Salary cap woes

Steve Gallen has revealed that Charlton were one of the clubs that voted against the League One salary cap and only the fact that they had a decimated squad in the summer meant they could cope with it: https://londonnewsonline.co.uk/charlton-athletic-voted-against-league-one-salary-cap-only-player-exodus-and-relegation-helped-them-trim-wagebill/

Here is an article I wrote about salary caps for a recent Voice of the Valley:

There is a continuous search for new ways of regulating football so as to create more of a level playing field between clubs.   Unfortunately, some of the proposals create more problems than they solve and this applies to the introduction of salary caps.   Charlton have, of course, been restricted to £1,200 a week because of the salary embargo. 

Formerly, clubs in the League 1 and League 2 operated within a spending constraint framework termed the Salary Cost Management Protocol (SCMP). SCMP limited spending on player wages to a percentage of a club’s turnover. In League 1 clubs could spend a maximum of 60 per cent of their turnover on wages, in League 2, the limit was 55 per cent.   The wages of coaching staff were not included. There were no restrictions (in themselves) on the amount a club could lose or spend on transfer fees.   Initially introduced into League 2 in 2004/5 for guidance purposes, sanctions for breaching the SCMP thresholds were introduced during the 2011/12 season, with Swindon the first club to be sanctioned under the rules. 

Crucially, a club didn’t have to overspend to incur the embargo, it only needed to be shown to be heading for an overspend. This interactive approach enabled clubs to increase their wage bill if their circumstances improved - a successful cup run will generate increased income and the Football League may be able to sanction additional wage spend. Because SCMP didn’t rely on the retrospective scrutiny of club accounts, it was also extremely effective at stopping overspend before the spending actually occurs (something that has been a problem for the Championship's version of FFP).

Salary cap proposals were brought forward for Leagues One and Two as an alternative, but were opposed by some of the stronger clubs such as Portsmouth, Plymouth Argyle and Sunderland.  They argued with some force that they would be better established as a percentage of a club’s turnover.   

Sunderland will have a grace period to cut their wage bill, with the wages of players already signed for the upcoming season been counted as an agreed divisional average, rather than their average wage. That will last until the end of the current contract.   In the future Sunderland will be capped at the same level as clubs like Accrington Stanley and AFC Wimbledon, who are able to generate far less than the Wearsiders and who would be effectively running beyond their means were they to hit the maximum wage cap allowance.

Portsmouth’s chief executive commented: ‘All the salary cap will achieve is a levelling of the playing field, enabling the smallest club in the league to compete with the largest for the same players – it has nothing to do with sustainability in its current form. A club like Portsmouth can afford, approximately, double [the permitted] figure and can’t even spend the money on players we are self-generating. It makes no sense.  How can it be right that a club with an average attendance of, say, 2,000 can have the same player budget as one with 30,000?’

Nevertheless, League One and League Two clubs voted in favour of squad salary caps to replace the Salary Cap Management Protocol in August 2020, doubtless because smaller clubs saw it as a way of constraining their bigger competitors.  There was overwhelming support in League Two, but in League One the vote was 16 for, seven against and one abstention.

The cap takes the form of a total limit of £2.5m in League One and £1m in League Two.  This averages out at around £1,700 per player per week in League One (just over £88k a year) and £1,000 per player per week in League Two.  To solve the issue of clubs currently paying in excess of the caps, the EFL will not account for any wages players earn over each league’s average salary.  So, if a player currently earns £3,000, then only £1,700 of his wage would be recorded for the cap.  

When calculating total salary spending, the ‘cap’ includes: basic wages; taxes; bonuses; image rights; agents’ fees; and other fees and expenses paid directly and indirectly to registered players.  There are financial penalties for overspending of up to five per cent which would amount to £125,000 in League One and £75,000 in League Two.  Above five per cent and clubs will be referred to a disciplinary commission that will be able to dock points. 

The Championship is reported to be considering a salary cap of £18m which says something about the financial gulf between the second tier and the lower divisions.  Their introduction in the Championship is being resisted, though arguably they are needed more there given the extent to which clubs overspend in an effort to reach the top flight. In the Premier League, they would risk undermining the global attraction of the competition because of its ability to attract world class players.

The Professional Footballers’ Association set out a substantial critique of the salary cap proposals which they described as illegal and unenforceable.  They considered that the proposed rules lacked clear objectives.   They claimed, ‘there is no evidence e.g. supported by financial modelling, of how the regulations will aid future financial sustainability or why they are the appropriate mechanism to achieve the overall objectives (which do not appear to have been defined).’   It was unclear how the salary cap had been determined.   The issue of an allowance for marquee players appeared not to have been considered.  ‘ The proposed salary caps, if implemented, could potentially reduce the ability of clubs to generate commercial revenue with sponsors and commercial partners now fully aware that clubs wage obligations will in some cases be significantly reduced. This effectively represents a potential loss of revenue to EFL clubs.’

The rules appear to be based on the Premiership Rugby Salary Regulations, but there were a number of differences between the two competitions, not least in the range and disparity of clubs. The PFA noted, ‘The financial performance of clubs in League One and League Two has remained relatively consistent in the last ten years with revenue growth being matched by increases in staff costs. Financial disparity is prevalent with the average ratio of top to bottom revenue generators being 7:1 in League One and 3:1 in League Two between 2014/15 and 2018/19.’   They pointed out that there were more important disparities between League One and League Two with a much higher ratio of highest to lowest revenue generating clubs (7: 1) in League One compared with League Two (3: 1).   They were concerned that the process of developing the new regulations had been rushed through without proper consultation, arguing that it typically took between 11 and 25 months to devise new sporting regulations.

Evasion and securing compliance has been a characteristic difficulty with salary caps elsewhere, notably in the US.  The PFA noted, ‘The ultimate goal of the draft rules should be to ensure compliance and we believe it is necessary for the EFL to demonstrate further how they shall monitor and enforce these regulations, before the Clubs carry out a vote on their adoption.’  It was unclear whether the rules would satisfy competition law scrutiny. 

Leading sports writer Gabriele Marcoti has commented: ‘U.S.-style caps only work if revenues are roughly equal throughout the league like they are in the NFL, where broadcasting and sponsorship income is equally distributed and the only variance come from matchday receipts and sponsorships.’ He continued, ‘In the long run, there are better ways to ensure the stability and solidity of clubs, such as having tougher rules on cash reserve requirements and ensuring there's enough oversight and legal muscle there to enforce them.’