How Parachute Payments Are Damaging British Football

The following transcript is Jon Mackenzie’s chat with Dr. Rob Wilson, a Football Finance Expert at Sheffield Hallam University. It has been truncated and edited for the purposes of the article. The full interview can be heard in podcast below.

Wilson is the co-author of the paper, ‘Parachute Payments in English Football: Softening the Landing or Distorting the Balance?’. Below, Wilson explains why parachute payments in its current form are decreasing competitiveness in the Football League.

Jon Mackenzie: Are parachute payments fit for purpose?

Rob Wilson: No, they’re an absolute nightmare.

Jon Mackenzie: Why have parachute payments been making an appearance in the media over the last week?

Rob Wilson: Rick Parry raised the issue when he did the parliamentary committee interview last week and he called them ‘the evil that spreads throughout the Football League’.

Jon Mackenzie: You’ve mentioned Rick Parry’s appearance before the Digital, Culture, Media and Sport committee last week. What was the substance of Perry’s assessments of the state of football, because he was quite a damning of the state of football?

Rob Wilson: I think what Rick has really done in his interview was it in his testimony is really shone a spotlight on what most of us know. If you’re somebody that looks at football’s finances, we’ve known for years that they’re very fragile…Adrian Babington described them to me as very much the mask that’s been removed now, particularly because of the coronavirus pandemic.

It’s really put that spotlight on football’s finances and demonstrates how many clubs are simply running this hand-to-mouth existence, overly reliant on certain forms of revenue and really can’t survive without the continuation of competition, which of course we’ve stopped at the moment because of the cause of the COVID-19 pandemic. He’s really just put it into focus that it has a £200 million black hole, 1400 players out of contracts, and a huge discrepancy right across the English football system.

Jon Mackenzie: So I think at the heart of what Rick Parry is talking about, especially with respect to parachute payments, is this notion of financial mechanisms through which the Premier League distributes money through the lower tiers of the Football League. Can you tell us a little bit about those financial mechanisms?

Rob Wilson: So essentially when the Premier League was started, it set up this goal to become a very revenue generating body. It would do that through broadcast rights and the sell, if you like, to the lower divisions was that it wasn’t going to cut those divisions out entirely from its revenue competition.

So it produced what we call some solidarity payments. Each team in each division will get some of those solidarity payments. Of course, it’s bigger the higher up the divisions you are. So a Championship club gets, for example, £9 million a year through these solidarity payments, and that reduces down to about half a million or so in League Two.

That means that the Premier League distributes about 5% of its total broadcast pot through the divisions. It makes its case for producing a bit of a lifeline to the clubs and tying the competitions together. But of course, now if you’re a Premier League club earning in excess of £120 million a year, it’s very different to the £9 million that’s offered to the teams in the Championship and indeed, lower down the divisions.

Jon Mackenzie: And the parachute payments are just an extension of that financial mechanism, right, which deals with clubs that are dropping out of the top division, and presumably that mechanism is designed to stop them from suffering from the financial inequality that exists between those two leagues.

Rob Wilson: Any club, of course, dropping out from the Premier League are in receipt of these parachute payments. The parachute payments will last for up to three years now. It used to be four years.

The total value of those payments to a Premier League team that got relegated last year will be about £90 million over a three year period and that’s where, when you think about the Championship play-off final, people often will refer to it as the £200 million game.

That £200 million is made up of a year’s worth of broadcast money in the Premier League, about £120 million, and then three years worth of parachute payments totaling somewhere between £80-£90 million. In year one you get about £45 million, year two a little bit less, year three a little bit less.

Of course that makes those clubs much bigger in financial terms than any of their counterparts in the Championship and creates a real spread of that financial inequality that we see existing throughout those league structures.

Jon Mackenzie: I’d like to go just into the structure the parachute payments just so that we can get a handle on how it functions. What would you say the purpose of parachute payments is? What is it that a club going out of the Premier League is going to face in terms of financial difficulties?

Rob Wilson: In very practical terms, it’s the probably the £1 million question, if you pardon the pun. I think initially the idea behind the parachute payment was to say to a club, ‘we know you’re going to have increased salary costs when you’re in the Premier League. We understand that those players that you have contracted to your particular club are going to need to be retained over the length of that contract in that lower division, and we’ll support you financially to get through that structure’.

Now, that of course was when there wasn’t this huge gulf that we now have between the value of revenues in the Championship and values of revenues in the Premier League.

As that gap has increased what I think we’ve seen happen with parachute payments is they are now really quite abused. They’re abused by players and agents.

So a player’s agent in the Premier League or so will say ‘you can afford to pay for my client over the next three years cause even if you do get relegated, you’re going to get these big parachute payments’. So it goes straight back out into the player wage packets.

What you’ve also seen is clubs dropping out of the Premier League using those parachute payments to form what we would call competitive advantage. They’re able to be much more aggressive in the transfer market, for example, pay wages that are way in excess of what you might normally expect to see in the English Championship.

What that creates is this gulf in competitive balance, in this inequality that then exists in the Championship. My view is they were initially set up as a safety net. What they’re now being used for is almost been abused and giving those teams a much higher degree of competitive advantage over their counterparts.

Jon Mackenzie: So what was the purpose of the payments?

Rob Wilson: I guess they’re there to try and bridge the gap a little bit between the revenues that are offered between each division, make sure that clubs are in a better shape were they to be promoted.

They’re also designed to improve the whole infrastructure around professional football, because when you tie up 95% of the wealth of English football in one division, it’s very difficult then for all of the so-called ‘smaller teams’ to generate sponsorship arrangements or commercial deals, broadcasting arrangements to enhance their own club infrastructure, whether that’s developments to stadium, whether it’s through the EPPP system through academy developments and so on.

So it’s so that they are to try and help smooth the financial transition of clubs for sure.

Jon Mackenzie: So in effect, then parachute payments and solidarity payments form part of a system that is designed to offset the inequalities that could exist between the top league of English football. Essentially, this is about protecting competitiveness in English football. Do you agree with that?

Rob Wilson: I think you would say that was the initial objective of them, yeah, for sure.

Jon Mackenzie: How does English football compare to other big leagues in Europe in terms of competitiveness?

Rob Wilson: So this is where, I guess, the paradox exists a little bit from our discussion. The Premier League and the English Football League is still more competitive than any of the other big five European leagues.

So much more competitive than the Bundesliga, Serie A, La Liga and Ligue 1 for example. You know, if I was to offer you a £10 bet you’d pretty much say that Bayern Munich were going to win in Germany. Juventus are going to win in Italy, PSG in France, and then probably one of Barcelona or Real Madrid in Spain.

So we still have this competitive balance in English football. The data that we’ve started to discover is suggesting that that competitive balance is declining, but we’re in the early stages of that. The policy makers, the league organizers, the Premier League, the English football league, are absolutely in this golden time now where they can make some changes to their competition, integrity and make sure everything’s supported.

Jon Mackenzie: How do you think the parachute payments play into that conversation about competitiveness in Europe? Do you think that they’ve actually increased competitiveness to a point, but then you’ve mentioned all the way through this conversation, it’s broadcasting rights and revenue has got so high that it just seems as though it’s upset the balance somewhat.

Rob Wilson: I think when, when parachute payments were originally conceivedthey probably had their place much in the same way as salary cap had its place in rugby union and the NFL derives competition integrity by things like the draft system and salary caps and all those types of things.

What we need to do though is reflect on those regulations and those structures and work out whether they’re still fit for purpose. I think what we’ve seen with parachute payments is that they have helped enhance a degree of flow between the Football League and the Premier League.

That’s why we’ve seen so many yo-yo teams. I just don’t think they’re now fit for purpose and they’re rather antiquated in their, in their approach. So I think what we need to see now is a different approach to revenue distribution, perhaps get rid of parachute payments entirely, but redistribute that 200 or so million pounds across the Football League in various proportions, depending on whether your Championship, League One, League Two that will help give the cash injection to those teams that are in those lower leagues too, to become more financially sustainable themselves and will actually improve the degree of competition that we see over the next 10 or 15 years.

Jon Mackenzie: You’ve already given us the findings of the paper, but you also put some recommendations forward at the end of the paper as well. So could you talk to us about those recommendations that you put forward?

Rob Wilson: We’ve essentially suggested is that, you know, if we accept that competitive balance is declining, we need to do something about it, then a team has an option; you either get rid of parachute payments entirely, unless they say redistribute that revenue across all member clubs. I think that would give clubs that are dropping out at the Premier League a much stronger leverage in a player contract negotiation because they can reduce player contracts to a level that is much more sustainable within the Championship.

But if a team is absolutely intent on retaining its parachute payments, then perhaps you give them some sort of handicap system. We’ve suggested a five-point deduction on the start of the season. I think that as a model it would need work, whether it’s three points, five points, seven points.

But certainly an eradication of payments entirely or redistribution of those across every member club or a handicap system would be where we were looking at initially.