Parachute payments in the Big Five leagues: Compensation that creates imbalance?

12.06.2018

As the end of the 2017/18 football season saw the crowning of domestic league champions, it also brought harsh disappointment for the clubs relegated to lower divisions. Indeed, by leaving the much-coveted elite status, the unfortunate clubs now have to cope with fan discontent and other sporting issues. But beneath the surface there are even greater economic hurdles following relegation as the clubs usually experience a huge drop in revenue (lower broadcasting revenues, less appeal for commercial partners and diminished interest from the fans), while still facing the relatively high cost of players´ salaries still based on first tier levels. As a consequence, this often entails in clubs selling top talent to balance the books, in turn resulting in a weaker squad fighting for promotion.

As this transition period can prove challenging both on and off the pitch, Europe’s so-called “Big Five” leagues have implemented payment schemes – defined as “parachute payments” – benefitting relegated clubs to the second tier (and sometimes even to the third domestic tier) to ensure minimal disruption and help them climb up the ladder back to the elite division in a relatively short timeframe. In this article, the KPMG Football Benchmark team reviews how parachute payments have been framed and implemented across the leading leagues and provides an overview of the challenges they pose.

Although parachute payments have gradually become commonplace over the past few years, their implementation mode as well as actual payment amounts widely vary. The English Premier League, applauded as the pioneer in creating this mechanism, provides its three relegated clubs with an equal part of the Premier League´s equal payment (equal share and overseas). These payments are spread over a three-year period following relegation (limited to one year if the club immediately returns to the Premier League), with the percentage of the equal payment amount being reduced each year. Hence, and as payments are directly correlated with the league’s broadcasting rights, the amounts are quite significant - relegated clubs received on average EUR 46.7 m in their first season in the Championship in the 2017/18 season.
 

While Spain’s LaLiga also links parachute payments to league broadcasting income, the league has established a fund – representing 3.5% of the total broadcasting rights – allocating money among the relegated clubs depending on various criteria including past broadcasting revenue and the number of seasons they’ve spent in LaLiga (average amounts of EUR 13.7 m for the 2017/18 season). Interestingly, until 2014/15, clubs going back to the first tier had to pay back the amounts to the league, making it harder for them to compete with first tier peers and maintain their place among the top bracket.
 

Despite lacking a dedicated parachute payment scheme, the German Bundesliga has designed an original system as part of its new broadcasting revenue sharing model, which provides a higher share to support clubs relegated to the 2. Bundesliga. In fact, with 23% of TV rights now distributed on a weighted five-year ranking combining the performance of the two top divisions, the league is favouring clubs who regularly appear in the top division, with recently-relegated Hamburger SV and 1. FC Köln reportedly receiving an average of EUR 7.9 m from next season.
 

By contrast, parachute payment schemes in Italy and France are not calculated as a proportion of the total league broadcasting revenue but are fixed amounts allocated to clubs based on the numbers of seasons spent in the top division. Italy’s Serie A has been constantly increasing the size of the wallet, allowing their relegated clubs to get an average of EUR 20 m each in 2017/18.

The French league, whose mechanism is the most recently installed and also the most limited in terms of financial support, allocates over two years a fixed amount (EUR 2 m in the first year and then EUR 1 m) and a variable amount based on the number of consecutive seasons spent in the first division over 10 years (average amount of EUR 4.9 m for the relegated clubs in 2017/18)

The implementation of payment schemes for relegated clubs has not gone entirely smoothly, especially with regards to second tier peers. Indeed, with generally well-above average budgets, newly-relegated teams are in a prime position to immediately return to their elite division. The underlying challenge posed by these payments is distorted competitive balance, as those clubs benefitting from the cash injection stand a better chance to gain a ticket back to the top division. This is particularly true in the English Championship, where most teams have considerable ground to make-up on newly-relegated clubs enjoying cash compensation from the Premier League. Since 2012/13, 46% of relegated clubs have achieved immediate promotion back to Premier League, or landed a Championship play-off spot, in the season following relegation.

While the debate rages on around the legitimacy of such payments – recent studies showed a positive correlation between parachute payments and promotion to Premier League in the case of English football – the leagues might be forced in the near future to review their current payment schemes to favour a more balanced financial and sporting dynamic between the clubs. The frequent changes in the leagues´ regulations are firm evidence of their willingness to design a more agreeable system and suggest the issue will have to be constantly addressed as TV deals and competition formats continue to change.  

Further investigation into this and related topics, as well as analysis of industry data, can be undertaken by the KPMG Sports Advisory Practice. Our subject matter experts can also assist stakeholders in business case development, financial modelling and future scenarios building.