The unbelievable economics & employment practices of football

Football continues to blaze a trail in the world of unbelievable employment practices.

It’s a world where those seen as failures by many fans continue to get plum jobs, where a manager who has never won any significant silverware can become England boss, and where players are bought and sold with valuations that absolutely defy logic.

Here’s an example: today, Manchester United announced that Paul Pogba would be joining them.  They are spending £89m on a player who left them for £800,000 only four years ago. In any other industry, this would be insane; but Man U are not alone. My club, Chelsea, seems keen to pay £60m for Lukaku, a player they sold for £28m only two years ago. And they have history here: in 1997 they bought Graeme LeSaux for £5m, having sold him for £700,000 a few years earlier. In 2015, Chelsea paid £23m for Matic, a player they had swapped four years earlier for a valuation of £3m.

The whole thing is indicative of a Premiership micro-economy which has no relationship with the wider travails of the last eight years. Average wages in the UK have increased from around £15,000 to £25,000 (a 67% increase) since 2000, with inflation pretty much in line. The average salary of first team players in the Premier League has gone from £410,000 in 2,000 to around £2m per year (with bonuses) in 2014/15– an increase of over 400%.

Or, to put it another way, average player wages have gone from a disturbing 27 times national average wages to an astronomical multiple of 70+. Only FTSE 100 CEOs can claim a similar record of over advancement in the period – though perhaps with even less justification.*

As a rule of thumb across most businesses, one third of total income should go to payroll. In the Premier League, the ratio is closer to 80%. This is madness, and leaves most clubs teetering on the edge of bankruptcy: one bad season, and they are gone. Even if you are a 5,000-1 shot like Leicester, and you can run the club profitably with small margins in a normal year, the benefits of a bumper year do not last.

Since its inception, and until Leicester last year, only one other club outside the big four has won the Premier League – Blackburn Rovers, on who Jack Walker spent millions and nearly bankrupted himself and the club. Similar stories are legion: Leeds, Fulham, Wimbledon, Wigan, and others have struggled mortally after trying to keep pace with the big spenders at the top of the league.

But here’s the thing: the 20 clubs of the Premier League between them turned over a record £3.4bn last year, and, despite the insanity of the wages, the majority were profitable. And if you view the clubs as a private equity-style play, with a drive towards realising the value on exit, there may be method in the madness.

At IPO in 1991, Manchester United was valued at £10m. The Glazers paid £790m for the club in 2005 and today it’s valued at $2.7bn. Similar inflationary stories can be found for Arsenal, Chelsea and Tottenham. According to a study last year by Tom Markham, each of these clubs are worth around $1bn, and increased value by between 20% and 60% from 2013 to 2015.

So the valuation of players may seem bonkers: but every success they drive adds significant multiples to the value of the clubs. As long as the correlation continues, it is hard to see an end to the madness of player valuations and wages any time soon.

* FTSE 100 CEOs earned an average of around £5.5m last year, compared with under £1.25m in 2000. The High Pay Centre noted that, since 2000, the multiple of earnings from FTSE 100 CEOs compared with average wages in their own businesses had gone from 47x to 130x – a 240% increase. At the same time, the average market cap of a FTSE 100 company has increased by only 30% – from 5,225 on 1 September 2010 to 6,827 today. Perhaps Premiership players are delivering better value for their stakeholders than these executives.