6 Nations Performance Risk Highlights

Last Saturday saw England claim the 6 Nations championship, albeit in less grand fashion than expected with a convincing defeat in Dublin. Sports betting markets have reacted by downgrading England’s chances of winning the Rugby World Cup (RWC) in October from 12.5% to 10.5%. The campaign must still be seen as a success though as England were only an 8% chance of winning the RWC back in January.

The unexpected loss to Ireland had considerable financial consequences too. The England squad was due to receive £500,000 in bonuses for winning the Grand Slam but instead made just £250,000 for winning the championship.

Nike, England’s apparel supplier developed a Grand Slam celebration campaign, “6 onwards”. This included planned advertising on the Underground, 5000 T-shirts and a video. When England lost, the campaign was made redundant. Of course, the 6 onwards campaign had to be prepared in advance in order to achieve maximum exposure and “own the moment” if England won but there was always a 35% chance that they wouldn’t. Nike did also have bonus payments due to the RFU if a Grand Slam was won so the cost of the 6 onwards campaign was offset to some degree when those bonuses were no longer due.

The other Rugby Unions and their sponsors also had varying cash flows dependent on last Saturday’s results but England’s were the most significant. The Rugby World Cup in October will bring these risks into focus once more and the numbers will be much larger. It’s important that Unions and sponsors are at least aware of the likelihood revenues and liabilities being realised even if they choose not to be hedged against losses.

A Better Way to Pay

Here is an article written for FC Business magazine back in 2010 that's still relevant. 


A Better Way to Pay

Why performance-related pay structures are the way forward

By John Nagle

The current financial turmoil at a number of football clubs has led to inevitable questions about the feasibility of the current player payment model and in particular, the ratio of wages to turnover. According to the 2009 Deloitte Annual Review of Football Finance, the wages to turnover ratio for the Premier League was 62%, rising to 87% for Championship clubs. Wages account for over 100% of turnover at some English clubs.

The current system, where players are paid according to their perceived value when they join a club, regardless of results during the life of the contract, is highly inefficient.  Simon Chadwick, professor of Sport Business Strategy at Coventry University, says that “clubs should ideally be targeting 50%-60% of turnover as the maximum spend on wages. Most businesses are not sustainable in the long term with anything higher than that.” 

And yet the pursuit of on-field success demands that clubs continue to attract the best players. The culture of the industry and the huge commercial success of the game mean that players are able to demand enormous wages. Clubs without billionaire sugar-daddies struggle to compete, but they have to try. So what’s the alternative to the current pay system?

Performance-related pay (PRP) structures hold many advantages over the basic wage model. Players receive a reduced basic salary but are remunerated very well for individual and/or team performance throughout the life of the contract. PRP systems ensure that players and staff are highly incentivised. They also make contracts more cost effective by lowering the basic pay package. That improves cash flow and perhaps most importantly, it reduces the likelihood of paying for failure. 

Despite all its advantages, PRP is not utilised enough. “Performance related pay generally makes up a small part of a player’s salary.  Most clubs do now include automatic relegation adjustments and some of the big clubs include   ‘Champions League’ salary ratchets for some players but significant performance related pay elements remain uncommon” said Ian Lynam, a leading sports lawyer with Charles Russell LLP.

So what are the pitfalls of PRP structures? Theoretically, they are based on the ‘we win, you win’ idea where the financial benefits of on-field success (increased TV & merchandise revenues, prize money, etc.) cover the bonus payments that are triggered by that success. In reality, further expenditure is often required to capitalise on the opportunity that success brings (stadium & player improvements, marketing drives, etc.). Clubs also don’t want to have large liabilities on their books throughout the season, which can be the case with PRP.  

Recently, companies like Sportsrisq Capital have begun offering a cost effective solution to these issues by providing customised forward contracts that ‘de-risk’ the performance element of player and staff contracts.  These innovative new structures give clubs an edge by allowing them to offer eye-catching PRP salaries to players and then offset the liability for a fixed amount.

For example, a club with promotion aspirations offers players a contract with a 50% bonus if the team makes the playoffs and a 100% bonus for automatic promotion. The club also buys a forward contract against the bonus payments, which will cost a fraction of the headline amount based on the chances of the bonuses being triggered. In the event that the bonuses become due, the club will have no further liability. Another advantage to the club is that they ensure they have players who buy into their employer’s aspirations.

Ian Lynam continues “A club’s revenues are highly variable.  For example, a club will receive an additional £800k for each Premier League place it can climb, Champions League qualification can be worth £20m plus.  Clubs would naturally prefer if their expenditure on player wages could reflect this variability.”

Clubs can also use forward contracts to attract better talent by combining PRP contracts with forwards to offer much larger headline packages without ever incurring the full liability of the contract. This enables smaller clubs to compete without jeopardising their futures.

The way forward for the football industry is to reduce the cost of player wages without reducing the players’ potential to earn. Thanks to recent innovations in financial services, this can now be practically achieved by using a higher level of performance-related pay in player contracts and combining that with related forward structures. The result is a true ‘win-win’ scenario.  

John Nagle is a Director of Sportsrisq Capital, who provide contract optimisation services and other financial solutions for football clubs in the UK & Ireland. For more information please visit www.sportsrisq.com.

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