The main goal
2 December 2002
28 October 2002
10 May 2004
2 April 2009
7 October 2002
20 May 2002
While the Premiership continues to prosper, the fates of many of the 72 Nationwide Football League clubs still hang in the balance. The single biggest cause of financial problems is, of course, the demise of ITV Digital earlier this year, which left £190m owing to the clubs. The recent collapse of the transfer market, which has prevented many clubs from offloading their highest earners, has also contributed to the number of clubs having gone into, or been under the threat of, administration. But the recurring theme behind the downturn in the fortunes of so many clubs is the soaring cost of players' wages.
Leicester City and Bradford City are cases in point. While both these clubs may recover, to ensure success going forward it is crucial for all clubs to review the level of the remuneration packages offered, and most importantly the way in which such packages are structured.
Leicester City was hit from all sides - relegation from the Premiership, a high-profile dispute with former midfielder Dennis Wise, plus a questionable decision to spend £35m on a new stadium and, inevitably, the level of players' wages. After being presented with a £1.5m tax bill earlier this year and with net debts of around £30m, the club went into administration in October. Several of the club's highest-earning players were sold, but this recouped just £8.5m. Gary Lineker is now fronting a consortium to take control of the club, but Leicester City's future remains uncertain.
Bradford City went into administration in May, just a year after being relegated from the Premiership and with around £36m of debt. In its desperate bid to avoid relegation, Bradford City spent way beyond its means on players' wages, which totalled a massive £14m in 2000. It became increasingly obvious that relegation could not be avoided and so Bradford City sought to slash its wage bill, but it was all too little, too late.
In May, Bradford City's administrators made 19 of the players redundant to save £20,000 a day. The Football League insisted that, for the club to avoid having its membership withdrawn, the players' contracts had to be honoured in full. The condemnation of the administrator's decision was strengthened by the club's earlier support for the allegations that Carlton and Granada (who owned ITV Digital) had acted in bad faith by planning to put ITV Digital into administration as early as November last year in order to avoid their legal obligations. The irony of the club's subsequent actions, which were perceived to be geared towards avoidance of its own legal obligations, was self-evident.
Bradford City struck a deal with the Professional Footballers' Association at the end of August, which will provide financial help for the next two years. However, the need to reduce wage bills going forward, in order for the club to live more comfortably within its means, is of paramount importance. The question is how to achieve this while still being in a position to offer sufficiently competitive packages in order to attract the likes of Benito Carbone again, although not on the basis of a £40,000 per week contract.
Bradford City's approach so far has been to ask some of its top players to take a cut in wages in exchange for job security; contracts will be extended for up to three years if the revised terms, which include an element of wage deferral, can be agreed. Leicester City's approach was to propose a 20 per cent pay cut to its players and, although this has been rejected, the players have now agreed to defer signing-on fees. An alternative strategy adopted by Coventry City was to ask players to take a 12 per cent wage cut over the next two years, which would then be repayable if the club's financial situation improved.
There are two other ways in which Leicester City, Bradford City and other stricken clubs could seek to restructure the remuneration on offer without losing their ability to attract top players. One method is a refinement of Bradford City's idea of deferring a part of a player's salary to the end of the season. However, rather than payment of the deferred amount constituting an automatic right, it could be made conditional on the club not being demoted or, for the more ambitious, being promoted.
The advantage of making payments conditional is that this should incentivise the players. Another way of achieving this would be to offer a reduced salary but with the grant of share options in addition. This gives a right to buy a specific number of shares in a company at a fixed price. Assuming that the club's value subsequently increases, players will be able to buy the shares at a discount and make an immediate gain.
Gains achieved under special Government-authorised share option schemes enjoy generous tax concessions. This could mean a capital gains tax rate on the sale of the shares as low as 10 per cent and exemption from National Insurance contributions for both employer and employee. This would be an enormous advantage to players, who would otherwise be subject to 40 per cent income tax on their salaries.
To enjoy this reduced rate, an option must qualify as an Enterprise Management Incentive. This is available for clubs whose gross assets do not exceed £30m (no doubt a steadily growing number) and for players who 'work' for the club for at least 25 hours per week, or for at least 75 per cent of their working week. The 10 per cent tax rate is available for players who hold their options for at least two years, which is beneficial to the club as it should obviously help to reduce player turnover. Share options can be beneficial regardless of whether the club's shares are quoted on the London Stock Exchange. Unquoted shares lack a ready market, meaning that options would be granted at a lower price, which could lead to an attractive gain if the club subsequently floats or is taken over.
Although share options can therefore prove extremely lucrative, inevitably options can also prove to be worthless. This possibility may prove an obstacle against the acceptance of share options as an alternative form of remuneration for the players. To a degree, such an objection is justified by the fact that another contributory factor to the downturn in the Football League's fortunes was the end of the City of London's interest in football, which was so buoyant just two or three years ago, and which has meant that clubs have found it increasingly difficult to raise money through the equity markets.
However, it is evident that in the aftermath of the ITV Digital debacle, the way in which the Football League clubs operate must undergo some substantial changes if it is to flourish once more alongside the Sky-supported Premiership. The level and structure of remuneration to be offered to players must evolve accordingly, in order to align more closely the interests of the club and its players.
David Cohen is head of the employee benefits group and Amanda Hope is an associate at Norton Rose
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