Analysis: Implementing a salary cap in the Championship? Data shows wages have little meaning for league placement
15 September 2020
Championship clubs are reportedly discussing whether to implement an £18 million annual wage cap – offthepitch.com analyses its implications.
There is little correlation between wage spend and league placement in England's second division, a stark contrast to the situation in the Premier League.
Despite that, a financial expert does not expect promoted clubs to struggle as a result of a presumably larger wage gap.
Not a single club who made the jump to the Premier League since 2010 recorded an operating profit in the year they were promoted.
League One has implemented a wage cap. League Two has implemented a wage cap. The EFL is facing a £200 million hole as a result of the coronavirus pandemic, and clubs need to "reset" their business models, according to chairman Rick Parry.
But the Championship kicked off last weekend and things are eerily similar as to how they have always been. Implementing an £18 million wage cap has reportedly been discussed but agreement has yet to be found among clubs in England's second tier.
Seeking to examine the implications of a wage cap and to outline the financial (un)health of the league, offthepitch.com has analysed what exactly would happen to competitiveness in the Championship and found that wage spend and league placement in fact has very little correlation.
"If you look back at the last seven years or so, the correlation between wage spend and points gained across all Championship teams over the seasons is less than 20 per cent, which to me suggests there isn't necessarily an advantage to overspending when it comes to wages," says football finance expert Chris Winn, MSc Football Business programme leader at UCFB's Global Institute of Sport, who has done his own research.
Premier League contrast
The findings are in stark contrast to the situation in the Premier League. Since 2008, wages have explained 42 per cent of the variation in clubs' final league ranking. In the Championship, wages explain just 16 per cent.
"Traditionally the Championship is characterized as a competitive battleground where clubs generally are equally resourced, bar those that have been in receipt of parachute payments, and as such that may lend itself to that particular relationship," Winn explains.
"In the Premier League, because clubs are able to outspend each other to a greater proportion that may contribute to that relationship being a bit more solid."
Accordingly, the data shows that Championship clubs should not fear a wage cap as wages appear to have little significance for their league placement.
On the other hand, though, won't it then be harder for those that are promoted to the Premier League as a cap would likely increase the wage gap between the first and second tier?
Sustainability pays off
Winn feels a salary cap may in fact make it easier for clubs to compete in the Premier League. A club run sustainably has more financial leeway and are therefore able to invest smarter, he explains.
"If you have your house in order, ideally that you are profitable, that may play a part following promotion. You are likely going to have more sustainable resources to invest in the playing squad to get things up to Premier League standards than you would have if you had been massively loss-making," he says.
The data shows, however, that Championship clubs are far off becoming profitable. Since 2010, not a single club that made the jump to the Premier League made an operating profit (excluding exceptional items) in the year they were promoted.
Winn highlights that since the Profitability & Sustainability (P&S) regulations were introduced in 2016/17, Championship clubs have made cumulative pre-tax losses exceeding £750 million. In comparison, Premier League clubs in the 2018/19 season alone made a collective operating profit (excluding player trading and exceptionals) of around £820 million.
"In the Championship, you have clubs that are willing to overinvest in the chase for promotion to the Premier League, and the associated huge increment in broadcasting revenues. Particularly from an owner-funding perspective which is where many of the losses get absorbed," Winn explains.
It is very difficult for a team to go from a Premier League wage level to that capped Championship level in the space of one season
A club not in receipt of parachutes promoted to the Premier League are ensured to be at least around £160 million better off by remaining in the top tier just one season – while making it two years equates to a minimum £275 million better off – highlighting the financial reward of reaching the first division.
"You can see the benefits to gaining promotion, and why teams are willing to overinvest to try to make it. But obviously that owner investment is A) potentially misleading given the historic relationship between wage spend and performance, and B) leading straight to that really stark loss-making nature of the league," Winn says.
Go hard or go soft
A hard salary cap is not the only way to go, however. Instead, as some have proposed, a soft cap, i.e. a cap as a percentage of revenue, is another option – and potentially a more realistic one. Since 2010, out of 208 wage bills, 150 exceeded the £18 million threshold.
A 70 per cent wage has been suggested – in line with what UEFA recommends.
"It is very difficult for a team to go from a Premier League wage level to that capped Championship level in the space of one season without either transitional arrangements or some very hefty relegation clauses in player contracts which they may not want to agree to in the first place," Winn says.
"A soft cap is potentially a little easier to implement in terms of it's simply allowable revenue and take a percentage and that's your wage expenditure."
In the 2018/19 season, 16 out of 20 clubs (excluding clubs which had been relegated in the previous year) exceeded the 70 per cent threshold, showing there is still some way to go. Just Rotherham were below the £18 million hard cap.
"Depending on the way you look at it some may feel a soft cap isn't levelling the playing field but it is achieving sustainability which is all the more important now in a Covid-19 world," Winn says.