Salary Caps in European Soccer

Salary Caps in European Soccer

 

Development of Soccer in Europe

 

            Europe was attributed with designing and structuring modern sports. Previously, sports and sporting events were made subject to regulation. Sporting activities became competitive sports subject to market forces in the 1980s (2000).  Competition meant the transformation of administrative sports into a system governed by the economic forces of price and labour movements.  This was strengthened in 1995 when community authorities expressed little concern with sports through the Bosnian ruling issued by the European Court of Justice stating that players can freely move from one team to another. This meant that without regulations, the European soccer system developed autonomously.  (2004) However, the lack of regulation is being challenged because of this systems inability to ensure the persistence of European soccer.

 

Issues in European Soccer

 

            Initially, economic forces led to the establishment of different soccer teams due to the promising gains that managers and financiers expect to gain from the comprehensive marketing plans targeting both live and television viewers fuelled by the competitive spirit. European soccer evolved to fit the peculiar characteristic of sports competition. The lack of regulation results to uncertainty leads to a high interest in the sport that coincides with a soccer event’s market value. (1964) However, recently the system seemed to backfire on the European soccer system because of the double breakdown in both economic and legal aspects.  This is because the soccer system has minimized the regulatory role of law in the sporting endeavour but competition is not capable of providing the necessary regulations to the labour market as well as collective team events. There are no means of dealing with opposing parties with differing financial capabilities. (2004)

 

            In a typical match, two teams face each other. The quality of the match depends upon the balance between the forces involved. There is a quality match when the forces of the different teams are equivalent. (2004) This means that the chance of winning does not hold a greater weight for one team relative to the other. Ideally, this would mean higher interest in the match and greater revenue from viewers translating to pay favourable to players. However, quality match does not always exist especially in a competitive market. This is because prominent and wealthy teams may choose to spend on ensuring their winning in the future by allotting higher budget on players wages and offering a higher pay to prominent and promising players in other teams. In this case, the balance tips in favour of the wealthier teams because good players tend to shift to other teams offering a higher pay. The other teams that lost their best players are likely to regularly loose, resulting to a decrease in playing level translating to lower revenue for the team and lower pay for the team members. Teams lacking in resources are not able to compete with wealthier and better-skilled teams resulting to the poor performance of the team leading to revenue losses and eventually to its closure.

 

Although this system works well for wealthier teams, it may not be beneficial for the sporting event in the long run because there will only be a few teams monopolizing the games decreasing the element uncertainty and viewers’ interest. (1964) Based on the economics of increasing or decreasing returns, resources become concentrated on a number of teams or clubs making it difficult for other parties to enter. This is attributed mainly to the lack of regulation of European soccer. The unregulated status of European soccer results to the development of related issues such as salary caps, the rate of player movement, competition between leagues, viability of leagues and clubs, and the possibility of reform.

 

Player Salaries

 

A related issue arising from the unregulated operation of European soccer is player salaries. Competition and free labour movement results to the determination of salary in terms of market forces. Unregulated sporting means that there is no maximum limit to the salary offered to a player. This is expressed in the determination of the highest transfer pays offered to players from 1968 to 2001 (2002). Table 1 shows the players offered with the highest transfer pay while table 2 shows the players given the highest transfer pay in the past decades. These tables reflect the lack of regulation of the salaries of soccer players particularly in the past decade where there is an observed significant disparity in player salaries and wide difference in the rate of increase.

 

Table 1: Highest Transfer Fees, All-Time

 

RANK NAME                  TEAMS                  DATE        FEE

 

1.  Zinedine Zidane        Juventus to Real

                             Madrid               July 2001     m

2.  Luis Figo              Barcetona to Real

                             Madrid               July 2000   .3m

3.  Hernan Crespo          Parma fo Lazio         Aug. 2000   .4m

4.  Christian Vieri        Lazio to Inter Milan   Aug. 1999   .7m

5.  Juan Sebastian Veron   Lazio to Manchester

                             United               July 2001   .5m

6.  Rui Costa              Fiorentina to AC

                             Milan                July 2001   .3m

7.  Nicolas Anelka         Arsenal to Real

                             Madrid               Aug. 1999   .9m

8.  Giantuigi Buffon       Parma to Juventus      July 2001   .6m

9.  Gabriel Batistuta      Fiorentina to Roma     June 2000   .4m

10. Lilian Thuram          Parma to Juventus      June 2001   .7m

 

Table 2: Record Transfer Fees

YEAR   NAME                TEAMS                          FEE

 

1968   Pietro Anastasi     Varese to Juventus             0,000

1973   Johan Cruyff        Ajax Amsterdam to Barcelona    .33m

1978   Paolo Rossi         Juventus to Vicenza            .5m

1982   Diego Maradona      Boca Juniors to Barcelona      .32m

1984   Diego Maradona      Barcelona to Napoli            .2m

1990   Roberto Baggio      Fiorentina to Juventus         .5m

1992   Jean-Pierre Papin   Marseille to AC Milan          .4m

1996   Alan Shearer        Blackburn Rovers to

                             Newcastle United             .6m

1997   Ronaldo             Barcelona to Inter Milan       .9m

1999   Nicolas Anelka      Arsenal to Real Madrid         .9m

1999   Christian Vieri     Lazio to Inter Milan           .7m

2000   Hernan Crespo       Parma to Lazio                 .4m

2000   Luis Figo           Barcelona to Real Madrid       .3m

2001   Zinedine Zidane     Juventus to Real Madrid        m

 

 

 

The lack of salary caps makes provides several advantages and disadvantages to players, clubs or teams, financiers, European soccer. To players the lack of salary caps is advantageous because excellent performing players are able to get the highest possible pay due to competition among financiers to get the best players to their team to ensure wins. However, this is disadvantageous to players in clubs whose best players have transferred to better paying teams. Teams with limited resources are not able to compete with the salary offers of wealthier teams. With their best players transferring to other teams, the team’s performance suffers resulting to revenue losses and lesser salary for players. This is because their performance and the highest possible salary that a financier can offer determine the salary of players.  

 

To wealthy clubs or teams and financiers, the lack of salary caps boosts the team’s performance because they are able to afford to pay the best players. An excellent performance means better returns translating to the ability to ensure further the wins of the team and increase profit or gains. However, as mentioned earlier, the monopoly of the championship by a number of teams or a single team over a period diminishes the sense of uncertainty important in competitive sporting and the interest of viewers. The returns and profitability may not be sustainable. Teams with limited resources are expected to compete in lower levels resulting to revenue losses.  

 

The lack of salary caps also offers advantages and disadvantages to European soccer. Without salary caps, teams are able to compete freely for players allowing the entry of different teams and clubs resulting to the vibrancy of European soccer. Free competition encourages any person with the necessary resources to create a team or venture into partnerships and other business arrangements to support a team. However, in the long run European soccer will suffer the concentration of playing teams into a few groups supported by financiers with the resources to support the team. The price of competition becomes a barrier to entry for potential teams. It may also become costly for some average or low performing teams to maintain. This affects the sustainability if the vibrancy of European soccer.

 

Rate of Play Movement between Clubs

 

            Salary offering is the greatest factor that influences the transfer of players from one club to another. The lack of salary caps results to frequent transfers because of the tendency of players to look for club offering the highest salary after the expiration of their contracts with their previous clubs. There are two approaches in understanding player transfers in European soccer and the transfer fee. First is the cost-based approach. This approach considers the user value of players calculated either from the perspective of the club or the player. From the perspective of the club, the transfer fee is calculated based on labour value. Club owners spend on players and other team needs so that this comes with the right to gain expenses on the salary of player and the expected contribution of the player. This is the case if the player has an existing contract. However, if the player is free from contractual obligation, the approach considers human capital and the player calculates a reasonable transfer fee based on opportunity cost, expenses of the player on enhancing the value of human capital through training should be less than the expected returns. (2004)

 

            Second is the talent-based approach use similar value system as in art where the transfer fee is determined by the number of years that the player has been a consistent member of top-level clubs, sporting honours, position and flexibility of the player, and the age and nationality. (1993) Market forces determine quoted value and this is economically sound in cases where pure market forces determine the price of transfer fees. However, in actual practice other factors intervene in the determination of the value of players such as the risk involved in hiring and training a player and the cost of loosing the player. (1997)

 

            The unregulated movement of players from one club to another applies the cost-based approach so that there is also no ceiling to the amount of transfer fee as it is a matter for negotiation and agreement. The lack of regulation increases the cost of acquiring players. This poses a risk in cases where the club may have over assessed itself regarding its expected returns relative to the cost of acquiring a new player. This gives rise to questions on whether to continue relying upon market forces or to establish regulatory measures in determining transfer value.

 

Competitive Balance of Various European Leagues

 

            Competitive balance is another issue affecting European soccer. Competitive balance refers to the economic value or quality of a particular sporting contest. There are four criteria for a quality contest, which are legitimacy of the contest, quality of the plays, uncertainty of outcome, and the significance of the contest. (1992)  Legitimacy refers to fair play as well as the freedom given for the entry of new players to join the contest as long as they are qualified. Quality of players refers to the ability to match the equal abilities of players from the two teams to increase the uncertainty of outcome. Uncertainty of outcome reflects the integrity of the contest because of the lack of predictability on the part of viewers. Lack of predictability then increases the value accorded by viewers to the plays. Significance of the contest refers to the overall characteristics of the contest from the matching of players to low predictability to the movement of players evenly across different teams to increased returns. (2004)

 

            Competitive balance is considered as a key requirement to the persistence of European soccer and its financial viability. In the Western European leagues, competitive balance is expressed in Table 3 (2004) that lists down the different leagues, classifies them according to competitiveness and shows the concentration of championship titles that each league received within 1992 to 2002. The consistently high competitive leagues are Germany, Denmark, England, France and Sweden. This means that over a decade, these teams dominated the top level. In the light of the criteria for competitive balance, there is an average level of balance because the top-level leagues are constant for the past decade and the championship title only passes from one of these leagues to another leaving out other leagues.

Table 3: Concentration of Championship Titles, Leading Western European Leagues

 

Concentration of Championship Titles

League

H-Index

CR(2)

CR(3)

Highly Competitive

 

 

 

Germany

0.076

28.9%

36.7%

Denmark

0.087

28.1%

38.2%

England

0.087

31.1%

42.7%

France

0.096

28.6%

41.3%

Sweden

0.099

29.9%

43.0%

Competitive

 

 

 

Belgium

0.121

37.4%

48.5%

Switzerland

0.121

40.4%

51.0%

Holland

0.130

42.3%

55.8%

Italy

0.137

42.0%

55.0%

Norway

0.148

43.6%

58.2%

Dominated

 

 

 

Austria

0.201

57.8%

68.9%

Spain

0.241

62.0%

74.7%

Turkey

0.275

64.4%

86.7%

Greece

0.326

74.2%

90.9%

Portugal

0.335

70.6%

97.1%

Scotland

0.349

82.4%

86.2%

Notes: H-Index: Herfindahl index. CR(2): share of top two clubs. CR(3): share of top three clubs.

Source: Rothmans Football Yearbook (various editions); author’s calculations.

 

Financial Viability of Leagues and Clubs

 

            The financial viability of leagues and clubs is dependent upon several variables. Generally, the number of viewers determines the financial performance of the leagues and teams. However, there are several factors both controllable and uncontrollable by leagues and clubs that influence the number of viewers. Several studies have shown that the success of sporting events are influenced by factors such as GDP translated into the ability of viewers to pay, population of the country or region where a sporting event is to be held, culture that covers the interest that people have on the sporting competition, and climate  (2000;1999; 2002;  2000; 2000).

 

 (2002) showed that GDP has a positive influence on the performance of sporting events but at a decreasing rate. The relationship of GDP to performance is described by diminishing returns. Two reasons were given for the nature of the relationship. First is soccer as a capital non-intensive sport which means that people are active in the sport especially people in the lower income classes but with increase in income people belonging to lower income groups engage in other activities such as employment and business ventures. Second is the increasing access to a number of alternative forms of entertainment with a rise in income.

 

Culture influences sporting performance because the integration of a sport into the social consciousness of people raises the popularity of the sporting activity affecting viewers and the revenue of the leagues and clubs. Leagues and clubs can influence this factor by staging tournaments in their countries. The frequent hosting of games influences the success of game hosting through viewer turnout by increased access. (1999; 1999;  1995)

 

            Apart from the factors influencing viewer turnout, there are also factors surrounding the European soccer system that influences the financial viability of the leagues and clubs. Firs is the organization of the games to achieve optimum competitive balance and draw interest in the competition by ensuring uncertainty, matching the players and choosing the host for the tournament. Second is the management of the leagues and clubs that covers the uncapped expenses because of the uncapped salary and transfer fees relative to expected return raising the risk of incurring loss. Since these factors are controllable by the leagues and clubs, questions of reform through regulations on salary and transfer fees have been proposed.

           

Proposals to Reform European Soccer

 

            To achieve high levels of competitive balance, several policy instruments allowing the people involved in the organization of sporting tournaments to intervene in several areas of the event. To achieve results, one instrument is to implement direct restrictions on the migration of players through actions such as a reservation system. (2004) This is a direct action involving a direct outcome. However, this should be implemented on all leagues and clubs in the European soccer is results are to be expected since the refusal of financiers to follow the restriction or their persistence in player transfers would defeat the purpose of the action, which is to maintain competitive balance by preventing the concentration of talent in a single or few clubs.

 

            Another instrument is the indirect imposition of layer migration by regulating the incentives to transfer by imposing salary caps (  2004). This may be viable move because it has been shown that uncapped salary and transfer fees are bearing down on the financial capability of leagues and teams leading to the classification of a few teams into the top level and all other teams in lower levels with a little chance of promotion, which decreases competitive balance. Again, despite the benefits of this action to the persistence of European soccer, the move may be faced with opposition especially from the players and financiers of the top-level leagues and clubs. Without the full cooperation of all leagues and clubs, the action would prove futile.

 

            Another instrument that indirectly affects competitive balance is through the redistribution of revenue to achieve revenue equality by imposing actions such as sharing gate revenues and the centralized sale of media and image rights ( 2004). This is difficult to implement because from the view of individual leagues and clubs this may not be economically sound or even unfair especially to top-level or excellent performing leagues and clubs. However, from the perspective of ensuring the viability of European soccer as a whole this may be a doable idea because it ensures the success of more leagues and clubs adding vibrancy to sporting competitions and enhancing high competitive balance to gain higher returns.

 

            Finally, another option is to restructure or reorganize the tournament to ensure that the members are equivalent in economic size. This is done either by terminating small market teams or by excluding these from newly created super leagues made up of big market teams from the different existing leagues. (2004) This is another way of ensuring competitive balance. By matching clubs with equal economic abilities, uncertainty is increased and interest is heightened. Again, cooperation of the different leagues and clubs are required to implement this action effectively.

 

            An earlier study by  (1956) showed that it might not be effective to implement migration restrictions and redistribution of revenue. Using the Coase theorem showed that the equitable distribution of talents is not affected by the apportionment of property rights to the revenue stream. Based on this study, the suggested intervention options are salary caps and restructuring of the tournament. The imposition of salary caps is also supported by (1995) as a scheme that could improve competitive balance and maintain the financial performance of leagues and clubs.

 

Conclusion      

 

            The persistence of European soccer depends upon several factors but the biggest determining factor is the ability of the leagues and clubs to maintain competitive balance to ensure viewers that translates to revenue. At present, European soccer offers an average competitive balance, which may not be sufficient to sustain viewers. European soccer requires interventions since the lack of regulation is not beneficial for the sporting activity. There are several ways of achieving competitive balance but the most effective are salary caps and restructuring of the tournament. However, these actions require the cooperation of the leagues and clubs. Thus, it is upon the coordination of the parties involved in European soccer that its continued existence depends. 

             

 

 

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