Amidst recent discussions on the state of the club’s finances, there is a strong need for the board to adopt modular and flexible contracts at Villa Park, and this piece details just how the board can hit their own targets without suffering the issues the club have faced in recent years.
The recent turnover figures – and associated losses – have graphically depicted the significance of Premier League TV money to the club, with roughly £50m of an £83.7m turnover coming from rights that are tied to survival. This, of course, is reflective of the past value of the TV rights contract, it has, since, gone up to a figure closer to £80m, meaning that relegation could cost a possible £65m given the difference between top flight TV rights and the maximum four year parachute payments.
As covered in my piece on Saturday, Aston Villa have begun adopting a tighter control on the club’s wage policies, leaving expenditure on average at a rate closer to £20k or less per player per week, a long way from the £40k or so averages at the peak of the club’s wage expenditure.
What we have found through experience is that neither Villa’s inflated former policy, nor their current austere approach, have been effective – the former was unsustainable for financial reasoning, whilst the latter has been a significant contributory factor to a degraded level of quality.
Villa’s move to a more restrained approach makes, at least in abstract terms, perfect financial sense. However, due to the highly static way wages are structured, there are significant issues which lead Villa towards a long term low league placing.
The solution? Primarily, the club needs to understand – and manage – potential risks that are associated with the relevant outcomes that Villa could face in the future.
The most significant impact to Villa’s financial future is the far-from-insignificant impact of relegation from the Premier League. Given the size of the drop in TV rights as a result of going down, such possibilities have to be understood and managed, but without making major & damaging cuts that could otherwise cause the club to regress.
As a comparative, the current TV deal will likely yield around £80m for Villa for the 2013/14 season – a figure that will be reflected in next year’s accounts due to the structure of payments.
If Villa go down instead, 2014/15 parachute payments are estimated to be around £15m per season for a maximum of four seasons, with the parachute payments a touch higher than last season where figures we close to £12m.
Which, if we take a rough look, would mean an impact of around £65m to turnover, something that would have a strong impact on the ability to pay costs.
The solution? Villa must, without argument, adopt a flexible and modular approach to how contracts are paid, assuming that the club want to be financially prudent, self-sustaining but also non-self-limiting.
To explain the core of how the club should progress, a few calculations need to be made. Firstly, Villa need to understand and quantify an acceptable level of wages as a proportion of turnover. Ideal circumstances dictate that a figure of 60-70% is the absolute maximum that should be paid for all player wages.
Basing such a figure on a projected next season revenue of around £115m (current turnover plus the ~£30m change in TV rights), we need to establish Villa’s maximum average wages that can be paid.
Let’s assume – for the sake of simplicity – that the first team squad’s wages will comprise a figure of 80% of total wages, with the remaining 20% being spent on youth wages.
Putting the figures into our equation, we can calculate that Villa – assuming they stay in the top flight – need to maintain an average wage of ~£55.2m (calculated as £115m x 0.60 [ideal 60% proportion of wages to turnover] x 0.80 [simplified percentage of first team wages being 80% of total player wages]).
This gives a figure of ~£2.2m per player per year, broken down to a gross average pay of around £42,500 per week (total wage divided by 52 weeks).
So why are Villa paying such meagre wages if the club can sustain average wages of over £40k a week? As mentioned before, the board are being cautious based on a potential risk of relegation.
Because the financial ramifications of relegation are so significant, let’s run that calculation based on a future accounting year based on receiving a parachute payment rather than the current Premier League Sky deal.
*NB turnover figures will likely be ~£115m next season as this year’s TV rights will appear on next year’s accounts – relegation would not impact accounts till the publishing of 2015/16’s figures given how TV rights are paid at the end of the season.
Assuming Villa go down, the turnover for the accounting period covering 2014/15s TV rights (which will be represented in the 2015/16 accounts) will be an estimated £50m – a figure that would significantly change the need for a far lower average wage.
As before, let’s do the calculations on average wages that the club could sustain on parachute payments:
£50m [£115m – £80m loss of TV revenue + £15m parachute payment for year] x 0.60 [ideal 60% proportion of wages to turnover] x 0.80 [simplified percentage of first team wages being 80% of total player wages])
This gives us a comparatively meagre budget of just £24m for a 25 man senior squad, equating to £18,461 per week.
Looking at that figure, it becomes more apparent why many players have been brought in at lower rates. Ashley Westwood, for example, was signed on a reported initial contract of less than £10k per week with the likes of Jordan Bowery and Joe Bennett on similar wages.
Of course, the likes of Ron Vlaar, Karim El-Ahmadi and Christian Benteke all were paid/are paid more than the £18,461 figure. However, because that is an average, deviations are to be expected.
However, the above figures are based on being in the Championship. Now whilst that is sensible (simply because such a possibility could occur), it is also self limiting and inflexible, leaving Villa reguarly unable to compete for players who could improve the team. In short, if Villa adopt such a nervous, low cost structure, there’s a strong argument to say that they will eventually end up relegated. Why? Because the players they are buying are mostly likely to be not good enough.
So what’s the answer? We’ve seen via past experience that the owner is hesitant to go in guns blazing, and has made statements through the CEO that sustainability is the target. With all that in mind, is there any other way that things can be done? Or is this the long term future for the club?
The simple answer is yes – there is another option that sates both the club’s need to be sustainable but also allows for spending. How? Performance related contracts that also include relegation fees.
In the modern game, it often strikes me as strange that more clubs don’t make their contracts more flexible. When you give a player £40k a week if he scores no goals or 20, you’re arguably going to set an environment when motivation could be limited – a situation that many fans will argue is exactly the problem Villa face now.
In addition, basing contracts on performance actually supports a statement that Paul Lambert made earlier in his time as Villa manager – that he doesn’t want players to suddenly think they have made it and “to go from driving a Skoda one day to a Ferrari the next”.
We’ve seen since last season that some players have been rewarded with new, improved terms. Players like Ashley Westwood, Andreas Weimann and Matthew Lowton have all received increased terms, though one could argue that they have not always performed at a level that a pay rise would suggest. In fact, if anything, at least two of the aforementioned trio have arguably gone backwards.
So what if the likes of Weimann’s contract was set up in a different way? Let’s assume a wage of £30k a week for the Austrian international. Is paying that flat rate the wisest choice? What if we were to, for example, pay him £20k flat rate and £20k per goal scored? Wouldn’t that make for a far more motivated player?
Some could say that it means that Weimann ends up earning more money and, depending on what happens, they would be right. However, and this is the key, Weimann only earns more if he performs well. If he scores no goals, he gets £20k. Score a hat trick and he could end up with £80k, arguably a fair reward if it then means Villa are winning more games.
Of course, the contracts could be constructed in far more complex ways – goals could be worth more vs. stronger opponents for example, and less versus weaker ones – but it illustrates that there are ways to both hit sustainability targets but without limiting the budget to a disabling level.
Finally, relegation clauses need to be standardised for every player coming in. I don’t subscribe to the idea that a £10-20k average wage a week – flat rate – is the solution to staying in the Premier League. Simply put, getting by on what you might earn if you go down causes harm to the ability for Villa to compete, meaning more time at the wrong end of the table.
If we take the basic figures listed above, and note both the 60% aim of wages versus turnover, and the fact that relegation has an impact on turnover, we could construct an offering like the following:
A new striker signs for £10m. They are paid £30k a week basic with a £20k a goal performance option. In line with the reduced turnover if the club goes down, the contract also includes a clause that says relegation means basic salary drops to half that figure – £15k a week – with performance bonuses pro-rata in line with turnover, so goals may end up being £10k each in the Championship rather than £20k in the Premier League.
What this allows for is an ability for two things. Firstly, the club ends up with a model that reflects where the club is at the present time – there is no situation where the club pays Championship level wages in the Premier League or vice versa.
Secondly, it allows for contracts that actively encourage players to perform. Yes, differing role players may have different bonuses – defenders may get clean sheet bonuses, midfielders passing accuracy or assist bonuses, and strikers may get extra for assists or goals.
What it does mean is that Villa can follow their own strategy of sustainability – a plan I support strongly in principle – whilst also being able to remain competitive at the level they play, without having to adopt an overly tense and inflexible stance such as the one exhibited in recent years.
If the club do that, and there is no real reason they can’t, we could well see both a better standard of player at the club, a more motivated squad and better overall performances.
Will it happen though? Randy Lerner, it’s over to you – the future of Villa is in your hands.
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