An analysis of financial regs and salary caps in the Premier League, NBA and Premiership Rugby
Published 13 November 2013 By: John Wallace
The Premier League Financial Fair Play Regulations (“FFP”) were ratified on 11 April 2013. The new rules, that have full effect this season, aim to prevent clubs from sustaining huge losses in the pursuit of glory1. This article will look at FFP, designed to curb excessive spending, and compare the practical and legal implications to the salary cap mechanisms in MLS, NBA and the Rugby Premiership.
FFP sits beside the UEFA Club Licensing and Financial Fair Play Regulations2 (“UEFA Regulations”). The UEFA Regulations only apply to clubs that wish to play in the Champions League or Europa League and therefore they do not impact the majority of clubs. An analysis of the UEFA Regulations is outside the scope of this article. However, it is useful to have a brief understanding of them to give some context to the FFP regime.
The UEFA Regulations set 36 criteria for clubs to qualify to play in the Champions League and Europa League centred on 5 areas: sporting, infrastructure, personnel & administrative, legal and financial. The Regulations restrict the losses that clubs can make to a maximum annual figure, currently £39.5m, and are intended to encourage greater prudence in the way clubs are administered. Following the fanfare of the announcement of the Regulations back in 2011 UEFA have indeed enforced the UEFA Regulations, withholding prize money from 23 clubs where investigations concluded breaches of the Regulations. UEFA has a wide array of sanctions that it can levy for breaches, including fines, deduction of points and ultimately disqualification from a competition or exclusion from future competitions3. In 2012/13, 6 clubs were prevented from playing in UEFA competitions for failing to comply with the UEFA Regulations4.
It is also worth mentioning that clubs in the Championship must adhere to a Financial Fair Play framework. This forces clubs to stay within pre-defined limits on losses and shareholder equity investment. The clubs must provide annual accounts to The Football League by 1 December every year, which are used as a basis to calculate what is considered an acceptable loss. By 2015/16, the acceptable deviation from that figure will be just £2m and those who fail to comply are subject to a transfer embargo until they can evidence compliance. Clubs in League 1 and League 2 must comply with the Salary Cost Management Protocol. This broadly speaking limits spending on player wages to a proportion of the club’s turnover, again with the threat of a transfer embargo for those who do not comply.
Background: Salaries in the Premier League
Deloitte’s 2013 Annual Review of Football Finance5 reported that total wages across the Premier League rose 4% to over £1.6 billion for the 2011/12 season. As a result, the league’s wages/revenue ratio remained at an all time high of 70%, having been as low as 59% in 2004/05.
The wage increase across the Premier League has continued to be driven by clubs that finished in the top half of the table. Six clubs with total wages above the average of £83m finished in the top eight. Manchester City had the highest wage bill at £202m, out-paying Chelsea who had been the highest payers for the previous eight consecutive seasons.
More worryingly, Championship clubs’ wage spending increased by 11% to £422m and resulted in the wages/revenue ratio of 89%. Nine Championship clubs have wage bills greater than their revenues.
This global rise in wages in the domestic game must be seen in the context of the financial collapse of Leeds United, Portsmouth, Glasgow Rangers and most recently Hearts, and the wider economic crisis. Of the 60 clubs that have gone into administration in professional football in England Wales only Portsmouth did so whilst in the Premier League. It is a fate most suffered by clubs in the Championship, League One, League Two and the Conference National. However, the shock waves are still felt by Premier League Chairmen and the introduction of FFP demonstrates a willingness on behalf of most Premier League clubs to embrace prudence.
FFP restricts the operating losses clubs can make, often due to the excesses outlined above, to a maximum of £105 million over a three year period, to ensure that owners guarantee any losses over £5 million per annum and restrict clubs from increasing their annual wage bills, initially, if more than £52 million, by more than £4 million per season (accumulatively up to a maximum of £12 million by 2015/16)6. It is the final string that differentiates FFP from the UEFA Regulations and the Football League Financial Fair Play framework, neither of which are concerned with any form of cap on salaries.
Other leagues and sports have chosen to use salary cap mechanisms to curb excessive spending and maintain competitive balance in the leagues and they provide an indication of the possible consequences of FFP in the domestic game.
Englishmen in MLS: Chris Birchall & David Beckham
Chris Birchall rose to fame as an industrious Port Vale central midfielder representing Trinidad and Tobago at the 2006 World Cup7. On the back of his success on the world stage, Birchall signed for LA Galaxy in 2009, signing a contract guaranteeing him a salary of just $99,125 per annum8. Birchall joined his compatriot David Beckham, who had signed a five year deal worth a reported £128 million in 20079. The paradoxical salary cap system in MLS has created a situation where team mates can be equal on the pitch but disproportionately unequal off of it.
A MLS club’s first team squad is comprised of up to 30 professionals, all of whom are eligible for the 18-man match squads. Players occupying squad positions 1-20 count against the club’s salary budget of $2,810,000 and are referred to collectively as the Salary Budget Players10 (“SBPs”)11. Chris Birchall, now at Columbus Crew12, would have been considered a SBP when he was at the Galaxy.
Players 19 and 20 in a club’s roster are not required to be filled and the teams may spread their salary budget across only 18 SBPs. The maximum annual salary for a SBP is $350,000. Players occupying squad numbers 1-24 earned at least $44,000 in 2012 and those in squad numbers 25-30 earned at least $33,750 in 2012, the latter were required to be under the age of 2513.
Players occupying squad numbers 21 to 30 do not count against the club’s salary budget and are referred to collectively as the club’s Off-Budget Players. All Generation Adidas players are Off-Budget players14. All Generation Adidas is a joint venture set up between MLS and US Soccer (the US equivalent of the FA) with the focus on producing top young talent and placing such players at franchises in MLS earlier than they would otherwise get the opportunity. Graduates from the scheme include Tim Howard, Clint Dempsey and Landon Donovan.
Franchises in MLS are able to acquire up to three players whose salaries exceed their salary budget. The club itself bears financial responsibility for a “Designated Player’s” salary. Under this rule David Beckham signed a £128 million contract to join LA Galaxy in the summer of 2007 and Robbie Keane more recently joined the same club, both to great success. $350,000 of the player’s salary is set-off against the club’s salary budget, the rest the club must find from commercial revenues.
Thierry Henry has criticised the salary cap blaming it for the loss of New York Red Bulls’ Kenny Cooper15. Cooper was Red Bulls’ top scorer last season with 18 goals. He was a very popular player in the dressing room and a fans’ favourite. Red Bulls’ Head Coach Mike Petke remarked, “If we kept Kenny – we know what he brings us, and it’s phenomenal – but we wouldn’t have been able to add anyone. (We couldn’t sign) all the supplemental picks and trialists we have in camp. And a step further, certainly a third [designated player] would be out of the question”16. Cooper’s salary, reportedly $300,000 to $500,000, consumed such a high proportion of the franchise’s salary cap that he was too expensive to keep. Cooper’s contract was not a Designated Player deal. The value of the contract accrued as a result of Red Bulls effectively buying salary credit with allocation money (grants handed out by MLS to underperforming franchises or franchises that have sold MLS players to foreign clubs for profit) to maximise the salary they could offer him and when Red Bulls sought a third Designated Player, Cooper had to go. In Petke’s words, he became a casualty of the salary cap restrictions17.
Henry thinks that MLS will not progress unless something is done to ensure that the salary cap does not prevent clubs from retaining their best players. The imposition of limits on salary spending by Premier League clubs could lead to a similar situation where they are unable to hold on to key players in order to comply with the salary budget criteria and see those players move to rival clubs. Top players will always be in demand regardless of salary. Gareth Bale left Spurs for Real Madrid in August and like Redbulls, clubs will manipulate their squads to find room for these special players. In this case, Real Madrid allowed last season’s second top goalscorer, Mesut Ozil, to join Arsenal to make way for Bale.
The impact is in fact on players on a lower level. Players that are out of form, have a history of injury or indiscipline may find that Premier League clubs are not willing to risk a large proportion of their salary budget on them. Those players will either have to re-evaluate their salary expectations or move to clubs in jurisdictions where there are no salary restrictions. It follows that we may see mid-ranking Premier League players moving to the Middle East or China, for example, at an earlier age than we see at present as their domestic options run dry. The age of Kieron Dyer moving from club to club despite playing just 18 games in 6 years18 is possibly over. A recent study has concluded that this secondary market (the primary market being the supply of fit, experienced players) has already become an oligopsony, with very many suppliers faced with a limited demand. They conclude that players in the secondary market face unemployment, downgrading and a shorter career in the market19.
A salary cap in US basketball (“NBA”) has created a market where players are actively pursuing contracts that are less than their market value in order for their teams to be able to afford other talented individuals, to give them a chance of winning the NBA title.
The NBA has introduced five tax tiers that will apply from the 2014-2015 season, effectively meaning that clubs will have to buy the right to spend over and above a salary cap, currently set at $58.679 million20. The penalties start at a rate of $1.50 for every dollar above the cap where it is exceeded by $0 to $4.9 million. The rate goes up incrementally to $3.75 per dollar for excesses of $20 million or more with an additional $0.50 per dollar for every $5 million thereafter.
LeBron James is arguably the greatest basketball player on the planet and commands an annual salary of $17.5 million21 under the salary cap regulations. To put James’ deal into context, Kobe Bryant signed his contract with the Lakers before the salary cap came in and he is paid $27.8 million22. European teams have reportedly offered James $50 million a year to leave the US, but James has chosen on court success in basketball’s most prestigious league over maximising his market value23.
The lessons to be drawn from basketball’s salary cap are that the cap acts as a downwards pressure on salaries for elite players, that this risks losing the players to other markets. However, some players may prefer to accept a lower salary in order to increase their chances of sporting success. The latter can be observed in football with stars being reluctant to move to wealthy clubs in Russia or the Middle East until the twilight years of their careers. For example, only last year a Russian club reportedly bid EUR200 million for Lionel Messi, thus exercising his contractual release clause, but he is still playing at Camp Nou.
This situation is sustained by the fact that there are very few economically strong championships outside of the NBA. There other economically homogenous champions at a lower level (France, Germany, Italy) and very heterogeneous championships with several rich and powerful clubs (Greece, Russia, Turkey)24. There are few alternatives for elite players outside of the NBA.
Smaller franchises in less glamorous locations may still struggle to attract top players to their clubs, even if other clubs are prevented from stock-loading talent due to a salary cap. The Minnesota Timberwolves in the NBA have a small fan base in a region known for its cold climate. Attracting talent to Minnesota can be difficult25. Broadly speaking the same applies in world football, with the obvious exception of the failed project at Anzhi Makhachkala.
The problem with the taxation approach is that some owners, such as the Russian billionaire owner of the Brooklyn Nets, will still be willing to buy the title. As far back as 1992, Jack Walker splashed the cash to fulfil his dream of Blackburn being Premier League champions. Roman Abramovich of Chelsea and Sheikh Mansour bin Zayed Al Nahyan of Manchester City have shown similar ambitions. According to the Deloitte report, Manchester City announced an operating loss of £82 million in the 2010/11 season, yet still had an annual salary budget of £174 million and a net annual transfer expenditure of £141 million in 2010/11. Taxation is expensive but not prohibitive, wealthy owners may be prepared to take the hit. In US baseball, a taxation approach is taken in respect of clubs that spend beyond their salary budget. Since the inception of the salary cap in 2003, four teams have exceeded the threshold, being the Boston Red Sox, the Los Angeles Angels of Anaheim, the Detroit Tigers and the New York Yankees26.
The salary cap in the NBA has two key consequences for players. The first being a stagnating effect on the level of salaries. Most concerning is the salary cap in NBA has seen players in the secondary market marooned at clubs with prospective buyers unwilling to take over their contracts and use up space in their salary budget on a player coming towards the end of his career, who is injury prone or who has been on poor form. Like in MLS, players in the secondary market have been the ones hardest hit by the imposition of the salary cap.
A comparison can be made closer to home by looking at the salary cap regulations that operate over Rugby Union. This is a hard salary cap, effectively a ceiling on the amount clubs can spend on player salaries from their respective budgets. Clubs are given an overall salary budget, with additional £30,000 allowance for each ‘home-grown’ player and in the season immediately prior to a World Cup, an allowance of £30,000 for each national team player in the club’s squad27.
The Rugby Premiership’s salary cap was introduced in July 1999 to ensure that all clubs were on the same level playing field, that clubs are operated in a sustainable way and protecting the “competitive balance” and unpredictability of the competition, thus ensuring it remains an attractive commercial product28.
The 2012-13 season saw the cap increased to £4.5 million, including a credit of £30,000 for each home-grown player in their squad. However, the most significant change saw the imposition of an “Excluded Player”. Much like we have seen in MLS, each Rugby Premiership team is allowed to sign one player that does not count against the salary cap. The conditions are that:
- The player has played with the club for two seasons before being nominated as a designated player;
- The player played outside the Rugby Premiership in the season prior to being nominated or was a member of a national squad in the 2011 World Cup29.
The increased cap and Excluded Player changes were made in response to growing concerns that English players would move to France or even Japan in order to benefit from higher salaries.
Leicester Tigers have complained that their lack of spending power prevents them from keeping pace with the free-spending Irish and French30 sides in the Heineken Cup, whilst Saracens and Bath have both questioned why spending should be limited to £4.5 million31. A brief analysis of the finalists of the cup since its inception for the 1995/96 season shows no fall in the performance of English rugby teams after the introduction of the salary cap prior to the 1999/00 season. In fact since the salary cap, English teams have featured in the final 8 times, the same number as Irish finalists and only 2 less than French. However, if you consider that the results in semi finals are less about form and more about knock-out luck, an analysis of who played in the semi finals tells you more about the quality of the teams in the competition.
The results from an analysis of the semi final results are equally as surprising. Pre-cap, France dominated the Heineken Cup, with 56% of teams in the semi finals being French. England represented just 13% of those clubs, the same share as Ireland and Welsh clubs made up the further 19%. Very similar figures can be seen in respect to the percentage of points scored by the clubs in the semi finals, with French clubs scoring 54% of the points and England and Ireland 18% and 15% respectively.
Post-cap, the opposite of what was expected happened. English clubs made up 28% of the semi finalists, Ireland 32% (with no salary cap) and France’s share reduced to 32%. The percentages for point shares mirrored those for appearances. So the salary cap appears to have made English clubs more competitive in the Heinneken Cup, not less as Leicester Tigers have suggested. If all clubs comply with the regulations, if they do not already, there is fair competition in the domestic league too. So has the salary cap achieved its aim in Rugby Union?
There has been a time lag between the imposition of the salary cap and the French clubs starting to take advantage of their spending limits. Already, top international players, such as Lions Jonathan Sexton and Jamie Roberts, have left domestic clubs to join clubs in France. Unlike in the NBA and, arguably, the Premier League, there is an alternative league that competes on a sporting and financial level.
The imposition of FFP has already seen Premier League and Championship clubs, in general, reign in their spending during the summer transfer window. That trend is likely to continue, at least in the short term, as finance directors come to terms with the implications of FFP and the financial health of their respective clubs.
It is unclear whether elite footballers will suffer the same fate as NBA players who have seen their salaries stagnate as a result of the cap in their sport. Lessons from the Rugby Premiership tell us that where there is other viable markets key players may move to a different country in pursuit of higher salaries. This has already been seen in football with the influx of elite players into the Premier League following the demise of the financial state of Serie A. However, the fact that many elite players continue to play in Spain despite higher salaries on offer in the Premier League tells us that other factors are taken into account when a player is deciding whether to move to a different country; style of football, language and the cost of living being influential in the decision making process. So the imposition of a salary cap may see elite players leave the Premier League, but it may not.
There will always be a demand for elite players as clubs make room for them within their cap. For those in the secondary market, the over-supply of players in this market will lead to unemployment, lower salaries, shorter contracts and shorter careers. The fact that football, outside of MLS, is an open market will not prevent this due to the over-supply.
For clubs, a movement towards compliance with FFP will see an improvement in their financial health, especially given the increased television revenues that are currently being enjoyed. The key question for players is whether increased profits will have an inflating effect on salaries or whether they will lead to club owners enjoying a return on their investment.
The success of FFP in bringing about financial stability in domestic football will rely on the enforcement of the regulations. Richard Scudamore, Chief Executive of the Premier League, has commented, “if people [clubs] break the £105m [limit] we will look for the top-end ultimate sanction – a points deduction”. Scudamore qualified this by stating, “if there is a material breach...we will be asking the commission to consider top-end sanctions”. So slipping over the £105 million limit may be acceptable, which the author suggests does not send out the right messages to the Premier League clubs who will need to, it seems, substantively comply.
4 Derry City, Besiktas, Gyori ETO, AEK, Neath and Rangers.
19 Pages 125-126, KEA – CDES: Study on the economic and legal aspects of transfers of players
24 Page 212 KEA – CDES: Study on the economic and legal aspects of transfers of players
26 Page 84 KEA – CDES: Study on the economic and legal aspects of transfers of players
30 The French salary cap is 10m EUR (£8.6m) for 2013-14.
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- Tags: Football | France | Governance | Italy | NBA | Premier League | Premiership Rugby | Regulation | Rugby | Spain | United Kingdom (UK) | United States of America (USA)
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John is a sports and media lawyer at McFaddens LLP and a Director at sports agency DBW. After reading Law at the University of Liverpool, he spent a year lecturing on the Law of Contract at the Université de Bordeaux IV, before training at the largest national law firm in the UK, Eversheds LLP.