With Reading manager Jaap Stam reportedly being interviewed in favour of abolishing Premier League parachute payments I take a look at the arguments for and against their existence in the top two tiers of the English game as well as some of the potential consequences of their removal.

This season, a team being relegated out of the English Premier League will receive an estimated sum of somewhere between £87 and £92 million over three seasons unless the club has only spent a year in the top flight where they will get parachute payments for just two seasons, so any club that has been relegated in their first season in the Premier League.

If we take Aston Villa as our example club we can assume that they will receive a ball park figure of around £87 million over the next three seasons. If they are promoted during this time then they will, of course, forgo these payments. The parachute payments are paid in decreasing increments over the three years, so £40 million in season one, £33 million in season two and around £15 million in season three. Clubs will argue that this will give them the best chance at adjusting their finances according to their new circumstances.

Looking at the arguments against the payments then the most obvious question is why should a team be rewarded for failure? Essentially you are being given a wad of cash for being relegated thus putting you at a huge advantage over your rivals for next season. You could easily argue that all clubs should have financial contingency plans in case of relegation. These could be automatic wage reductions for players or the sale of the team’s highest earners. When Portsmouth got into financial trouble it transpired that they had already borrowed against future projected TV income and had to be subbed some of this in advance just to survive the season. So why should a club who have failed so abjectly to control their finances be rewarded with parachute payments? The truth is I’m not sure they should be but if the payments were removed we would see a lot more clubs go the way of Bradford, Coventry and Portsmouth.

So do parachute payments actually give a disproportionate advantage to the relegated side? Well if the answer is yes you would expect to see a trend forming where the same clubs are promoted and relegated every year such is their financial advantage over the other clubs in the Championship but interestingly this has not transpired. Over the last decade we have seen a host of different clubs get promoted including the likes of Blackpool, Bournemouth, Reading, Burnley and Hull City. We have also seen some of those relegated really struggle despite their financial advantage, Bolton, Blackburn, Fulham and Wigan come to mind.

I ask myself where I sit regarding the issue of parachute payments and in truth I am a bit conflicted over this. I can see that the sums being estimated now seem to give such a huge advantage to those coming down that it could really skew the competition but on the other hand it has been nice to see sides promoted to the Premier League not afraid to invest in new players in an attempt to be competitive. If they did not have the security of parachute payments many sides may not strengthen their squads to any great extent and just take the money from that season and resign themselves to relegation. The other main argument for them is that it stops teams from going out of business or into administration. If I was a betting man I reckon that the number of clubs coming out of the top flight and heading into financial melt-down would increase massively if it were not for the parachute payments. This is not a situation that anybody would want as it would severely damage the competitiveness and reputation of the Championship if clubs kept being docked 10 points and potentially relegated for entering administration.

So Jaap Stam may want them abolished but he should perhaps ask some of those on the Reading board just where the club might be now if they had not received them. My guess is heading up the M55 for an away game at Fleetwood in League One!

Parachute Payments – A workable solution?

Like most things in football it is very easy to sit and criticise without actually offering any answers so in order to prevent myself falling into this trap I have tried to come up with a workable solution to parachute payments that will hopefully even out the playing field for those Championship clubs that could be left behind.

As discussed, parachute payments are a contentious issue at the best of times. There are some good points and clearly there are also some bad ones, the biggest of which is the unfair advantage it gives relegated sides over those already in the Championship.

The main advantage is that it gives promoted sides the confidence to delve into the transfer market in an attempt to be competitive in the Premier League. With the safety net of the parachute payments they will be able to offer for quality players and will hope to attract them with generous wages that, should they be relegated, would be covered by these payments. This will keep the Premier League competitive and hopefully prevent the three that come up from going straight back down each season.

The Solution

Well here it is, after taking a look at all the ideas in the ether I have come up with, what I believe to be, a workable plan.

1. Firstly all Premier League clubs must submit a financial plan in case of relegation to an independent auditor once every three years. This plan will detail what the club would do to ensure their financial security if they went down to the Championship. Any promoted side must submit a new plan within a specified time frame of promotion being confirmed.

2. At the end of the season a club relegated from the Premier League has 14 days to submit a list of 10 players whose contracts will be 75% covered by the parachute payments.

3. Should any of the 10 listed players leave then NO substitute can be made.

4. 75% of the basic wage of any player listed will be covered by the payments for up to 2 years up to and including a wage of £50,000 per week. (Essentially this means that the maximum contribution from the parachute payment is capped at £37,500.)

5. If a club submits a player who is receiving over the £50,000 cap then the club will have to fund any wage above the maximum payment of £37,500 themselves.

6. All parachute payments cease after two years or upon the club receiving them being promoted.

Ok so there it is. Within the remit of this plan a relegated club could potentially receive a maximum of £375,000 per week towards their wage bill if all the 10 players on their list are on £50,000 per week or more. However this will still require the club to fund £125,000 per week toward these ten players alone, based on the assumption that they are all on £50,000 per week. The figure could rise if they have any player paid more than this.

In reality it is likely that some of these players would chose to leave but the club would only be under any compulsion to sell them if relegation release clause values were met.

This still gives an advantage to the relegated side but it would allow those promoted to the Premier League the confidence that, if they should offer big contracts to new signings, then they will not face financial ruin should they go down. I hope this is a more balanced approach than the current model of just throwing money at club and allowing them to spend it how they like. After all this has been proven to fail on a number of occasions with clubs still managing to end up in significant financial difficulty despite receiving all this cash.

Any way I you all enjoy picking this apart and sending me back to the proverbial drawing board!

words James Richards

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