How would a wage cap in the Premier League impact clubs?

Would the creation of a wage cap create a more level playing field?

There has been debate in the past over whether a wage cap should be implemented in football, especially given that wages tend to be football clubs' biggest expense. A wage cap could take one of two forms: either as a percentage of a club's turnover (considered to be a soft cap), or else a fixed amount (considered to be a hard cap) - or even, a combination of both may be used. For the purposes of this article, the analysis will focus on the same clubs mentioned in an article which was uploaded last Saturday dealing with 14 Premier League clubs who had so far published their accounts in full for the 2018/19 financial year.

Before beginning the analysis, here is a reminder of the wage bill for each of the 14 Premier League clubs who will be looked at in the analysis.

'Soft cap' One of the forms of a wage cap mentioned was that of a percentage of the club's turnover, whereby no club's wage bill can exceed a specific proportion of their income. In the Premier League, the ratio of wages to turnover was roughly 62% - total wages were around £2,455m whilst turnover was approximately £3,951m. In order to maybe reduce wages, the League may for example opt to cap wages at 60% of a club's turnover. The image below shows the wage bill of each club in the event that a club's wage bill could not exceed 60% of its turnover (for those clubs who already had a wage bill below 60% of turnover, the same figure as per their accounts was kept).

As a result, 7 out of the 14 clubs would have had to reduce their wage bill (in some cases, quite significantly) in order to comply with the wage cap. The average wage bill for each club from the accounts published was around £175m - with a wage cap set to 60% of turnover this average would fall to around £162m. Furthermore, as a result, the wages to turnover ratio would fall from 62% to 57%, a drop of around 5 percentage points which would equal a fall of around 8 percent. In addition, such a cap would not only lower wages, it would clearly affect clubs' operating profits as well as profits before interest and tax. The first image shows operating profits/losses that the clubs actually recorded, whilst the image below it shows how these would change if a wage cap at 60% of turnover were imposed.

Note: It is being assumed other expenses remain the same as per the figures in the club's accounts (which in truth, would be not so realistic).

On average, last season, the 14 clubs featured in this analysis made an operating loss of around £36m. Under the wage cap, whilst only one club (AFC Bournemouth) would move from an operating loss to an operating profit - thanks to a £32m reduction in the wage bill. That said, the average operating loss would drop to around £23m, a drop of just over a third. It is interesting to note that the clubs with the sharpest drop in operating losses due to a wage cap would be Leicester City (a reduction of around £43m in operating losses), Everton, who would see a £47m fall in operating losses, with AFC Bournemouth seeing the third sharpest drop in operating losses. It is no coincidence in truth that these three clubs would see the sharpest drop in operating losses with a wage cap at 60% of clubs' turnover, as these three clubs were the ones with the highest ratios of wages to turnover. It should be pointed out, however, that Everton's financial year ran for 13 rather than the usual 12 months, as they changed the financial year end date from 31st May to 30th June - so their figure is not entirely representative. On the other hand, despite a drop of £18m in their wage bill, Chelsea's operating losses would still be very large, highlighting the fact that their wages to turnover was only slightly above 60% and thus a wage cap would have not had such a significant effect on their profitability. Meanwhile, seven clubs, as stated earlier, had a wages to turnover ratio below 60%, hence they would not have been affected by the cap. Furthermore, a wage cap would also affect club's profits before interest and tax. The following two images below show the profits before interest and tax, firstly the amounts each club recorded for the 2018/19 financial period, whilst the second graph would show how these would change if a wage cap set at 60% of clubs' turnover was put in place.

The 14 clubs who have so far published their accounts in full for the 2018/19 season, made, on average, a loss before interest and tax of around £13m. If there were to be a wage cap set at 60% of turnover, AFC Bournemouth and Leicester City would now make a profit before interest and tax, and, on average, clubs would make a very small profit before interest and tax of around £400k. Under the wage cap at 60% of clubs' turnover, despite still making an operating loss, the reason that Leicester City would now make a profit before interest and tax thanks to the fact that they rely quite heavily on selling players for big money to balance the books. Meanwhile, Watford and Manchester City, made profits before interest and tax whilst having a wages to turnover ratio of below 60%, despite making operating losses, highlighting the fact that they also rely on selling players for considerable money to balance the books, though not quite on the same level as Leicester City or Chelsea (who, one could argue, incorporate the strategy of selling players for big money into their business model). Alternatively, the Premier League could for example decide to set the wage cap figure to 55% of clubs' turnover. As a result, only 3 clubs would be able to maintain the same wage bill as they had in their accounts - Manchester United, Wolverhampton Wanderers, and Cardiff City all had wages to turnover ratios below 55%. If a wage cap of 55% to clubs' turnover were imposed, clubs' wage bills would be as follows.

As stated earlier, the average wage bill of the 14 Premier League clubs mentioned in the analysis was around £175m. If a wage cap were to be set at 55% of clubs' turnover, this average would show a fall to roughly £153m. Meanwhile, the wages to turnover ratio would fall from a total of approximately 62% to around 54%, a drop of roughly 8 percentage points which would be a drop of around 13 percent. Meanwhile, just like in the analysis of a wage cap set to 60% of clubs' turnover, capping wages at 55% of clubs' turnover would also inevitably affect operating profits/losses as well as profit/loss before interest and tax. The image below shows how clubs' operating profits/losses would be affected with a wage cap set to 55% of clubs' turnover.

As stated earlier, the average operating loss from these 14 clubs was around £36m. If the wage cap were to be set at 55% of clubs' turnover, this average would fall to around £14m, a drop of just under two-thirds. Once again, the clubs whose financial position would show clearest improvement are Leicester City, Everton and AFC Bournemouth - influenced by the fact that these three clubs had the highest wages to turnover ratios. Once again, Chelsea would also see a considerable drop in the wage bill, however, their improvement in profitability would not be as large, given that they had a considerably lower wages to turnover than the 3 aforementioned clubs. Once again, just like in the scenario of a 60% wage cap, the only club who would have moved from an operating loss to an operating profit would have been AFC Bournemouth. However, Liverpool would significantly increase operating profits, as, although they only would have exceeded their wages to turnover ratio by around 3 percentage points, they made over £500m in turnover and thus would have seen a considerable drop of around £16m in wages. Also, Manchester City would have moved from an operating loss of £22m to a loss of around "only" £1m, as being 4% over this limit would mean a considerable drop in the wage bill given that they too, just like Liverpool, generated turnover in excess of £500m. A wage cap would also of course affect profits/losses before interest and tax, as seen in the analysis of a wage cap set at 60% of clubs' turnover. Although capping wages at 55% of clubs' turnover meant only one club moved from operating losses to operating profits, this would have made a significant difference when dealing with profits/losses before interest and tax, as illustrated in the graph below.

As a result of this wage cap set at 55% of clubs' turnover, the number of clubs making a profit before interest tax would have increased from 6 to 10. Leicester City and AFC Bournemouth would both have made profits before interest and tax, as they did in the case of a wage cap at 60% of clubs' turnover. However, now both West Ham United and Brighton & Hove Albion would have made profits before interest and tax, whilst Fulham and Arsenal's losses would have been below £10m. Chelsea would have been the club with the largest losses before interest and tax, which suggests that a 'soft cap' would not have been as beneficial to them, and highlights how the London club depend heavily on revenues from competing in the Champions League as well as selling players for big profits in order to balance the books.

As seen above, imposing a wage cap as a percentage of clubs' turnover has its benefits and would have helped clubs reduce losses whilst making some more profitable. It can clearly be seen that capping wages as a percentage of clubs' turnover ("soft cap") would encourage more financial responsibility and help clubs live more within their means, whilst it would also encourage clubs to look at increasing revenues more organically by having good infrastructure and setup which may help success also on the pitch, thus enabling clubs to increase revenues, rather than relying on financial backing from owners which may stop at any point in time and possibly lead to financial problems further down the line. The above analysis shows that a wage cap of around 55-60% of turnover in the Premier League would be good for profitability. Furthermore, especially with clubs lower down the league table, having a wage cap as a percentage of turnover might help them better cope with relegation which leads to a significant drop in revenue (aided slightly by parachute payments which help reduce revenue gradually over time). However, critics argue that the imposition of a wage cap is a protectionist move which serves to make it more difficult for clubs to compete with and potentially finish ahead of the very top ones who generate considerably more revenue. Also, critics argue that if a wage cap were to be imposed in the Premier League, English clubs would struggle to compete in the European competitions with other European clubs who would be able to have the best players by offering them big wages which would be more than English clubs could offer. Therefore, in reality, it is highly unlikely to see a wage cap imposed solely in the Premier League unless done on a collective basis for all European clubs through UEFA for example. Another difficulty with imposing a wage cap in football, whichever the division, is its enforceability - it might be difficult to police such a wage cap. (An analysis looking at a hard cap scenario using these fourteen clubs will also be looked at in the future, so stay tuned.)

This article was amended on 24/03/2020.