What Premier League Squad Cost Control Might Look Like

She's Lost Control

Although the Premier League appears incapable of securing an agreement on a more equitable distribution of money to the clubs in the English Football League, it did recently approve new squad cost control rules as a replacement of the existing Profitability and Sustainability Regulations (PSR).

They explained the decision in a statement, “At a Premier League shareholders’ meeting today clubs agreed to prioritise the swift development and implementation of a new league-wide financial system.”

The League added, “This will provide certainty for clubs in relation to their future financial plans and will ensure the Premier League is able to retain its existing world-leading investment to all levels of the game.”

Why Is This Important?

Many fans will see this as yet another tedious discussion about balance sheets, but the issue has clearly become more of a focus for football clubs, especially after the Premier League punished Everton with a 10-point deduction for breaching PSR. Although this was subsequently reduced to six points on appeal, this still showed that the regulations actually had some teeth.

Similarly, Nottingham Forest have been charged for non-compliance with PSR and are currently awaiting their fate.

This was one of the factors behind the significantly reduced activity in the January transfer window with the spending limits imposed by Financial Fair Play (FFP) referenced by a number of Premier League managers, such as Erik ten Hag at Manchester United and Eddie Howe at Newcastle United.

Alignment with UEFA

It is not yet clear exactly how the Premier League will implement the new squad cost control rules, but it is likely that they will align themselves with UEFA, as was the case with PSR.

This was mentioned in comments made by Richard Masters, the Premier League Chief Executive, to a parliamentary select committee, “We have some proposals out for consultation with our clubs about moving and aligning more with the UEFA system. UEFA has spent two years changing its financial regulations away from what used to be FFP to something that is called ‘squad cost ratio’, which is more of a wage-to-turnover calculation.”

He added, “Because, over time, we have historically aligned with UEFA because seven or eight of our clubs are in European competitions, we need to consider whether that is an appropriate move for us, how we do that, and when.”

Squad Cost Control Ratio

Therefore, it seems reasonable that we should be able to review how clubs in the Premier League are positioned to meet a squad cost control ratio by using the methodology that has already been implemented by UEFA.

Essentially, UEFA are seeking to limit the amount that a club can spend on players (in wages, transfers and agent fees) to a percentage of what it earns.

Their additional objectives in implementing a new cost control ratio were to:

• Provide a direct measure between squad costs and income to encourage a more performance-related approach

• Limit the inflationary impact of wages and transfer fees of players.

In effect, UEFA have applied a salary cap, albeit a “soft” variant, while the resulting financial sanctions could be described as a sort of “luxury tax”.

Squad Cost Ratio Calculation

A club’s squad cost ratio is calculated as the sum of:

• Wages of players and head coaches

• Player amortisation and impairment

• Termination payments for players and head coaches

• Agents’ fees and cost of other intermediaries

Divided by the sum of:

• Operating revenue (adjusted for fair value, if required)

• Profit from player sales

• Other transfer income

Premier League Squad Cost Ratio

Although the Premier League has not officially stated how much it will apply as its cap, it has been widely reported that this will be 85% of a club’s earnings (from football activities), though this will be reduced to 70% for clubs playing in UEFA competitions, as they benefit from higher revenue.

As an example, if a club’s total earnings are £400m and it is playing in a UEFA competition, then its spending cap for the relevant expenses referred to above would be £280m, i.e. £400m x 70%.

One point that will require clarification is whether clubs in the Europa League and Europa Conference will have the same ratio as those in the Champions League, as the earnings from Europe’s leading tournament are much more lucrative.

Caveats

Before I start with the calculations, I should list a couple of caveats:

• The analysis is based on the latest available accounts for each club. This means using the 2022/23 accounts where these have been published, but 2021/22 accounts where these are not available.

• As the clubs promoted from the Championship in the previous season have much lower revenue, these have been excluded from this particular review.

Premier League Review

Bearing those points in mind, let’s take a look at the squad cost control ratios for the clubs that were playing in the 2022/23 Premier League, based on the approach taken by UEFA.