Can the Premier League clubs find a wage cap that fits all?

The logical solution to protect clubs from themselves is to tie wages to turnover as now happens in League's One and Two

Dennis Bergkamp, right, Arsenal: £25,000-a-week (Getty Images)

To no great surprise the 20 Premier League clubs failed to agree on a form of salary capping this week, though they promised to revisit the subject in the new year. Rather like the newspapers post-Leveson there is a broad agreement that "something must be done", but, as with the newspapers, so disparate are the individual perspectives, finding agreement on what should be done is challenging.

At least the press are united by a single threat, that of Government intervention. The clubs do not even agree on the problem. While for most the issue is how to resolve the bizarre conundrum of an industry that is experiencing an extraordinary boom yet fails to produce a financial return, others (Arsenal, Manchester United) view a salary cap as a means of combating clubs with limitless resources (Manchester City, Chelsea). There are also a few who object to any cap either because they fear it would make their club less attractive to investors or it would destroy their operating model. Aston Villa, West Bromwich, Fulham and Manchester City are reportedly among the objectors.

What is not in doubt is that wages have increased exponentially during the Premier League era, growing even faster than the explosion in television income. Even with clubs exploiting other revenue streams, notably charging ever-higher ticket prices and developing the global market, they have failed to prevent wage ratios when measured against turnover from spiralling.

In 1995-96 the 20 Premier League clubs had a joint turnover of £346m, out of which they paid £173m in wages, a ratio of 50 per cent, resulting in a collective profit (before transfers) of £52m (an average £2.6m each). Fifteen years later in 2010-11 (the last season for which all clubs' figures are available) Manchester United alone turned over £331m, with the league's revenue as a whole totalling £2bn. But wages had mushroomed with the result that eight of the 20 clubs recorded a loss.

The suggested barometer above which wages are a cause for concern is two-thirds of income. Of the 20 current Premier League clubs only five were within that range in 2010-11: Arsenal, Manchester United, Tottenham, Newcastle United and West Bromwich Albion. All are noted for keeping a relatively tight rein on wages – Manchester United may pay big money, but they earn big money.

Four clubs had a wage bill that exceeded their entire turnover: Aston Villa, Manchester City, Queen's Park Rangers and Swansea. The latter two were in the Championship, and in the process of going up, but while promotion would have brought in vastly increased income, it is probable, given their transfer activity and limited ground capacity, that QPR's wage bill still exceeds 100 per cent of turnover.

Villa's situation is instructive. In 1995-96, despite keeping wages to 41 per cent of turnover, the club came fourth under Brian Little, as well as making a decent profit. By 2010-11 Villa's turnover had increased five-fold but wages were 103 per cent of income, precipitating a £34m loss. And the club finished ninth. By then owner Randy Lerner, having taken fright at the cost of attempting to break into the top four, had already decided to rein in expenditure and the consequences were starting to show with results waning and Martin O'Neill walking out in 2010. Villa now pursue a youth-first policy, supplemented by lesser-known overseas talent.

Manchester City, like Chelsea, operate under different conditions to the rest of the league, especially City who are playing the same game of catch-up Chelsea did when Roman Abramovich arrived in 2003.

Both clubs have driven up wages. Manchester United have been able to compete because Old Trafford is the country's biggest domestic stadium and they have a global support to "monetise". Arsenal have competed up to a point because of continued Champions League participation, supplemented by the lucrative Emirates Stadium. Tottenham, by dint of Daniel Levy's acumen have hung in, but others have struggled to compete. Newcastle are sensibly run now, but that was not always the case, and for every West Brom, shrewdly banking their parachute payments as they yo-yoed between the Premier League and Championship, before using them to stabilise, there has been a Portsmouth or Leeds, Birmingham or Coventry.

If it is clear from the accompanying table that wage restraint is even harder outside the top flight than in it (thus the spread of salary capping measures in the Football League) the majority of top-flight clubs now recognise the only winners in this arms race are players and agents.

So what is to be done? The logical solution to protect clubs from themselves is to tie wages to turnover as now happens in League's One and Two. However, like Uefa's Financial Fair Play plans and those in the Championship, which follow a "break-even" principle, that will effectively preserve the status quo making it difficult for owners to challenge the established order. The same applies to any regulation limiting annual wage increases to a set percentage.

Unsurprisingly the likes of Arsenal and Manchester United favour these models. "You should just get the resources you generate, that will determine the real size of the club," said Arsène Wenger this season.

It is not just City and Chelsea who object to this, Fulham have long been bankrolled by Mohamed al-Fayed and he has reportedly threatened legal action if prevented from continuing to support the club financially.

An alternative is an annual limit to how much can be added to the collective wage bill, with Sunderland's Ellis Short understood to have suggested £4m. This would probably benefit the middle-sized clubs, enabling them to close the gap, but not arrivistes. It should also ensure some of the new £5bn TV deal, which will bring in £60-100m a year per club, ends up in the accounts of those owners who expect a financial return as well as reflected glory.

Most clubs' approach is one-eyed. Reading and Southampton opposed FFP when they were spending to get out of the Championship last year; they support it now. Wigan chairman Dave Whelan massively outspent his club's income as he propelled them up the league – Wigan's wages-turnover ratio in 1995-96 was a staggering 223 per cent – now his team is a small fish in a big pool he wants clubs to show restraint.

What is not on the agenda is a limit on owners piling debt onto clubs. A personal view is that Uefa and the English game should allow big investment but only if, as with City, Chelsea and Southampton, owners' loans are converted into equity not dumped on the balance sheet. That way a club's future is protected. In addition a much larger slice of income should be directed into grassroots and other good causes before the owners get their mitts on it. Both measures would indirectly curb wage inflation.

What is crystal clear is that left to their own devices too many clubs will continue to spurn the opportunities offered by the greatest bonanza in the game's history.

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Unbalanced books: Premier wage inflation

1995-96:

*Revenue *Profit Wages Ratio

[£m] (loss) [£m]

Arsenal 21 2.5 10 48%

Aston Villa 18.9 5.8 7.7 41%

Chelsea 15.9 0.7 9.2 58%

Everton 17 1.3 10.1 59%

Fulham (L2) 1.4 (0.5) 1.2 86%

Liverpool 27.4 7.4 13.2 48%

Man City 12.7 0.8 6.4 50%

Man Utd 53.3 16.7 13.3 25%

Newcastle 29 0.8 6.4 20%

**Norwich (C) 5.2 (2.4) 5.6 108%

QPR 7.2 (1.3) 5 69%

Reading (C) 2.8 (-1) 3.1 111%

So'ton 7.6 1.6 4 53%

Stoke (C) 3.7 0 2.5 68%

Sund'land (C) 7.2 (0.4) 4.5 62%

Swansea (L1) 1.2 0.3 1 83%

Spurs 27.4 15.5 11.5 42%

WBA (C) 5.4 0.3 2.7 50%

West Ham 12 1.4 6.2 52%

Wigan (L2) 0.6 (1.1) 1.4 233%

2010-11:

*Revenue *Profit Wages Ratio

[£m] (loss) [£m]

Arsenal 226.8 34.1 124.4 55%

Aston Villa 92 (34.2) 94.8 103%

Chelsea 228.6 (48.7) 191.2 84%

Everton 82 (0.5) 58 71%

Fulham 77.1 2.6 57.7 75%

Liverpool 183.7 (2.8) 134.8 73%

Man City 153.2 (81.6) 174 114%

Man Utd 331.4 100.7 152.9 46%

Newcastle 88.5 13.3 53.6 61%

Norwich (C) 23.4 (3.4) 18.4 79%

QPR (C) 16.2 (22.5) 29.7 183%

Reading (C) 23.1 (8.4) 20.5 89%

So’ton (L1) 16.4 (11.5) 15.3 93%

Stoke 66.8 8.5 47.1 70%

Sunderland 79.5 (2.1) 60.9 77%

Swansea (C) 11.7 (9.1) 17.4 149%

Spurs 163.5 32.3 91.3 56%

WBA 65.1 11.8 43.9 67%

West Ham 80.9 6.8 55.7 69%

Wigan 50.5 6.8 39.9 79%

*Excluding transfer fees.

**six-month figures, doubled for comparison.

C=Championship; L1/2=League One/Two equivalent