A Premier League Salary Cap: Questions and Consequences- Daniel Geey

By iSportconnect | December 4, 2012

Introduction

It has recently been reported that the Premier League (PL) is considering implementing certain cost control measures. In line with the UEFA Financial Fair Play (FFP) rules and the Football League (FL) FFP rules, the PL is continuing the growing trend of leagues and associations looking to reign in club spending to ensure long term club sustainability.

The aim of this blog is to set out what the PL proposals may look like, the practical and political ramifications of whether such proposals are likely to be implemented and the consequences of such a change to the PL rules. Such consequences include comment on the potential legal challenges, the sanctions that may be imposed for breaches of the rules and who the rules may benefit.

Background

PL and foreign clubs alike (bar a few jurisdictions) have historically been able to spend beyond their means in their search for success. Such astronomical spending usually occurs through the injection of funds from benefactors willing to subsidise a club’s cost base. The PL, just like other leagues, has welcomed external investment into its football clubs. The one regulatory jigsaw piece missing from the PL handbook is something which has formed the basis of the updated UEFA Club Licensing Regulations as well as the recent Football League FFP rules. It is the break-even aspect that is absent in the current PL regulatory framework. Whether a break-even regulatory model is adopted by the PL rather than a type of salary is discussed below.

The reasons why the PL are now contemplating further cost controls may include the following:

• PL club owners are keen to ensure the new likely £5bn+ television deal stays (to a degree) out of player’s pockets. The rationale is that a salary cap will collectively dampen the wage market because the twenty PL clubs will only have finite wage resources to allocate to their players.

• Around half of the clubs competing in the PL may already be planning to compete in UEFA competition and therefore will have to adhere to types of cost control mechanisms like the UEFA FFP rules in any event.

• In an age of ‘fiscal prudence’, there may also be a heightened appreciation of the public mood of austerity and belt-tightening.

Regardless of the underlying reasons, it appears that the PL may well implement a version of UEFA FFP or alternatively push through a type of salary cap. For explanation on the UEFA and FL FFP rules click on the highlighted links. The aim of the rest of this blog is to examine the consequences for a salary cap in the PL and what form it could take.

A PL Salary Cap: The Options

The reported options that the PL are likely to consider during their November meeting include:

• prohibiting clubs from increasing their wage bill by more than five per cent annually (the 5% increase rule);

• only allowing a club’s wage bill to be a certain percentage of its overall revenue (the wage to turnover rule); or

• adopting a version of the UEFA ‘break-even’ FFP rules.

If the PL considers implementing the 5% increase rule, then that will disproportionately advantage those clubs with higher wage bills. The simple arithmetic being that 5% of a £70m wage bill (£3.5m) is £6.5m less than 5% of £200m (£10m). It has the impact of potentially protecting those clubs that have spent large sums on wages and disadvantages those who have been more prudent with their spending. Similarly, it could perversely encourage wage spending in the short term before sanctions kick in to provide clubs with bigger wage bills to increase season on season.

The second proposal links wage costs to revenue. Manchester City’s recent wage to revenue figure of over 110% demonstrates that some clubs were spending more on wages than they received in revenues. This figure for Manchester City is now not as eye watering with the increased PL, Champions League and sponsorship monies in the last year.

An example of this rule in practice may see regulations that prohibit clubs from spending more than, for example, 70% of its income on player wages. As you can see from the below table (based on the 10-11 figures), over half of the clubs had wage/turnover ration of 70% and above. Whilst this benefits the bigger clubs with higher revenues, this at least incentivises revenue growth for all clubs. A similar system is in force in the FL divisions one and two. They are part of the Salary Cost Management Protocol (SCMP). For the 12-13 season, clubs in League 2 have to adhere to 55% wage to income ratio. Clubs in League 1 have to adhere to a 65% ratio. Swindon were recently were hit with a transfer embargo because they breached the SCMP regulations. As a result, the precise definitions of revenues and wages become extremely important for compliance purposes.