01 May Increase Club Profitability Through Player Contracts
As another lucrative and successful season comes to an end across Europe, the more effective managers and club directors are already articulating their performance targets for the next season. Just as the club’s position in the league table is usually reflective of the hard work of the manager and the players on the pitch, the profitability of the club is driven by the commercial efforts of the club directors led by the CEO or President.
The primary duty of the CEO of every football club, like in most other businesses, is to take the necessary steps to maximise the clubs revenue whilst minimising its costs in order to leave a substantial residue which is the profit. Thus effective cost management increases profits.
The single most significant component in the costs structure of top flight football clubs is the player wage bill. Get effective control of this and the club’s profitability will rise. By way of illustration, in the 2013/14 season, player wages in the Bundesliga totaled 1 billion euros, representing 51% of the league’s revenue while a similar wage bill in Spain represented 56% of La Liga’s gross revenue. In France’s Ligue 1, 66% of their 1.3 billion euro revenue was spent on player wages whilst Serie A, Italy’s top flight, with revenue of 1.7 billion euros, spent 1.2 billion euros on player wages, a ratio of 71%.
The picture in the Premier League is not dissimilar. £1.8bn (2.1 billion euros) was spent on player wages from a total revenue of £2.5bn (2.9 billion euros), again representing 71%. The ratio is even worse in the England’s Championship, where on revenue of £435million player wages soared to £462m, representing 106% of total revenue.
With these statistics if follows that every football club, particularly those that are susceptible to relegation from their respective top flights, should have a proper strategy for managing the player wage bill. Quite apart from negotiating the transfer fee and the player’s wages, it is in skillful drafting of the player’s contracts that the initial opportunity arises for the clubs to exert control over the wage bill as a whole.
Although player’s contracts follow a standard form, it does not follow that they are incapable of amendment to suit the contracting parties needs. Clubs should tailor individual player contracts to suit rather than adopting a one size fits all approach. It is often the case that a club suffers a substantial decline in its revenue due, for example, to relegation, but finds itself stuck with inflexible player contracts entered into in the previous season. The dilemma of player wages being disproportionate to the clubs now reduced revenue is a common problem. Prudence dictates that the introduction of suitable provisions should be considered at the outset to cater for such eventualities. The key contractual provisions that merit particular attention include the following:
1. Review & Break Provisions
Review and Break clauses are not ordinarily standard in player contracts yet they are essential tools that could be inserted to give the club and the player the necessary flexibility to adapt the contract that can no longer be performed due to the club’s change in circumstances. Clearly this will have to be negotiated and drafted with considerable care in order not to avoid undue prejudice to the player.
2. Salaries & Incentives
Instead of adopting the approach that the negotiated player’s salary should always follow the pattern of a fixed weekly or monthly amount to be paid in all circumstances, it may be more effective to adopt the approach that the player’s salary should contain a fixed component as well as a performance related component. This should reflect the club’s expectation of the player’s performance with the appropriate provisions for the player’s remuneration to increase in line with him meeting the specified performance targets, together with commensurate flexibility for adjustment in the unlikely event that either the club as a whole or the player in particular fails to meet its expectations.
3. Image rights
This is more applicable to elite players whose image and personality have acquired a distinctive value which the club could leverage for commercial benefit. This could be in merchandising or in the digital economy. The necessity is that a proper mechanism is introduced which properly relates the fee paid under the player’s image rights to the actual revenue generated by the club through the acquisition of those rights.
4. Retention, Release and Buyout Provisions
Every club wishes to retain its most talented players who are sought after by competitors. It is the quality of the drafting of the retention provisions that will enable the club to achieve that objective.
It is important to note that players are one of, if not the, most important components in the game of football. Hence why they figure so prominently on football club’s balance sheet, regardless of how big or small they are. However, the current trend shows that if clubs are unable to appropriately manage wages in line with business targets and external economic factors, they may suffer beyond returning to their former glories. Leeds United FC and Portsmouth FC in recent footballing history come to mind here. Therefore, it is important that club directors presiding over transfer business in the upcoming window strike a balance between bringing the best players possible to the team and keeping the business alive. This begins and ends with how the player contract is drafted.