Just when an unusually warm summer had succeeded in convincing many of us that a barbecue was an integral aspect of Saturday afternoon, along comes a new football season – extended until mid-July 2014 to accommodate the World Cup – to grab us by the throat and insist upon our unconditional attention.
And with another season imminent, notwithstanding a still sluggish economy, tales of what Shakespeare called “wasteful and ridiculous excess” continue to emanate from the football industry and justify its ‘Micky Mouse’ reputation.
According to the latest review of football club accounts published by accountants Deloitte, top-flight English football’s average wages-to-revenue ratio remains stubbornly fixed at 70 per cent. This means that almost all of the extra income generated from broadcast or sponsorship deals is spent on salaries.
Drop down a division and the situation is even more dire. Deloitte calculate that aggregate losses at Championship clubs last year totalled £158 million. Astonishingly, the division’s average wages-to-revenue ratio is 89 per cent; there are nine clubs with ratios in excess of 100 per cent.
It would appear that those who believed Premier League clubs were capable of disembarking the merry-go-round of financial lunacy were wrong.
There is no doubt that collectively, the Premier League has been incredibly good (and phenomenally lucky) when it comes to raising extraordinary sums of money. Remember, however, it wasn’t football’s chiefs who suddenly realised what their product was worth back in 1992; rather, it was BSkyB that acted as the catalyst which has resulted in our top-flight clubs generating huge sums of money.
In short, it was Sky’s executives who saw the opportunity to make football work for their business, not the other way around.
Today, Sky is worth £13.2 billion and recently reported pre-tax profits of £1.2 billion, almost treble the figure of just four years ago. Conversely, while aggregate top-flight income has increased more than 15-fold since the formation of the Premier League in 1992, operating margins have plummeted. On average, football clubs enjoyed margins of 16 per cent in 1991-92; nowadays, they’re lucky to achieve three per cent.
To ensure their longer-term survival as viable businesses, leading football clubs know they must address the phenomenon of constantly rising player salaries. However, without European-wide co-ordination and trust, features generally conspicuous by their absence, there is little prospect of a workable salary cap being introduced.
UEFA’s Financial Fair Play rules are now in operation, but it will be impossible to gauge their effectiveness until the end of the 2015-16 season at the earliest.
Closer to home, meanwhile, the FA deserves credit for introducing their Salary Cost Management Protocol (SCMP), which limits a club’s wage expenditure to a percentage of turnover.
The system has been in place for League Two clubs since 2004-05, capping salary costs at 55 per cent of income, but SCMP will be extended to League One clubs during the current financial year; they will be limited to spending 60 per cent of turnover on wages.
Adapting the discredited model whereby clubs spend significantly beyond their means in an attempt to gain promotion will result in penalties from now on. Breaching the agreed percentage by up to £100,000 will attract a one per cent ‘Fair Play Tax’. Exceed it by £10 million and the tax is 100 per cent.
It is, of course, entirely possible that, as BT Sport launches today with the warning from the head of its consumer division that the “days are numbered” for subscription-based television models, the problem of soaring salaries will be addressed naturally, either by a player exodus or the introduction of a newer, subscription-free business model throughout continental Europe. Either that, or all clubs will become franchises owned by sugar daddies who keep the sources of their wealth secret.
In the meantime, help may be at hand for clubs, particularly for those unencumbered by effective financial management, in the Premier League and the Championship.
Sporting sponsors have, for many years, been able to insure against financial bonuses due to winning teams and their staff, but for more than 12 months, football clubs have, subject to certain criteria, been able to do the same. To date, however, very few have even explored the possibility.
Rod O’Callaghan, head of risk management at Airton Risk Management, one of the firms capable of arranging insurance to cover bonuses paid to footballers, is surprised that clubs have not taken advantage of a product which can be bought for a fixed cost.
“Our Bonus Insurance Scheme allows clubs to insure against the likelihood of their main striker being the division’s leading scorer, or against their team being promoted, winning the league or the FA Cup, for example, but in truth, the take-up has been slow,” he told me earlier this week.
“In our experience, the football industry is naturally conservative and in many respects, there is an element of ‘follow-the-leader’ involved with a newish product like ours. Once it gets a little traction, however, we would expect it to be widely adapted by forward-looking clubs.”
O’Callaghan is keen to point out that clubs may only insure against positive outcomes, such as winning trophies or promotion and must register details of the policy with the FA within 10 days of the August transfer window closing.
I asked him how much he would charge Malcolm Glazer should the American owner of Manchester United call wishing to insure against Robin van Persie once again being the Premier League’s top scorer in 2013-14. “Let’s assume van Persie was told he would collect a bonus of £2 million for being the top scorer,” muses O’Callaghan.
“In this case, we would charge a premium of around £500,000, potentially saving Mr Glazer £1.5 million.”
Such arrangements are more widespread in rugby than football, explains Mr O’Callaghan, for two reasons.
“First, there is a greater requirement for rugby clubs to be run as businesses because there’s just not as much cash around the sport. Second, player bonuses form a much larger part of the overall employee reward package than they do in football because the windfalls for gaining promotion or winning a trophy are lower than in the beautiful game.”
On paper, it may appear surprising that such products, which effectively hedge future expenditure, have been slow to permeate an industry hardly renowned for commercial innovation. Actually, on reflection, considering its love of wasteful and ridiculous excess, perhaps it isn’t.
