognition of the fact there are substantial profits being made. Thus in a short while, the price of bread falls given the new supply coming on stream. The entrepreneurs who set up bakeries benefit, consumers benefit, it is a win-win situation as the interests of everyone are aligned in this situation, and the price mechanism provides a crucial signalling function. If the bread market was tightly regulated however, with licences required to set up a bakery, it would be difficult to get extra supply on line quickly if at all, and everyone loses out.
That is not to say that markets are perfect however: government’s role is to provide the framework in which the market works (law and order, respect of property rights etc) and should there be a clear market failure, it is the duty of government to attempt to improve the situation. The incentive of football clubs, with a clear incentive to overspend is a clear example of a market failure, and so some form of intervention is required.
Which, unfortunately, is why the FA’s report is so disappointing. They abdicate responsibility for the financial side of the leagues to the responsibility of the Premier League. As I outlined earlier, the problem is there is a) too much money in the Premier League compared to the Football League and b) parachute payments reward failure and encourage excessive spending. Clearly the only two solutions to those problems – greater revenue distribution to the lower leagues and the abolition of parachute payments – are not in the current Premier League clubs’ interests: parachute payments almost create a closed shop, with relegated sides favourites for promotion, while greater distribution of revenue would invariably mean Premier League club’s receiving less. Clearly, neither of those two things are in the interest of the Premier League, and thus they will not reform in this area.
This is why regulators are supposed to be independent, third parties: proposals are made from a standpoint of “what fixes the problem?” whereas the Premier League has its own inherent self-interest to contend with, unfortunately, and hence little will be done.
As an aside to the general thrust of this article, I would also like to make the point that generally when analysing issues such as this, people focus on the minutiae, instead of considering the wider, systemic problems. People wonder why Portsmouth overspent, why Hull did, why Birmingham did instead of focusing in on the wider question of “why did they all overspend?”
As an economics student, I see this mistake made in the wider world all too often. In the aftermath of the Financial Crisis, everybody nitpicked and debated the smaller causes and tried to regulate out of existence the mistakes that the banks made. This is the wrong approach. Instead they should be asking: why can’t the banks make mistakes? Why, every time a bank makes a mistake does it threaten to drag the whole system down? Even with Greece, nobody is asking the question of how a small percentage of the Eurozone economy (Greece accounts for 2% after all) can threaten to bring down the whole system via a domino effect? People focus in on the details of each individual case, as opposed to the wider problems that bind all of them together. In the case of the above financial examples, it’s the bank leverage – banks can’t make mistakes, as they only have a tiny % of genuine loss absorbing capital to cover losses on enormous piles of assets. Fix that, and most recent banking crises would never recur.
The same applies to football. Instead of trying to address a myriad of minor issues the authorities should grab the bull by the horns, and fix the issue of poor financial distribution. Once clubs have no incentive to spend wildly, many other issues will be dealt with as a result. Of course, there are other issues unrelated to the financial side of the game, but the depressingly regular bankruptcies/administrations of football clubs suggest to me that financial mismanagement should be a key priority.
One of the obstacles, as with the banks, is that the incentive to overspend is not confined to just this country? it therefore it is beholden to the one authority very few have any faith in … FIFA?
Unless you include and address the wage structure and contracts of players you ain’t going to get very far fast. Many clubs will not break even or make a profit, when most of their income goes out on players wages.
@ Gerry Lennon,
Agreed. To think of FIFA and any real “reform” is worth precisely zilch. Power corrupts and absolute power corrupts absolutely.
Look to the German Bundesliga, they have been pro-active in addressing their own financial problems, they have not waited for Uefa to implement FFP.
A properly regulated league that is domestically competetive, as a result season ticket prices are cheap by comparison, stadiums are well attended and the German national team is now flourishing with young homegrown talent.
This is very good. In a way relegation is a problem with huge financial implications. While it does make for more excitement for the spectator, it is not very helpful for the clubs. I think this is why the MLS does not have relegation. But there is incentives for failure for the clubs that go down and then once down they have an advantage over the other clubs in coming back up. There does need to be more incentive for successfully managing a club’s finances well.
The sugar daddy also distorts the financial balance in a way that is unsustainable. It would seem that lots of mid-table clubs would love to be taken over by a billionaire with lots of heart to spend his money on football players so they can become the next man city. But then the sustainability does not rest on football revenue but on oil, or whatever has created the wealth for the sugar daddy. But this also disrupts the clubs that are trying to manage themselves financially as it disrupts the real value of players and the wage scale of players. While some clubs can cash into this by selling players for high prices, I think over all it is negative for competition and it affects the mid-table clubs the most because they can never keep there really good players for example Villa, or Everton over the past decade.
The clubs already have in-equities that come from the stadium the have. So Man U makes more as it has the biggest stadium. Everton makes less as it has a small stadium. If the TV revenue is shared equally that helps each club and I think is correct.
Thanks Phil.
The parachute payments is news to me. I’m trying to think; why WOULD you need to pay a club that’s gone down? That’s almost like saying – I’ll reward you whether you play well or not. The logic of ‘less money’ being available is flawed too. As in, surely a club will have to think beyond 1 season and buy players accordingly. If they do a ‘double or nothing’ as you say, and bank on ‘parachute payments’ to pay salaries…it is a loophole in the system.
I’ve always been an advocate of free market though. If you earn your money honestly through good strategy and good business decisions, surely you have the right to spend it the way you want? That seems fair.
I dislike salary caps..frankly. They are just not fair to the genuine innovator. So if Arsenal is a fair club, and does everything right and through brilliant decisions makes a 50 million $ profit; they should be allowed to spend it. If there’s a cap, then why would they make the 50 million in the first place? Why strive for excellence? Why innovate? etc etc.
But we’ve done this discussion on Untold before and the counter argument is that Arsenal (as an example) need the other ‘smaller’ clubs ..inorder to survive themselves. Its the EPL as a brand and not only about the 5-6 big clubs. If that is the case, and the main revenue earners feel that there is a lot of indirect benefit through the bottom clubs; then a better model should be allowed to be worked out.
I however strongly dislike the idea of dumping a salary cap just so it is ‘fair to all’. It just makes no sense. Its another variation of the ‘parachute payments’ IMO. You get paid if you do well. You get paid if you do badly. Why bother?
The only thing the FA needs to do is to ensure what AW says often; ‘Spend what you earn’ .. irrespective of whether its 5 million or 100 million. That to me is the only fair thing.
Sugar daddies complicate things though. Can a club reject an insane amount of money though, if they feel it’ll be a risk down the line? If they can, then why don’t they just reject that money? Instead of taking it, and then asking for bailouts when it goes pear shaped? So all I’m saying is… it isn’t the sugar daddies who are the ONLY problem. Its the people letting the sugar daddies play, with limited long term thinking that are also a problem.
All just my own opinions obviously. Any good counter arguments are most welcome : )…. rants about how my way is ‘selfish’ are not ; )
I disagree with Phil that the problem here is the financial distribution, its more to do with the incentive for clubs to spend more than they earn and I must say that even fans contribute to this.
I find it not so amusing that despite the huge number of clubs with financial problems, a lot of so called Arsenal fans would slate their club for its financial prudence but I guess its because most want some financial sugar daddy to come and ‘spend’ on the club but they fail to realise that there are few of such sugar daddies ready to embark on such profligacy. If I’m not mistaken, the likes of Ecclestone who was formerly part owner of QPR are richer than Roman Abramovic but sold the club to a less wealthy owner because they realised they just couldn’t run it as a proper business (along with some ownership squabbling too).
I do believe FFP will be an effective initiative to take out that incentive to overspend if its properly enforced but it might be a bit naive to assume that the extreme short termist thinking about winning the next trophy (even though its mostly pyrrhic in nature) which has prevented the PL from being able to embark on such an obvious solution will not also afflict the more politcally diverse UEFA as History has shown us that people are very adept at hiding their heads in the sand until disaster strikes, one only needs to remember the farce that went on about Player’s wages in the La Liga earlier on in the season and how that league has carried on since as if nothing happened without addressing the fundamental problems.
Duduspace,
To follow on: If it is naive to put head in sand and assume disaster can’t strike, then when it does, it is even more naive to assume that one’s head can be extracted from the sand. That would be two self-serving assumptions that are destroying football (alas, if only football…)
Arvind,
You act like “genius” is something inherent and of so deserving of domination: something independent of prior social and historical conditions, and as if big money earned elsewhere (not on the football pitch) can innocently and fairly buy into football and then buy the big brained management geniuses and the big salaried players (pitch genuises) that only big money can attract to itself. A democracy of the geniuses, you posit. Then your big money boyz are geniuses when compared to the lesser sub-geniuses who have not made their money elsewhere; who do not have as big a Sugar Daddy from off your social darwinian food chain; and who cannot afford the players and the management talent that oh so rightly accrues to the geniuses who were genius enough to make their big money outside of football and oh so fairly, you assume. You wrongly consider a historically tilted playing field (on and outside the pitch) to be a fair game, and an even game when it never was that. Never. Your model is a model, a myth, completely unhistorical and a fairytale of a world you want to see and project on to the existing world of football and call it fair. Bollocks.
Read Phil’s link to David Conn’s article and then come back and say that the differences between the winners and losers in this craven cave-in come down to an act of “genius”. Or, in your model, does being willing to be more rapacious than the rest of the herd equate to what you call “genius”? It being top predator the only incentive that counts, the only way that innovation would be incentivised in your model? If you think or feel this, there you will find the roots of your preferred model. Adam Smith always saw the market in a framework of moral regulation and state intervention when the predators run amok. He was not naive about this. Nor was Ayn Rand, and less so as she grew older.
@Mark
I think the reason the MLS doesn’t have relegation is largely because North American sports fans don’t see relegation in any sport (hockey, gridiron, basketball, college sports).
Again Bob, very like our last debate you’re not trying to understand what I’m saying. Am I saying this will WORK now? In the world as IT IS NOW? No.. I’m not. And if some of my writing above has conveyed that message, then I correct myself here – that’s not what I meant. It obviously won’t work, because of corruption at various levels.
What I do think and believe though, is that I’d love a world to be that way where each one got rewarded to an extent that’s proportional to his deeds. Whether that has any relevance or not to the real world, really, is not what I’m pointing out. I am well aware it is ‘pie in the sky’, unfortunately may I add.
I am only discussing the merits of that kind of a system over the mess we have in today’s world…everywhere. Hopefully you can distance yourself from your own opinions, which I can see are diametric (and fine by me), and point out why…in an ideal world… this system isn’t the best. I’ll be happy to admit I’m wrong…again though I’m not sure this is the right forum.
I’ll try and answer your points though. I’m not talking about ‘sugar daddies’ being the way to go. How has United made their money and become a huge brand? That’s not sugar daddy..rt? If you make money through good marketing and on field performance, follow the laws while doing so… what’s wrong in me wanting to spend it?
I don’t like Sugar Daddies in principle. They’re obviously uneven and pump insane amounts of money into clubs disrupting a lot of things. Again though, if the club doesn’t want to.. why is it selling out? Don’t sell out. Don’t get tempted by what sugar daddies offer. Don’t buy players and run up debts on salaries… so you can’t refuse when sugar daddy comes along. Do business like Arsenal football club. You won’t NEED a sugar daddy. THAT is what I’m saying.
However, if clubs do get a sugar daddy what CAN anyone do? Its someone putting his own money into the club..voluntarily. What do you do then? Prevent clubs from selling out? Put a cap on how much money they can make? Put a cap on how much they can spend? What happens to a club like Arsenal then? Who HAS earned things honestly and WITHOUT a sugar daddy? Suddenly, the cap is applicable to them too and all their honest work over the years to become big, the right way, is down the drain. THAT is what I have a problem with.
Regulation regulates the dishonest.. no doubt…it also punishes the honest and clips his wings. And that I don’t agree with… coz there’s nothing sadder for me, than to see genuine talent inhibited through someone else’s fault. Its not about being Top Gun… its about being rewarded or punished..for whatever your actions are.
Again.. just to remind you… what I’m saying will never ever happen… it is plain and simple Utopia. I’m aware of that. But in an honest world, a corruption free world… there is no other way I’d choose.
I hope that makes my stance clear. It is just an opinion of course, so if you don’t like it, that’s obviously okay.
DuduSpace – I agree that financial incentives aren’t the sole reason for the club’s overspending, but it is a big part of it. Fix that, and you’re half way home.
Regulation I would have would focus around compulsory wage cuts in the event of relegation – clubs simpyl cannot afford to pay £10k+ if they are the Championship, so if they offer higher salaries than thar in the Premier League, there must be a compulsory clause that cuts wages in the event of relegation.
That, and some form of “season budget” submission – clubs must submit a season forecast of revenues and costs, with documentation on wages (as a key cost) provided and conservative forecasts on match day revenues (TV and commercial will be pretty clear cut, bar performance clauses). This would ensure that clubs cannot pay players more than they can afford, and end the phenomenon of clubs going out of business over the course of a season. This could easily be included as part of a “Premier League licence” – clubs cannot play in the league unless they meet strict criteria.
Arvind,
Arvind,
Salary caps work in three highly competitive leagues that I also follow: NBA/US pro basketball and MLB/US pro baseball (if you pass a certain level a luxury tax is imposed) and in the NFL/US pro football (a very exciting and competitive league with ever-changing champions). They do even up the competition, as they are intended to, and act to some degree to enhance competition which creates. That you condemn this real world measure as an immoral brake on the incentive of the honest zillionaire genius of your ideal world is what I have trouble with. And why should your zillionaire genius be hampered? So that the fans and players and other owners have a more competitive chance which actually makes it a lot more exciting than the predictable monotony of endless championships by your zillionaire genius’s team. Anyway, this is all I have time for now, so any more is up to you. Cheers.
Thats cool Bob. Back to Arsenal now : )
Unless salary caps are brought in across the world (which means accounting for various different laws in various different countries) it won’t work. In fact, even in England, the Premier League might bring in salary caps, but the Football League may decide not to. In US sports there is a franchise based model which world football simply doesn’t have. Besides, the salary caps have a flip side as well. You have players unions taking on the owners and the league in the NBA due to which this season was in doubt. The players do NOT want a hard salary cap because it cuts down on their earning potential, while the owners say it will help keep the league profitable as a business. Such ‘lockouts’ have happened in the NHL and the NFL as well.
By the way, I think a few years ago, even Arsene Wenger spoke out against salary caps, though that was more from a practical viewpoint. How to enforce it. I believe the example he gave was if a club wants to pay a certain amount to a player’s grandfather in Brazil, how can you stop it?
Anyway, I think salary caps in that sense won’t work in football, but I do think there has to be better and better defined regulation that limits the spending of the clubs based on their earnings, as well as better checks on ‘owners’ and their accounts. Both the FFP and the Fit and Proper Persons Test fall far short of what is required.
However, one thing that I believe must be brought in from US sports is that players cannot be bought or sold. Only their contracts can be traded. So if a player signs a 3 year deal with a club, another club cannot come in and offer him more money. They can only acquire his contract. This ensures that contracts are respected and that a player genuinely moves for sporting reasons. At least until his contract expires.
Salary cups in football wuold fail in many countries. Have you heard about the Parma(lat)gate?
They paid star players more money that in their contract to avoid taxes.
The salary cap in US sports is the most un-American thing I’ve ever seen (in sports terms). Imagine if a US President wanted to limit the pay of top executives on Wall Street, the lobbying machine would go into overdrive trying to get him impeached/replaced.
The only reason a salary cap exists is that the owners who are bank-rolling the sports business in the US don’t want to see a restriction placed on the amount of money they can earn.
A salary cap in football is unworkable because of the number of clubs run for political reasons (Milan, Madrid etc.) for whom a salary cap would be a massive hindrance. This is another thing that American owners of football clubs don’t seem to grasp, whereas the Arabs have grasped it very quickly. MCFC is no longer a football club, it’s a promotional tool.
Too late?
@bob
Except that baseball is not a sport. It is a past-time. It is nice to see trained athletes playing baseball. You will not become athletic playing baseball.
@Phil
Perhaps the payments by the Premier League to relegated teams isn’t working as desired. And I am not an economist, but I’ve read a little and understand some math (as an engineer).
I can see the reason why such a thing might be considered. So, their heart is in the right place (so to speak), the implementation leaves a little to be desired.
I believe these payments are extended over more than 1 year (4 years?). Let’s ignore the first year a team was relegated as a special case.
I’ve seen a bunch of papers at arXiv, and nominally they all say that examining the scores in football matches will not allow one to rank the quality of teams based on scores in games. So, let’s assign a weighting factor to every team in the championship based on their position in the league the previous year. The weighting factor varies between 1 (to the 1st placed team) and 0.5 for the last placed team. People can argue about whether 0.5 or something like 1/e or 0.33 or something else is better.
If a team is just the first year out of the Premier League (not yet discussed), their weighting factor is multiplied by 2. If the team is in their second year out of the Premier League, their weighting factor is multiplied by the square root of 2. Third year out, multiply by the third root of 2. Fourth year, fourth root of 2. Again, people could quibble about whether the lead factor should be 2 or something else, or instead of roots (square, cube, fourth) they use something based on logarithms.
The reason I suggest square roots, is that a few years ago I looked at repartitioning election ridings in Canada to adjust with changing populations over time. And square roots of population seemed to work much better than logarithms.
The Premier League Provides X amount of money to relegated teams. The money is given to the lower leagues, and not teams. Each team in the Championship gets its weighting factor divided by the sum of the weighting factors of the relegation monies. And if a team that was relegated from the Premier League, gets relegated from the Championship the next year, the money gets similarly diluted.
The idea was, that the team in going into the Premier League acquired players who “demanded” that they play at the highest level. And if relegated, many of those players would choose to leave, leaving the team with much less talent than when it was initially relegated.
In part, this money is a recognition that the lower leagues do produce players of value. And hence, a lower league in general, should benefit from having a Premier League team relegated into it. With some money going to all teams in the lower league(s), all teams should be able to better compete.
In terms of first year of relegation, perhaps one makes up a “special” league composed of all the teams in the lower league not relegated from it plus the teams relegated from the upper league (Premier League). The rank of the team that topped in Championship is 1, the rank of the team bottom of the Premier League is 0, …. And then you shift the ranks down such that the highest ranked Premier League team relegated is 1. And you apply the same weighting and allocation scheme as for the general case.
The amounts of money given by the Premier League to relegated teams was set by some formula, and this kind of allocation will completely screw up how that number was determined.
But, it does recognize the lower leagues have value to the Premier League, at least for the next 3 or 4 lower divisions goes (assuming a 4 year Premier League plan). And it spreads the money to all teams, not just the teams that were relegated. The relegated teams get a bonus, as they were at some (recent) time, in the Premier League.
Useful? I don’t know. You’re the economist, does this have merit? Will it help, rather than hinder?