How Does The Premier League Distribute Money To The Wider Pyramid?

There is no moment that illustrates the huge financial disparity between the Premier League and the Championship better than the Championship play-off final. The game at Wembley is known for having the highest financial return in football. It is financially worth more to the winner than winning the Champions League or World Cup final.

Deloitte’s Sports Business Group concluded that the 2022 Championship play-off final between Huddersfield Town and Nottingham Forest for the final 2022/23 Premier League spot was worth at least £170 million. The amount would even rise to more than £300 million in case the winner survives their first season in the English top level.

It is the result of the enormous difference in (broadcasting) revenue that playing in either the Premier League or the Championship generates. Since the founding of the Premier League in 1992/93, the English topflight has grown immensely, both popularity wise and financially. Far faster than expected and far more than the Championship and foreign competitions.

Over the years, English football has implemented different formats of money distribution from the topflight down to the rest of the English football pyramid. However, questions are raised whether the current structure of parachute and solidarity payments is the right one with most clubs below Premier League-level being neither profitable nor sustainable. Calls for reforms, including from the English government, are therefore growing louder.

So, how large is the financial disparity between the Premier League and the rest of English football? How is the distribution of money arranged? And what needs to change in the future to get a more sustainable and fairer system?

Premier League Breakaway Spurred By Revenue

The Premier League was created in the early 1990s because top clubs wanted a better bargaining position in the renewal of the broadcasting deal. In addition, several top clubs were not satisfied with the distribution of broadcasting revenue at the time.

The income was distributed among all Football League clubs and with the formation of a new league, the revenue would only be split between the Premier League clubs. Resulting in more revenue for these clubs.

Before 1986, First Division clubs received around £25,000 per season from broadcasting rights. During the 1986 negotiations it doubled to £50,000 and in 1988 it multiplied by 12 to £600,000.

So, during a short period, the broadcasting rights revenue increased rapidly. Yet, top clubs saw even more potential and with the introduction of the Premier League the amounts have risen to multi-billion figures. The current domestic deals are worth £5.1 billion, while international broadcasting revenue has a value of £5.3 billion for the 2022-2025 rights cycle.

Broadcasting Income Per Premier League Club

Currently, revenue from domestic broadcasting is split on a 50:25:25 basis among Premier League clubs. 50 percent is equally divided between clubs. In 2021/22 this amounted to £31.8 million per club, while this was almost £31.4 million in 2020/21. There is also a facility fee of 25 percent, which is calculated based on the amount of televised matches.

Bigger clubs generally receive more as they are televised more often. The final 25 percent is awarded based on final league position (merit basis).

International broadcasting revenue was shared equally up to 2019. From the 2019/20 season onwards, any increase in international broadcasting revenue is awarded based on merit (with a 1.8:1 cap between highest and lowest earning clubs). The pre-rise amount will still be shared equally. In 2021/22, this equally shared pool amounted to £977.7 million (£48.9 million per club), while it was £950.8 million (£47.5 million per club) in 2020/21.

PL Revenue Projected To Be Over £6 Billion In 2022/23

The major increase in broadcasting revenue over the years is the main driver behind the explosion of overall Premier League clubs’ revenue. In 1992/93 (22 teams), Premier League clubs’ revenue was just over £200 million.

It has risen to £4,863 million in 2020/21 (20 teams), so 24 times what it was when the Premier League was introduced. Deloitte even projects clubs’ combined revenue to exceed £6 billion during the 2022/23 season.

The 24 Championship clubs had a total revenue of £600 million during the 2020/21 season, which is only 12 percent of the Premier League clubs’ revenue. The three tiers of the EFL together made revenue of £823 million, around 17 percent of what the Premier League clubs made.

Revenue And Salary Differences Across Leagues

The financial disparity can also be seen in the differences between the average revenue and wage costs per club across the leagues. Championship clubs make on average 10 percent of what Premier League clubs generate in revenue.

While Premier League clubs spend around 5.6 times more on salaries. The difference between the Championship and League One is also considerable, while there is a smaller drop between League One and Two.

Average revenue and wages across English football in 2020/21

Promoted Sides Spends More Than Championship Clubs

The amount spend on transfers across the English leagues is vastly different as well. During the 2022 summer transfer window, Premier League clubs spent a record £1.9 billion on transfers (gross), according to Deloitte.

Net spend among the clubs amounts to 18 percent of estimated revenue in 2022/23. Championship clubs spent £86 million, 4.5 percent of what the Premier League clubs invested in players. It is significantly less than before COVID-19 though, as the average gross spend on transfers by Championship clubs was £169.4 million between 2017 and 2019.

Promoted side Nottingham Forest contracted 22 new players for £126 million during the summer transfer window. Their transfer expenditures thereby even exceeded that of all Championship clubs combined.

Distribution By Parachute And Solidarity Payments

In a bid to support lower league clubs and grassroots, the Premier League distributes part of its income. Currently, there is a system of parachute and solidarity payments in place, which was implemented in the 2006/07 season and reformed in 2016/17.

Parachute payments are made to clubs that get relegated from the Premier League to the Championship. It is designed to incentivise Premier League clubs to invest in talented players and wider business operations knowing that in case of relegation they receive payments that reduce the risk of financial hardship.

The reasoning behind this is that if clubs invest more to develop and acquire talented players, it leads to a more competitive competition. This would normally result in added interest in the Premier League product.

How Much Are Parachute Payments Worth Now?

Parachute payments are calculated based on the equal share that all Premier League clubs receive from UK and international broadcasting rights revenue.

As the value of broadcasting deals change, the value of parachute payments also varies over time. Since the 2016/17 season, the distribution is such that relegated clubs receive parachute payments during three seasons rather than the previous four.

In the first season after relegation, clubs receive 55 percent of the equal share of broadcasting revenue that Premier League clubs receive. The second season after relegation this is 45 percent, while it drops to 20 percent during the third season. If a club gets relegated in the first season after promotion, they are only entitled to the first two parachute payments.

Parachute payment as % of equal share of broadcasting rights revenue from 2016/17 onwards

Solidarity Payments

In addition to parachute payments, the Premier League distributes part of its revenue to teams in the lower leagues through solidarity payments. For Championship clubs, these are payments that must offset the potential competitive advantage clubs receiving parachute payments could have. Amounting to around £100 million, it is paid alongside youth development grants and community funding to all EFL and National League clubs.

The Premier League recently increased its investment package to support the National League to £12.6 million across three years. £9 million to support the 72 clubs with running costs and sustainability and £3.6 million to support the National League Trust and the network of club community organisations.

Before the 2016/17 reforms, solidarity payments were fixed with Championship clubs receiving £2.3 million each per season. League One and League Two clubs received respectively £360,000 and £240,000 per season. The reform changed the fixed structure into a formula that is based on the third-year parachute payment, which is 20 percent of the equal broadcasting share.

Championship clubs receive 30 percent, League One clubs 4.5 percent and League Two clubs, three percent of the year three parachute payment. By using a formula, payments will adjust to changes in the Premier League’s broadcasting revenue. For now, it has more than doubled the solidarity payments for all three tiers.

Parachute Payments Distorting Competition

However, solidarity payments do not offset the advantage of parachute payments in the slightest. In 2021/2022, four Championship clubs (Fulham, West Brom, Sheffield United and Bournemouth) received £39 million in parachute payments compared to £4.8 million in solidarity payments for most other Championship teams.

In 2018/19, seven teams received parachute payments with a value between £16 and £44 million. With a total of £237 million it accounted for 30 percent of Championship clubs’ revenue and was the main contributing item to their revenue.

Similar amounts were distributed as parachute payments by the Premier League in 2019/20 (£228 million to six teams) and 2020/21 (£236 million to seven teams).

It seems that the distribution of Premier League revenue only diverges overall revenue and distorts competition in the Championship.

Deloitte Annual Review of Football Finance 2021 noted how the 2019/20 revenue between Championship clubs with parachute payments was on average £52 million. For clubs without such payments, it was only £20 million.

Since parachute payments were significantly increased in 2013/14, almost half of the club’s winning promotion to the Premier League received parachute payments. This was 33 percent in the ten seasons prior to 2013/14, according to Deloitte.

So, clubs that receive parachute payments not only generate more revenue on average than those only receiving solidarity payments, but they are also more likely to gain promotion to the Premier League.

Problems With The Current Format

The current distribution system thus favours clubs that have been relegated from the Premier League, subsequently distorting competition. It has resulted in Championship clubs taking the risk of overspending in a bid to get promoted and to receive major financial returns.

According to Deloitte, the 2020/21 season was the fourth consecutive season that Championship clubs’ wage costs exceeded revenue. With the wages to revenue ratio reaching 125 percent during 2020/21. In the Premier League the average ratio was at 71 percent during the same period.

Despite wage costs decreasing recently, it is still a worrying and unsustainable situation for Championship clubs. Only five out of 24 teams had higher revenue than wage costs during the 2020/21 and 2019/20 seasons. The risk of financial hardship and insolvency issues, as was the case with Derby County, is high.

Premier League’s Solidarity During Covid-19

The COVID-19 pandemic increased the clubs’ financial challenges. The pandemic decreased the clubs’ (matchday) revenue and showed, once again, that EFL clubs’ financial stability and sustainability needs to be addressed.

In a bid to prevent clubs from going out of business, the Premier League announced a relief package on top of the regular solidarity payments in December 2020.

For League One and Two clubs, a fund of £50 million was set up and distributed in the form of a grant and monitored grant payments. For Championship clubs, the League committed to assisting the EFL in securing a loan facility worth up to £200 million that would be interest free. In November 2021, the Premier League committed a further £20 million to League One and Two clubs during 2021/22 and £5 million to the National League until 2025.

Premier League COVID-19 relief package to wider pyramid

EFL Wants 25 Percent Of Broadcasting Revenue

The financial challenges underline the importance and necessity of the Premier League’s financial support to the wider pyramid. According to the Premier League, they provided an aggregate 47 percent of the Championship clubs’ turnover in 2019/20. This was 32 percent in League One and 24 percent in League Two. Without the financial parachute and solidarity payments many clubs would likely no longer stay in business.

However, the EFL considers the current distribution unfair and insufficient. When the Premier League started, around 25 percent of the league’s commercial and media revenue was distributed down the pyramid. Before the league’s creation, the second, third and fourth divisions earned half of the broadcasting revenue.

It has decreased to around 15 percent with the Premier League paying £1.23 billion to the English football community between 2019 and 2022. £409.3 million of that was paid to the 72 EFL clubs in 2019/2020. From the 2022/23 season, the Premier League commits £1.6 billion to funding the pyramid over three seasons.

The EFL has now requested to once again receive a 25 percent cut of broadcasting revenue. An amount that could be disastrous for the Premier League, according to its chief executive Richard Masters.

Independent Regulator Could Impose New Rules

So far, no new distribution agreement has been reached. The pressure for a new agreement is increasing though, after a government report recommended the appointment of a new independent regulator. Imposing a transfer levy may even be an option for the regulator if the leagues cannot find an agreement. The regulator will also oversee that clubs down the pyramid are better managed financially. Nullifying the argument of financial mismanagement of funding by the Premier League as well.

One distribution idea by the Fair Game group (a coalition of 34 clubs) is to use a “sustainable index” that considers criteria such as good (financial) governance. Championship clubs could receive up to £11.1 million in their proposal, with League One and Two teams £5.1 and £3.1 million respectively.

It remains to be seen whether the leagues can find a solution and if it improves the fairness and sustainability in the wider football pyramid. The founding members of the Premier League have achieved exactly what they wanted, more (broadcasting) revenue and a larger portion of the pie. Now they are just forced to share it more fairly with the rest of the pyramid.