Premier League Salary Cap - A Governance Perspective

On 29^th April 2024, the Premier League agreed in principle to introduce a cap on squad spending from the 2025/26 season. This is pending economic and legal analysis. It will aim to 'anchor' any spending cap to a multiple of the spending of the league’s lowest earner of prize money and TV revenue. For context, this multiple has been reported as being around 4.5-5 by major UK news outlets with no official confirmation. They aim to introduce this a year after “squad cost ratios” which limit clubs to spending 85% of their revenues (70% for those in European competitions) on player-related costs. The current system entitles clubs to lose a maximum of £105 million over a rolling 3-season period and the change aims to improve the competitive balance of the Premier League.

Under the current model, the spending of the richest and poorest clubs is diverging. Higher revenue generating clubs are permitted to spend significantly more on wages and can outbid other clubs. This results in them, on average, finishing higher up the table, with greater prize money and potentially qualification for European football. There have of course been notable exceptions to this in recent years in the guises of Brighton’s success and Chelsea’s lack thereof in comparison to their wage budgets, for example. Over multiple seasons, though, wage spend is an extremely important driver of league position. Furthermore, success makes a club more marketable and a more attractive proposition in terms of sponsorship opportunities which further boosts revenue, entitling them to a greater wage spend in following years. This self-fulfilling cycle is viewed as further reinforcing structural and financial hierarchies in the league as it not only disadvantages lower revenue teams for merely having less to spend on wages but also greatly limits the ability of owners to invest their own capital into the team to break out of their team’s current financial position.

With regard to governance issues alone, we have identified three key aspects that will need to be addressed:

1. Stakeholder Engagement
2. Measuring Success
3. The Premier League's Wider role in Football

Stakeholder Engagement

The ultimately calamitous venture of the European Super League ought to have been a timely lesson for football of the importance of stakeholder engagement and how things can go disastrously wrong if you fail to undertake it properly. But has that lesson been sufficiently learned?

The Companies Act 2006 indicates that employees are one of the stakeholder groups to be taken into consideration when directors make decisions. Large companies, of which all 20 Premier League teams likely meet the criteria, are required to produce a statement in their strategic report describing how they have had regard to three key areas listed in the FRC’s section 172 guidance 7A.35:

• environmental matters (including the impact of the entity’s business on the environment)
• the entity’s employees
• social and community and human rights issues

These clubs therefore must be able to justify their actions that impact their employees such as voting in a salary cap.

Upon the news of a salary cap being voted in by the Premier League, the Professional Footballers’ Association (PFA) reiterated their opposition to a ‘hard’ cap on player wages and reminded everyone of the 'established process' for the consultation of the PFA on proposals which 'directly impact' its members. This 'established process' is a collective bargaining agreement which takes place through the Professional Football Negotiating and Consultative Committee (PFNCC), which contains members from the Premier League, EFL, The FA & PFA. One of the key terms of reference for this committee is:

“No major changes in 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.”

This formal codification of the inclusion of players and their union in any processes that will affect their employment such as this suggests that clubs will be unable to avoid a robust engagement of players as a stakeholder.

There is recent precedent for salary caps in English Football from 2021 after an independent arbitral tribunal upheld a challenge from the PFA on the EFL’s attempt to impose a salary cap in Leagues 1 & 2. However, the EFL refused to publish the details as to how the tribunal came to their conclusions, meaning that it is difficult to take many learnings from this as external observers.

Furthermore, any salary cap will potentially draw the attention of the Competition & Markets Authority (CMA) as in their 2023 guidance they explicitly mention wage-fixing agreements as anti-competitive behaviour. Punishments for breaking UK competition law can result in businesses being fined up to 10% of global turnover, directors facing up to 15-year bans from running companies and, in the most serious cases, prison sentences. From a governance perspective, company secretaries of Premier League Clubs should be flagging this with urgency for discussion in upcoming board meetings.

Despite the threat of the CMA - Premiership Rugby have proven a model that was acceptable to the CMA however this required extensive stakeholder involvement, most notably with the Rugby Players' Association. Although unprecedented in English Football, disagreements over Collective Bargaining Agreements have resulted in multiple strikes in the US, most notably in Major League Baseball (MLB), with the 1994 season being cancelled partway through over the proposed introduction of a salary cap.

By looking at the matrix below, it is evident that players very much fit in the top right-hand corner with high influence and interest in governance decisions indicating the need for them to be strongly engaged and consulted.

Although large parts of this decision-making process have not and will not be open to public scrutiny, it is inevitable that the players and their union will have to be heavily involved in any salary cap negotiations and implementations. 

Measuring Success

On its website, the Premier League states its values as being:

• Ambitious: Playing the world’s most competitive and compelling football. Striving for excellence in everything we do. Thinking big; not setting any unnecessary limits or barriers.
• Inspiring: Sharing everyone’s excitement and passion for the game.  Creating experiences that excite people and invigorate lives. Remembering that we are fans too.
• Connected: Being for everybody, everywhere. Being easy and open to work with. Listening as well as talking
• Fair: Being objective, responsible and trustworthy. Safeguarding the integrity of the game. Thinking of tomorrow when making decisions for today

As indicated by the name, the Premier League’s profitability and sustainability rules (PSR) very much fit under the idea of ‘thinking of tomorrow when making decisions for today’ as clubs reflect on reckless spending throughout the football pyramid threatening the existence of clubs. Aligning itself with UEFA’s “squad cost control” rule on this front has evident benefits as it addresses the dilemma of having to conform to two sets of rules, both aiming to improve club solvency, thus streamlining this process.

This focus on financial sustainability has in practice resulted in the further reinforcement of financial asymmetries into structural hierarchies within the Premier League. Addressing this competitive balance issue is therefore a key part of the potential introduction of the salary cap to stop the gap in wage spend growing to such a large extent. This fits in with the Premier League’s aim to be ‘ambitious’ as ultimately ever-growing financial disparities are likely to reduce competitiveness in the league, from which the Premier League generates a good proportion of its TV revenues.

As a self-governing entity, the Premier League will have to both create and hold itself accountable for any metrics of success and enforcement. Assuming the aim is to increase competitiveness on and off the pitch, this will mean that any KPIs will have to cover both the annual spread of points throughout the league along with wage bills and look to reduce these gaps proportionately, especially focusing on the transition for newly promoted teams.

The Premier League’s Wider Role in Football

This could well be a crucial moment for the Premier League to reflect on its wider role in the football and sporting landscape.

The announcement of many of these policies along with the league’s open opposition to external regulation could indicate that they are undertaking these changes to reduce the heavy handedness of rules which government may impose upon them. If clubs are to institute wage caps, combined with the rising cost of watching games whilst increasing club valuations attract evermore investment throughout the pyramid with an eye on potential Premier League revenues, it is not unfair to ask, who are going to be the beneficiaries? Even though many players in the league are on astronomical wages, if there were to be a cap placed on these and knowing that some clubs are starting to become more profitable, where will this money end up?

The Fan-Led Review of Football Governance identified the following 3 major issues:

1. The incentives of the game mean many clubs are gambling for success, leading to clubs facing financial distress.
2. Clubs are too often being run recklessly, owners make decisions with personal impunity frequently leaving communities and others to deal with the consequences/fall out of their decisions and fans are cut out of their clubs and key decisions.
3. The regulations and oversight of the game are not up to the task of ensuring a sustainable future for clubs.

Clubs moving away from consistent loss-making is undoubtedly crucial in creating a financially sustainable league. Nevertheless, the Premier League does not function in a vacuum and depends on a wider footballing ecosystem. Any future code of governance for the game is likely to require – as do the Code for Sports Governance, the Companies Act and the UK Corporate Governance Code – that boards factor the impacts on stakeholders, wider society, and the environment into decision-making.

As the pinnacle of domestic football in England, playing in the Premier League rightly should be an aspiration for many clubs. However, its current status as a golden goose with the vast differential in riches on offer structurally incentivises excessive financial risk taking further down. Creating a financially sustainable environment in the Premier League alone risks making this financial nirvana even more appealing, likely encouraging evermore reckless risk taking in the already financially insolvent Championship.

Additionally, just within the Premier League, as clubs are seen more as financial assets to their owners than multi-stakeholder community entities, they will be happy to keep investing their money into their clubs as long as they receive a sufficient return on investment. These returns can come in the form of profits, through the increased value of the club as an asset, or more intangibly as vehicles of soft power. Even if the club is losing money on its balance sheet, if its value is increasing at a greater rate and owners still have the cash to invest, wages will continue to rise which will ultimately worsen the problem for teams lower down.

The Premier League is very happy to talk about the unintended consequences of any regulator knocking it from its pedestal atop European football in terms of revenue. It appears less interested, however, in accountability for the unintended consequences of its own success. Project Big Picture demonstrated the Premier League’s vision for its relationship with the clubs lower down the pyramid and was rightfully widely criticised. With the current incentive structure undermining the existence of multiple clubs across the country and self-interest overriding long term solutions that aren’t merely tinkering at the edges, some form of external regulation is now inevitable as the 150 year tradition of self-regulation is failing to steer too many of the game’s clubs away from the precipice.

Ultimately, the Premier League’s current direction of attempting financial sustainability within just its 20 members goes well beyond its borders and could ultimately accelerate the doom spiral it is inducing below. The governance within the league seems disinterested in trying to engage external stakeholders upon which it depends so the introduction of regulation seems inevitable if football is to avoid the destruction of many community pillars across the country.