Contract Extensions: The Silent Turnover Killer

 

It’s that time of the year again.  The transition into spring from February through April is when most Premier League clubs diligently try to announce their previous years’ financial accounts as quietly as possible.  Some clubs try even harder to fly under the radar by announcing earlier, like Swansea City who announced their latest accounts back in October.

Regardless of when it happens, every Premier League club is required to submit their numbers from the previous season to the UK’s Companies House, the executive agency that handles company registration and it must be done 9 months from the previous financial year’s end.  Most of the time the end of the financial year tends to be the 31st of May or the 30th of June.

Citizens are able to purchase these documents through the Companies House once they have been submitted which almost assures fans that their club will make some form of an announcement on the previous year’s financial accounts rather than risk appearing to brush any financial black marks under the rug.

From club to club, these announcements are far from uniform with most clubs picking and choosing the data they prefer to mention.  Most communications and PR departments seem to assume that most fans will read the club summary along with one or two media outlet summaries and never bother trying to get their hands on the actual accounts submission.

More often than not they’re right, though the context that many media outlets are now placing on the discussion of these financial accounts each year is that of UEFA’s Financial Fair Play (FFP) causing more people to pay attention.

In recent years, a lot of financial focus has been placed on the amount of money that is spent on transfer fees, or “player registrations” if you read the financial reports.  These figures are seldom released but speculation and leaks cause them to be more widely known and sometimes grow to obscene amounts which garners the attention of fans and pundits alike.  This happens less frequently for wages and salary.

No matter the size of the club, nobody really wants to publicize wage and salary information too much.  As an example, in this most recent round of financial filings and announcements, Swansea City, Aston Villa, Manchester United, Arsenal, Liverpool and Chelsea all failed to even mention wages.

For the 2011/12 season, according to data from The Guardian, the average wage percentage of turnover was 72%.  Meaning that on average Premier League clubs spent 72% of their annual turnover on wages for their players and staff.  5 clubs actually spent over 85%.

The impact of wages on club financials is undeniable.  While Manchester United’s venture onto the NYSE is questionable for a number of reasons, a benefit for fans is that annual financial reports become much more easily accessible. Manchester United’s latest 900 page financial report, directly stated, among other things, that its biggest annual expense continues to be wages.

Despite salaries and wages becoming more prominent in discourse, there is still a somewhat under reported aspect in terms of the potential impact: Contract Extensions.

This season, in the Premier League, four players have amounted to an estimated £43.94 million of total investment.  These players are Wayne Rooney, Luis Suarez, Leighton Baines and Aaron Ramsey.

The £43.94 million comes from each players’ extension in regards to speculated pay rises.  Prior to contract extensions, Wayne Rooney was speculated to earn £250,000 a week at United, Luis Suarez was speculated to earn £120,000 a week at Liverpool, while Aaron Ramsey and Leighton Baines were both speculated to earn £50,000 a week at Arsenal and Everton respectively.

All four contracts are middle to high level earnings for a Premier League player and all represent a significant long-term investment by their clubs. Over 52 weeks, these wages add up to millions.  With Financial Fair Play’s threshold of £37.2 in losses over 3 year observation periods, even a new or unexpected £5 million investment over that period of time is significant.

Because player transfer fees, for accounting purposes, are amortized over the length of their contract, (£30 million fee + 5 year contract = £6 million against the books each year) transfer fees naturally are a huge consideration.  As a result, it’s easy to see speculation of £25,000 a week pay increases not having a huge impact on the books.

That inclination is misleading.  To use the four players mentioned above as an example; Rooney is speculated to have gotten a £50,000 a week raise to £300,000. Let’s assume Manchester United have already accounted for the original £250,000 long-term having expected him to stay beyond his contract.  Rooney signed a 4 year extension which leaves the 50K increase.  That over 52 weeks is £2.6 million a year, which is £10.4 million at the end of the final year.

Take that process against the other three players and Ramsey’s extension adds an extra 5 year £11.7 million to the Arsenal accounting, Suarez’s 4 year extensions adds £16.64 million to Liverpool’s books, and Baines’ 4-year extension adds £5.2 million to Everton over that time.

They are all big name players on long contracts.  The impact, while significant, isn’t that surprising.  Take into account that Arsenal extended Santi Cazorla’s and Per Mertesacker’s contract as well, not to mention they’re looking at extending Lorient Koscielny’s contract and are currently negotiating with Bacary Sagna. It’s not just the big name contracts that add up.  Hopefully it becomes a little clearer why many clubs lose players to what seems to be miniscule demands on wage increases.

Financial Fair Play is no longer just a UEFA program, the Premier League and the Football League both have their own Fair Play implementations.  Clubs around Europe are preparing for the impact but some fans may still find it difficult to understand why certain decisions are made on what appear to be marginal amounts of money.  In the world of Financial Fair Play, no amounts of money are marginal and often times they are only a portion of the picture.

Reporting on the business side of the world's game.