The EFL Salary Cap: A Financial Analysis
Updated: Apr 6, 2021
In the latest piece for The Legal Pitch, adopting a financial outlook, LLB Law Student, Toby Newton-Dunn and financial consultant, Alasdair Malcolm analyse the English Football League’s economic control mechanisms in light of a recent arbitration decision to scrap ‘Squad Salary Caps’ for all clubs in League One and League Two. Further, the article includes an evaluation of current economic measures in place and assesses whether they are an appropriate means of controlling clubs’ finances considering the impact of COVID-19, before suggesting alternative mechanisms that could combat the current issues that remain with existing regulations.
Why was the salary cap first introduced?
Prior to the commencement of the 2020/21 season, the English Football League (EFL) issued a statement in August confirming that clubs in League One and League Two had voted for the introduction of new financial controls in the form of ‘Squad Salary Caps’ after extensive consultation with all clubs across the two divisions. The intention behind the ‘Squad Salary Caps’ was to address sustainability and wage inflation issues across the EFL following the effects of COVID-19; in particular the lack of ticketing revenue that clubs in League One and Two are so heavily reliant on.
The existing Salary Cost Management Protocols (SCMP), a mechanism which allows clubs to spend a percentage of the turnover it receives, was replaced with a ‘one-size fits all’ salary cap fixed at £2.5million for clubs in League One and likewise £1.5million for Clubs in League Two. · The cap includes: - Basic Wages; - Taxes; - Bonuses; - Image Rights; - Agents’ fees and; - Other fees and expenses paid directly or indirectly to all registered players.
The idea behind this was to ensure that clubs cannot extend themselves to the point that could cause financial instability after suffering from the economic impact of COVID-19 and prevent overspending on wages that clubs could not afford whilst being unable to receive revenue from ticket sales and, as a result, incur large amounts of debt.
Why was the salary cap scrapped?
When the salary cap was introduced in August, the Professional Footballers Association (PFA) launched proceedings against the EFL after claiming the EFL had breached the constitution of the Professional Football Negotiating and Consultative Committee (PFNCC). Paragraph 3(b) of the PFNCC’s constitution states that “no major changes to the regulations of the leagues affecting a player’s terms and conditions of employment shall take place without full discussion and agreement in the PFNCC”. The Premier League, EFL, The Football Association (The FA) and PFA are all members of the PFNCC and must be consulted in the event that any major changes are made to a players terms of conditions in his contract of employment. The PFA’s argument was that the EFL had not fully discussed an agreement with the members of the PFNCC. In a report to all Chief Executives and the EFL about the proposed salary caps, the PFA stated on August 6th 2020 that: “The report has raised concerns that the proposed cap is being rushed through, without proper consideration or consultation.
The introduction of a salary cap in English football represents a seismic change. It is a change that will have far-reaching and significant impacts right across the professional game. We must take the time to ensure that these are properly considered and understood.”
Furthermore, the PFA added in the same statement:
“Today, we have invited the EFL to a period of expedited arbitration in August, before the next season starts and the transfer window closes, in order to reach a shared agreement on the way forward.
The EFL has a legal obligation to consult with the PFA and the Professional Football Negotiating and Consultative Committee [(“PFNCC”)], over any potential changes to a player’s conditions.
This consultation has not happened, and as such, we are gravely concerned that any cap brought in will be unlawful and unenforceable, which will ultimately be detrimental to everyone involved.”
This makes the case quite a narrow issue of whether the matter should go through the PFNCC or not. However, on 9th February 2021, the independent arbitration panel decided that the EFL clearly breached the constitution of which it remains a party of, acting unlawfully with the introduction of these salary caps after failing to consult other members of the PFNCC. As a result of this case, the EFL decided to reinstate the pre-existing SCMP rules that were in place before the salary caps were introduced at the beginning of the 2020/21 campaign.
Does a ‘one-size fits all’ fixed salary cap work for Clubs in League One and Two?
In Leagues One and Two, there still remains a huge disparity between various Clubs in each division. This is due to the fact that the leagues comprise of ex-Premier League Clubs such as Sunderland, Portsmouth, Hull City and even Bolton Wanderers who are competing with local community clubs such as Accrington Stanley and Harrogate Town. Therefore, a fixed salary cap of either £2.5million for League One Clubs or £1.5million for League Two Clubs, restricts bigger clubs (such as those above) from spending what they can afford - impeding said clubs from growing sustainably in the future.
Nevertheless, it initially appeared that the EFL had stepped up its financial restraints to prevent more clubs, such as Bury and nearly Bolton Wanderers, from entering administration and ultimately disbanding as football clubs with the introduction of these fixed salary caps. The impact of COVID-19 has hit the clubs in League One and Two much more severely in comparison to its neighbours in the Premier League and Championship due to the lack of commercial revenue available at their disposal.
Therefore, it was necessary for the EFL to introduce a financial control mechanism to prevent the demise of any more of its members whilst ticket revenue remains unavailable as fans are still not allowed to return to stadiums until at least May 17th 2021 at reduced capacity in line with the government’s roadmap out of lockdown. This helps to explain why EFL Clubs decided to vote in favour of the salary cap initially; the majority were in agreement that there had to be some financial control in place to ensure the economic stability of each club by protecting them from spending unaffordable money.
However, is a ‘one-size fits all’ approach consistent with how football functions in England - namely the football pyramid? Firstly, it poses difficulties for clubs when they are promoted to a higher league and must compete with richer rivals that are not as financially constrained or alternatively in the event of relegation and clubs must immediately reduce costs to enable them to compete with rivals of a lower budget. Secondly, a fixed salary cap goes against the sporting principles of risk and reward. The risks in football are high, but in order to succeed you have to gamble with aspects such as spending money on new players to compete with better rivals. If the risk pays off, the rewards can be astronomical, for example promotion to the Premier League from the Championship sees clubs gain approximately £120 million worth of revenue. Therefore, a salary cap in League One makes it more difficult for promoted clubs to compete with other rivals in the Championship, limiting their chances of ever gaining promotion to the Premier League.
For example, Sheffield United were promoted to the Championship from League One in 2017 and gained promotion to the Premier League two years later in 2019. During the 2018/19 season, the Blades’ wage bill was £19.6million, which rose to £41.2million following promotion - the lowest wage bill in the Premier League. Putting that into context, Manchester City’s wage bill that same season was £332.4 million, £17 million lower than Manchester United’s which was the highest. Consequently, clubs in League One that receive promotion would not be able to compete with those in the Championship financially and the likelihood is they would return to League One after one season once relegated. This offers clubs in the lower divisions very little opportunity to ever reach the Premier League, which is contrary to the footballing principle that “anything can happen”, evidenced by miracles such as Leicester City winning the Premier League in 2016 after being in the Championship two years previously and non-league team Lincoln City beating Premier League side Burnley in the 5th round of the FA Cup in 2017.
The fixed salary cap would be more effective in a US-style ‘closed-league’ system where there is no promotion or relegation because clubs will never have to worry about financially competing with teams from a higher division or having to cut costs in the event of relegation. However, with the football pyramid system which the English leagues operate by, clubs will find it increasingly difficult to progress and compete with better teams. The mechanism questions sustainability if clubs are unable to spend what they can afford; clubs with an average attendance of approximately 40,000 which generate large commercial revenues would only be allowed to spend the same amount as clubs with 2,000 attendance and have much smaller commercial revenue. Ultimately, this mechanism prevents clubs from being able to develop and recruit talent if all clubs are capped at the same rate, creating larger disparity between clubs in the Premier League and Championship with those in League One and Two. Further, the changes may discourage owners from trying to invest and improve their football clubs, causing owners to become complacent as they will put fewer resources into attracting additional sponsorship deals, and may resist investing in their club’s stadium or facilities, as their chances of competing are much slimmer with a fixed salary cap.
A return to the former SCMP Mechanism
The EFL had always maintained that, if they were to lose the arbitration case against the PFA, they would return to the previous Salary Cost Management Protocols (SCMP) mechanism. Although only advisory, this is a cost control mechanism linked to the turnover of each individual club and the regulations are as follows:
League One Clubs can spend up to 60% on player-related expenditure (wages), or up to 75% in the season following relegation from the Championship.
League Two Clubs can spend up to 50% on player-related expenditure (excluding those players under the age of 21).
Each club’s turnover can range from broadcasting income, gate receipts, food and beverage sales, merchandising and sponsorships, plus each club is allowed to spend 100% of its “football fortune income” such as profits on player trading and prize money from success in domestic cup competitions.
However, SCMP does not produce a cap on the amount of money that an owner can invest into a club, for example through equity, donations or loans. This is because by definition, there is no limit on the amount of losses a club can make and as a result, the SCMP mechanisms are not able to prevent more clubs like Bury from liquidating. Clubs in League One and Two are heavily reliant on ticketing revenue and whilst this is not a viable option to recoup some of the economic losses imposed by COVID-19, clubs are at risk of being financially exposed. This means clubs may overspend because the game’s prize mechanism encourages owners to do so which has been discussed above.
It is understandable that there had to be some financial limits implemented at the start of the 2020/21 season because the clubs with more financial power would have taken advantage of the COVID-19 situation and would have been able to buy more expensive players, meanwhile clubs with less money would have been at a clear disadvantage. However, it is perplexing that the EFL decided to reverse a decision to return to a financial control mechanism that was never truly adequate for meeting the demands of its members and ensuring long-term financial sustainability.
Bespoke salary caps for each individual club?
After concluding firstly, that a ‘one-size fits all’ fixed salary cap approach does not benefit all clubs in the long term because it prevents clubs from being able to progress and compete with those in higher divisions and secondly, that SCMP is not an adequate mechanism of ensuring financial sustainability as it allows owners to spend what they please, it is clear there ought to be consideration for an alternative financial control mechanism. The middle ground here would be to find a solution that restricts clubs from overspending what they cannot afford but also promotes financial longevity and does not undermine sporting principles of risk and reward.
In comparison, all Spanish Clubs in La Liga have bespoke salary caps which allows clubs to spend what they can afford based on actual revenue, with the combined salary cap for all 20 top tier clubs set at €2.3 billion. This mechanism has been in place for approximately five years and every club is obliged to submit its accounts to La Liga’s finance department who then determine a ‘club-specific’ salary cap before the summer transfer window and again before the January transfer window. This reflects the different sizes of clubs and their respective ambitions but is also contemporaneous. For example, at the start of the 2020/21 season, Real Madrid’s bespoke limit is €468.5m, the highest in the division meanwhile newly promoted Elche have the smallest salary cap at €34 million. However, it is clear that whilst this tailors the salary caps to each club, it does not allow newly promoted clubs to spend more on their players’ wages in a bid to compete and rise up the league. Consequently, it is likely that this structure supports the traditionally larger clubs to remain in their positions, as their caps will always be greater than the clubs further down the league, based on past performance.
It is hard to confirm whether bespoke salary caps would be the answer to the EFL’s financial control mechanism crisis, however offering a tailored approach to each individual club seems more beneficial because it enables clubs to spend what they can afford, incentivises owners to invest and improve their respective clubs, but also prevents clubs from overspending and entering administration from accumulating unsustainable amounts of debt.
It is generally agreed that clubs want financial control mechanisms available at their disposal and that the current measures are not satisfactory enough to achieve sustainability, therefore there is a need for the EFL to re-evaluate the present SCMP mechanism and assess whether bespoke salary caps for each individual club would be a better and more sustainable means for everyone moving forward.
It is clear that player salaries are capable of driving clubs into the abyss. Without clubs, there is no mechanism to pay the players. It is essential that clubs are sustainable, and this must be understood by all club owners across the football pyramid. Otherwise, where some owners are able to inject capital into lower-league clubs, which is disproportionate for its position in the pyramid, the resulting destabilization can have a knock-on effect. In response, other clubs may need to spend more to compete, which is unsustainable in the long-term.
Whilst the SCMP was merely advisory and lacked teeth to hold clubs to account, the idea around turnover-related capping should be developed and taken forward. An approach whereby a percentage of turnover can be spent on players’ salaries would allow clubs to be rewarded for building their fanbases, being successful in cup competitions, and for having profitable player-trading transfer strategies in place. Further, owners may still invest in the club’s infrastructure such as stadia and training grounds, as this in turn may increase revenues elsewhere, allowing clubs to grow.
This article was written by LLB Law student Toby Newton-Dunn, Alasdair Malcolm, Consultant and Adam Smith, Founder. All views discussed in this article belong to the above authors and do not represent any other organisations beliefs.