'Evil' parachute payments explained - and why they put Sheffield Wednesday at a huge disadvantage

Some clubs have lobbied to have them removed as the football league prepares to recalibrate its spending in response to the ongoing coronavirus crisis. The average outlay on staff costs in the Championship comes out at 108 per cent of turnover as pressure to reap the financial rewards of the Premier League show no sign of slowing.

And with clubs entering the second tier from above receiving huge payments, the financial playing field in the Championship is skewed.

We spoke to football finance expert Kieran Maguire, a lecturer at the University of Liverpool and one half of the Price of Football podcast, for an explainer of all things parachute and how much of a disadvantage it places on clubs such as Sheffield Wednesday.

What are parachute payments?

Parachute payments are made to clubs that are relegated from the Premier League to the Championship and are also made fr clubs falling from from the EFL to the national league.

They are based on a formula and allows gives clubs approximately £41m in the first year, £31m in the second year and £14m in the third year, following relegation from the Premier League.

Where does that cash come from and why do they exist?

It's a distribution of cash made by the Premier League independently of the EFL.

To use the parachute analogy, relegated Premier League clubs go from receiving £100m in TV money, to £7m. That's a drop off a cliff. If you're dropping off a cliff then you're going to crash into the rocks below. Is there a way of stopping that? With a parachute, possibly yes.

When PL clubs sign players, they are on PL wages. The average PL wage according to my figures is around £70,000 a week. Even if you're a bottom-six club, you're likely to be paying £40-45,000 a week. In the Championship the average wage is £16,000. There is a significant difference.

If a Premier League club signs a player for £50,000 a week, there's no way you can do that and survive in the Championship. The aim is to make the Premier League more competitive to allow the more provincial teams to recruit a better class of player.

And it's working. As we've seen this season, Norwich City have beaten Manchester City, Watford have beaten Liverpool and Brighton have beaten Arsenal and Spurs. That perhaps wouldn't happen unless those teams were able to recruit better players.

Are they achieving what they set out to achieve?

In some ways yes, in some ways no. I think it has made the Premier League more competitive while potentially it makes the Championship less competitive. But also it has resulted in a race to the bottom by other Championship clubs.

If you are Leeds, Forest, Derby or Sheffield Wednesday, you're one of the bigger clubs in the Championship, you want to be going for promotion and in order to do that you need a competitive wage budget. If you are competing against clubs that have just been relegated from the Premier League and they are paying significantly more wages, that means that they are at the front of the queue when it comes to signing players.

It's made things worse in the Championship, but has made things better in the Premier League.

How much of a disadvantage do they put clubs like Wednesday at?

A big one. It means that if Wednesday are competing with clubs that have been relegated relatively recently, they have to reach for something that is at a higher level, and that puts more pressure on Wednesday.

What did you make of EFL chairman Rick Parry’s description of parachute payments as ‘evil’ last week?

I've described them in the past as a 'necessary evil' because without them, I don't know how we would deal with clubs that have been relegated from the Premier League.

You couldn't run any business where you lost £90m, or effectively 80 per cent of your total income in a single year. If you've got clubs relegated with players on big wages, unless you can sell those players quickly, you do run the risk of going out of business.

The problem is that the gap is so big between the two divisions. If you were to narrow that gap, you wouldn't need parachute payments.

Have any alternatives to the system been touted?

It has been suggested to reduce the payments. There would be one or two consequences in that either the money would go to clubs in the Premier League and there would effectively be no change there, it wouldn't benefit the EFL. Or it could be redistributed to other clubs in the EFL, which clearly would help them.

Given it's the Premier League's money and it's effectively their decision, I can see which way that decision is likely to go!

What we could have as an alternative is that if clubs are given parachute payments, that money is allocated towards paying up the contracts of players that were on the wages of Premier League. If those players leave, then the parachute payments are withdrawn or get reduced. That would achieve the original objective, which is to stop clubs from going bust.

In terms of results, have they given relegated clubs a huge advantage on the pitch?

If you take a look at Sunderland, Hull, Wigan, Stoke, Huddersfield, Swansea, Middlesbrough. They've all been relegated with parachute payments and without being trivial, they stunk out the division to a certain extent.

It certainly helps the club financially, whether it helps clubs on the pitch it may not necessarily be the case. You need a certain type of player to get you out of the Championship and another type of player to help you survive in the Premier League. What we have seen is that clubs have come down, spent money like it's going out of fashion on the wrong type of players and they've wasted their parachute payments.

What are the chances of anything changing?

All rules of the Premier League are ultimately decided by the club. In the Premier League you need two-thirds majority.

You would have to have 14 clubs vote to reduce parachute payments and the problem is that at the start of each Premier League season there are probably 12 or 13 clubs concerned about relegation.

Are the clubs going to do that? I think you'd have to make a very good case. How you get Championship spending down is a genuine challenge.