The gap between rich and poor in modern football is bigger than ever before. While the total cost of 2022-23 Premier League Champions Manchester City's squad is thought to be a whopping €960 million, newly-promoted Championship play-off winners Luton Town assembled their promotion-grabbing team for just over €6 million, a stat that illustrates the huge financial divides within English football.
The result of this is complicated; not only is Premier League survival arguably tougher than ever, with numerous hugely wealthy and historic clubs competing in relegation battles in recent seasons (Everton, West Ham, Leicester etc.), it can also spell trouble for clubs who do experience the dreaded drop. The consequences of going down, particularly if a club has not made adequate preparations for relegation, can be cataclysmic. You only have the look at the continued fall of sides like Sunderland, Wigan, or Bolton in recent years to see this in action.
Due to this reality, when a team drops out of the Premier League, certain measures are required to keep them afloat. In this article, we'll be exploring perhaps the most well-known safeguard of the lot: the parachute payment. We'll dive into why teams receive parachute payments, what kind of sums are available, and whether the Premier League is the only division in the world in which these kinds of payments are made. Ultimately, we'll be questioning the fairness and necessity of this financial element of the modern game, and noting the reason for any backlash against it.
Parachute payments were first introduced in 2006 as part of a restructuring of how Premier League TV money is organised and distributed. Essentially, when football clubs are relegated from the English Premier League, in the following seasons they receive a percentage of the equally shared element of Premier League broadcasting revenue. This acts as a financial buffer to lessen the impact of the fact that they're no longer generating Premier League levels of income.
After a club is relegated to the English Football League (EFL), they receive payments from the Premier League on a structured basis over the following seasons: in their first year in the Championship, they receive 55% of what they would be given within the Premier League's per club basic TV money deal. Then in the second year following relegation, they receive 45%, and if the club in question was in the Premier League for more than one season before being relegated, they'll also get 20% in the third year.
The current system was introduced for the 2015/16 season, replacing a similar system that has been tweaked over the years (before this restructuring, payments were spread over four years). Crucially, if a club achieves promotion back to the top division during the parachute payment period, the club no longer receives parachute payments, as they will once again have the financial benefits of being in the top flight.
For some people, the idea that a club will continue to be paid by the Premier League even after going down is bizarre: does this not effectively reward them for poor performance? Well, that's one way of looking at it; however, it's important to note that relegated teams will never receive more than around half of a basic Premier League TV deal, and the alternative could be far worse...
Essentially, these phased payments are made to lower the risk of a club going into administration after dropping down due to the high cost base of being in the Premier League (with probably the most expensive aspect of top-flight competition being substantial player wages).
While it's important that other financial measures are in place to protect clubs in the event of relegation (for example relegation clauses in player contracts that automatically reduce the wage bill if a team goes down), this measure plays an important role in facilitating a smoother transition between the EFL and Premier League.
Even with parachute payments in place, there have been multiple examples of clubs going into financial disarray after being relegated from the Premier League, with some teams dropping down to League One or even League Two (Bolton, Blackpool, and Portsmouth being notable examples) in successive seasons. Getting back to the Premier League is the aim for most teams that go down, and it's undeniable that these payments are extremely beneficial in that regard.
In order to truly understand why parachute payments are used by the Premier League, it's useful to emphasise the significant difference between revenue for clubs in the Championship and revenue for clubs in the Premier League. In the top flight, the majority of a club's income is provided by TV money, with each team receiving a base amount at the end of the season to share out the whopping sums made broadcasting the league. The amount each club receives depends on where they finish in the table, with last season's bottom club Southampton earning a share of $159 million and title winners Manchester City being handed $210 million.
However, in the English Football League, the amount of TV money each club receives pales in comparison to the Premier League's broadcasting revenue, primarily because the Championship doesn't have a wide audience outside of the United Kingdom, whereas the EPL is hugely popular in countries such as China, India, the United States, Canada, and Ghana. So while a newly-relegated former Premier League club receives 55% of a basic TV revenue package in the Championship, other clubs in the same league will have a fraction of that income.
As a result of this income difference, since the 2016/17 season all EFL clubs have also received solidarity payments from the Premier League as a way of sharing some of the top flight's revenue to help the development of football in the lower leagues. The EPL's budget for solidarity payments is around £100 million per year, divided between 64 clubs as a way of helping them re-address the balance and better equip themselves against richer clubs.
Previously, Championship clubs received a flat fee of £2.3m each per season, while League One clubs got £360,000 a season, and League Two clubs received £240,000. Recent changes to the solidarity payment rules mean that now, Football League clubs will receive solidarity payments amounting to a percentage of the value of a Year 3 parachute payment. Championship clubs will each receive 30% of the value of a Year 3 payment, League One clubs 4.5% and League Two clubs 3% of the Year 3 Parachute payment value.
As detailed earlier in this article, the payment made to each club depends on how long they have been back in the Championship for; figures will range between 55%, 45%, and 20% of the equal share broadcast revenue. But how much money does this actually equate to?
According to the Daily Echo, Championship clubs received £233 million in parachute payments over the 2020-21 season, which averaged out at around £33 million per club in question (there were seven clubs receiving payments at this point, at different stages in the payment cycle). Independent research from Sheffield Hallam University found that the average revenue of clubs without parachute payments during this season was around £20 million, meaning that former Premier League clubs received a serious boost above their rivals.
England is the only country in the world in which a parachute payment system is in place to protect the income streams of relegated top-flight clubs. The primary reason for this is the fact that commercially speaking, the Premier League is by far the most successful and popular league in world football, and as a result its broadcasting revenue is astronomical, particularly in comparison with other top leagues such as Serie A, La Liga, and Bundesliga. In fact, research by Safebettingsites found that in the 2021/22 season, the Premier League's broadcasting revenue of $3.5 billion was more than Germany’s Bundesliga (€1.46 billion) and Spain’s La Liga (€2.04 billion) combined.
The huge amount of money there is in the Premier League means that the financial drop-off when a team gets relegated to the Championship is absolutely massive, hence the necessity of some form of "parachute" (designed to allow teams to drop down a little more smoothly). But not everyone is a fan of this system, with many people deeming it an unfair advantage for relegated clubs.
One of the biggest criticisms the Premier League parachute payment system faces is the idea that this boosted income for relegated clubs shifts the competitive balance of the Championship strongly in favour of teams who have recently competed in the Premier League. Given the wide gap between rich and poor in English football, this is a perfectly valid concern.
While a relegated team may be getting more than £30 million from the Premier League, a club that's just gained promotion to the Championship from League One will likely be operating on a shoestring budget. According to World Soccer Talk, the three clubs relegated at the end of the 2022-23 season (Southampton, Leeds, and Leicester) all pocketed an eye-watering amount of TV money last campaign, with TV income for the three clubs ranging between $159 million and $164 million.
When you take those figures into account, the prospect of an even barely level playing field seems pretty much out of the question, and you can understand why some people view the Premier League's solidarity payments as little other than a drop in the ocean. The fairness of parachute payments continues to be debated, but it's hard to question the fact that they're a necessary measure to reduce the cataclysmic financial impact of relegation from the English Premier League.
Want to find out more about how the worlds of football and finance collide? Head over to the Business & Commercial section of the Jobs in Football blog to read interviews with industry figures such as Dan Parr, Commercial Director of Insport Education or Henry Staelens, the former CEO of forward-thinking EFL club Forest Green Rovers.