It’s a long way away yet, but the subject of relegation from the Premier League is a hot topic in some quarters. Daniel Story has written a great post today over at Football365 on the implications of a record increase in the parachute payment on offer to clubs relegated from the Premier League.
Storey has the figures on the new deal that is rankling a lot of Football League clubs: “The existing figure of £48million spread over four seasons would be raised to almost £60m (a 25% increase), whilst the first-year payout would increase by 44% to £23m (from £16m).”
Storey believes the rationale for the increase in parachute payments involves encouraging newly promoted Premier League clubs to take greater financial risks on transfer spending and wages in order to foster a more competitive top flight. The payment in theory helps soften the blow of diminished revenues that follows relegation. This in turn would allow smaller clubs to sign player contracts without facing a potential fire sale should disaster strike.
That’s good for the Premier League, but perhaps not so good for the Championship. Here’s Storey:
This season, whilst QPR, Wigan and Reading have been given £23m each, non-parachute Championship clubs will receive just 10% of this total as part of the broadcasting deal. Over the course of their four-year windfall, these three will receive £60m in parachute payments alone, whilst a club such as Ipswich Town will get £9.2m. Given that the three relegated clubs already received in the region of £63m each last season through broadcasting alone, they have a significant advantage over their Championship rivals.
Championship clubs this summer spent £36.3m on transfers. The relegated trio accounted for £18.9m of this – or in other words, 48% of the transfer expenditure was shared between 21 of the 24 clubs. The same three accounted for 60% of all the money received in transfers – they are operating in a different sphere to other teams in the league.
In other words, the sizable payments, which far exceed the “solidarity payments” the Premier League issues to all Championship teams, could promote competitive imbalance in the long term.
I say ‘long term’ because in the last three seasons in which the parachute payment came to £48 million over four years (also a controversial deal with the Football League), results on the field have been mixed. In 2010-11, the first year of the old parachute payment cycle, only one of the three relegated clubs bounced back the following season—though the other two rather notably made the playoffs but failed to gain promotion.
The three relegated clubs in 2011-12 fared much worse, however. One, far from bouncing back up again, suffered another relegation, this time to League One. Another finished 17th out of 24 teams, and a third managed to finish in 7th place, missing out on the playoffs on goal differential. So it’s not yet evident that the parachute payments tip the balance yet.
There are more discrepancies that need addressing. Let’s look for example at the transfer spending among clubs relegated from the PL in the Championship for the past few years (WARNING: this is a ridiculously small sample size, and these numbers don’t include wages, which is very tricky historical information to find—still, work with me here). Now, granted, the last parachute payment deal wasn’t as generous as the current one, but in historical terms £48m over four years is still a significant chunk of change. So one might expect to see relegated clubs trying to spend their way back to the Premier League.
And indeed, if you look at total transfer expenditure for clubs that dropped down to the Championship the season before, relegated Blackburn took top spot in the Championship for spending in 2012-13. And yet for the £15 they spent on players, they sold £10m, at a deficit of -£5m. For their efforts they finished 17th. Wolves were in second place behind Blackburn in transfer spending having blown £13m. But they sold £26m worth, mostly on the back of sales of Matt Jarvis to West Ham and Steven Fletcher to Sunderland, with a surplus of £13m. They ended up relegated to League One. As for Bolton, they barely spent much of anything, dropping a paltry £2m on the market and calling it a day. Where did they end up? In seventh place, the team that missed out on the playoffs on goal differential.
In 2011-12, the story isn’t much different. Birmingham City had a fire sale and lost £30m worth of players whilst spending half a mil to get new ones. Blackpool did much the same, with the second highest transfer surplus in the league at £8.7m. West Ham meanwhile spent the second highest amount in the league and sold slightly less on players, and for their pains earned promotion.
So where did the parachute payments go?
Well, they might have gone to pay outstanding debts incurred during the stay in the Premier League, or to cover expected losses in commercial revenue and ticket sales, or to maintain operational costs that increased during the clubs’ respective time in the top flight. So it seems that while the parachute payments may have cushioned the financial blow of relegation, they didn’t necessarily help clubs bounce straight back up again.
So the system works, right? Well, maybe it once did, but perhaps not any longer. In fact, we should question the purpose of parachute payments in the modern era of outsized TV rights deals and Financial Fair Play.
Because there might have been a moral argument for parachute payments in the days when it was permissible, nay expected, that clubs would spend more than they could afford in the form of debt to compete in the top flight—parachute payments would be necessary to prevent revenue shock for example, a primary culprit in insolvency and club administrations in recent years with relegated clubs unable to pay back what they owe.
But in the age of FFP and the break-even clause, clubs are no longer allowed or expected to spend more than they earn. So newly promoted teams should no longer simply borrow their way to the top and then blame wage and transfer fee inflation before spending money they don’t have.
Teams should instead carefully calculate competitive risk and put away money as needed in the eventuality they end up relegated. There is more than enough data available to get an idea of the risk of relegation relative to transfer spending and wages; simply expecting the PL to send you a fat cheque should everything go pear-shaped is no longer tenable.
Don’t newly promoted teams have to spend a lot in order to compete in the Premier League though?
Yes, but those clubs also have the option of off-loading talent should they go out in a single year. However the data suggests that spend more on transfers in their first seasons tend to stay up for more than one year in the top flight, historically speaking, making it worth the risk. Over the past 10 seasons for example, the average transfer bill for the newly promoted team that stays in the PL longer than a single year comes to £19.4m, while the average transfer bill for the team that goes back down again after one year is £10.3m.
The reward for that extra bit of spending to stay up is more than one season’s worth of TV rights money, increased gate sales, and the opportunity for improved commercial deals. Certainly some clubs experience bad luck, some poor results, injuries on their way to the drop. After all, three clubs have to go down each and every year. Would it not be far better than to simply increase the solidarity payment across the board? Why should relegation mean you deserve a chance to bounce right back up again anyway? Why pretend relegation doesn’t exist, instead of prudently planning for it in the age of break-even?