On 7th August, clubs in League One and League Two voted to introduce wage caps for the 2020/21 season. Player costs – including wages, bonuses (apart from cup and promotion-related bonuses), taxes and agents fees – will be capped at £1.5m per season in League Two and £2.5m in League One. Significant penalties will result from breaches of the limits.

Clubs also agreed to maximum 20-man squads, although there is no limit on the number of players under the age of 21 and their wages don’t count towards the cap. To give clubs time to adjust to the new regulations, squads of 22 will be allowed in 2020-21 in a transition season.

It appears that 22 of the 24 League Two clubs voted in favour of the cap, with Southend and Bradford the two dissenting voices. In League One, 16 were in favour, one abstained and seven voted against, including Ipswich, Sunderland, Portsmouth, Oxford and Peterborough. As for Argyle, while prudent financial management is at the heart of the club’s philosophy, it has previously expressed opposition to any wage cap that is not linked to income levels. It’s a fair bet then that Argyle also voted against the EFL proposal.

What does the cap mean for League One clubs?

Let’s focus on League One, since that’s where Argyle will play next season. The maths is pretty simple; for a 20-man squad, average wages for players aged over 21 must total no more than £125,000 a year to meet the £2.5m cap.

While it’s notoriously difficult to find out what clubs are actually paying their players at the moment, some snippets of information are available. Kieran Maguire, who teaches football finance at the University of Liverpool Management School and is regarded as something of a guru in the field, said in his recent book The Price of Football that average annual wages for League One players in 2018 were £164,000. He also published figures for the same year for some individual clubs. Given his reputation and connections, they are probably pretty reliable.

According to Maguire, Rochdale, Walsall, Shrewsbury, AFC Wimbledon and Blackpool had average player salaries of between £85,000 to £107,000 which would have brought them in under the new cap. MK Dons, Southend, Bristol Rovers, Portsmouth, Rotherham and Scunthorpe were paying an average of £145,00 to £160,000 which, depending on the mix of over and under-21s in the squad, would have made it marginal. Meanwhile, Charlton (£271,000), Wigan (£313,000) and Blackburn (£447,000) would have blown way through the new wage cap.

As for Argyle, in common with all others, the club does not publish the wages of individual players, or the average pay for the squad. However, the wage bill in 2018/19 for all staff – both playing and non-playing – was £5.5m, and it is highly likely that player wages accounted for more than £2.5m of that.

Clubs do have some near-term leeway to get their houses in order, with the EFL stating that: “Any contract entered into on or prior to today’s vote will be capped at an agreed divisional average until that contract expires.” Nevertheless, a lot of clubs are clearly going to be taking a long, hard look at their wage bills in the next 12 months.

A focus on wages was inevitable

EFL football finances are undoubtedly a mess, and Covid-19 has brutally exposed an existing problem. Too many clubs have been run in an unsustainable fashion, as expenditure has consistently outstripped income. With limited potential to increase revenues, and with wages the largest single component of expenditure, player costs were going to have to be tackled sooner or later.

It could be argued that the financial situation in Leagues One and Two is so dire that draconian measures are needed to prevent widespread bankruptcies. By setting a hard limit on wages, the caps will force the majority of clubs to cut their expenditure at a time when the outlook for revenues is highly uncertain. Argyle is probably fairly typical in deriving 42% of income from ticket sales, making the loss of all that cash through the pandemic hugely significant.

With no certainty on when fans will be allowed back onto the terraces, the EFL would argue that hard-and-fast guidelines are the only option as clubs cannot be trusted to limit spending voluntarily. If this measure means that, in the longer term, wages will come down to more realistic levels, helping clubs to become more sustainable, that’s obviously a good thing.

The exemption of under-21s from the cap should also offer more opportunities for younger players, as clubs will be incentivised to include more of them in the squad. It will probably open more doors for loan moves for those players, offering them proper game-time rather than simply bench-warming. On the flipside, players may come to regard an approaching 21st birthday with trepidation, as their clubs calculate whether they merit their squad places and the chunk of capped budget that their wages will now take up.

But wage caps have serious downsides

While there are certainly some merits to the salary caps, the negatives more than outweigh the positives.

 The biggest problem by far is that a simple wage limit ignores one of the most basic rules of financial life – matching expenditure to income. While It would be reckless for a club with an income of £2m to spend the full £2.5m on wages. for another club with income of £6m, a £4m wage bill would actually be far more prudent. The salary cap might limit the potential for vast over-spending, but it is certainly no guarantee of responsible financial management.

It is also demonstrably unfair to clubs that are doing the best job in developing their sustainable income base; by placing an absolute limit on wages, the salary cap punishes well-run clubs. Those that are successful in growing attendances, bringing in commercial income, developing a hospitality business and making money from identifying promising talent and selling it on at a profit, are being prevented from investing in the playing side of the business.

For the starkest demonstration of this, take a look at relative crowd sizes. Is it really fair that Sunderland, who attract around 30,000 supporters, should be forced to have the same salary budget as a club in the same division – Accrington Stanley – with average attendances below 3,000? What’s the incentive for clubs to build their income base if they can’t use it to bolster their most important asset – the playing squad?

The bottom line is that the EFL has decided to drag all clubs down to the same level because some can’t be trusted to operate responsibly, and because those who oversee the league have failed to intervene effectively when clubs have behaved recklessly. This is deeply unfair.

The playing field is uneven across the divisions

It doesn’t always feel like it, but one of the defining principles of English football is that the four top divisions are connected through a system of promotion and relegation. Since any team can move up to the higher levels, it is fundamental that all divisions should operate under the same rules. However, this ideal has just been shredded since no salary limits have been introduced in the Championship or Premier League.

With regard to the second tier, the EFL says that; Discussions continue with Championship Clubs in respect to amendments to their own financial controls’. So there is absolutely no guarantee that Championship clubs will vote to introduce similar rules, leading to the question of why the EFL has gone ahead with a salary cap for the third and fourth tiers regardless.

As for the Premier League, there is no potential for an absolute salary cap. FFP rules in place there, while far from perfect, do adhere to the principle that income and expenditure are linked, making the framework totally different to that for the bottom two tiers.

We now have a situation with three different sets of regulations across four divisions. The League One and Two wage cap blows a big hole in the idea that the leagues should operate on a level playing field.

The gap between the top and bottom two divisions will widen

The primary impact of this will be to further widen the gulf between the top and bottom two divisions. If no salary cap is introduced in the Championship, it will be almost impossible for a promoted League One club, having operated with a £2.5m annual wage cap, to compete in the Championship with clubs wielding budgets many times that figure. However active they might be in the transfer market before taking their place in the higher division, it will mean they are starting from a much weaker position.

Even if a salary cap is imposed in the Championship, the word is that it is likely to be set at £18-20m a year, vastly greater than the £2.5m League One limit. This potentially hands a big advantage to clubs relegated to League One from the Championship. According to the EFL statement, “Clubs that are relegated will be permitted to cap all contracts at the divisional average prior to the Club’s relegation until those contracts expire.” In other words, depending on the structure and timing of player contracts, a Championship club could be competing for at least a season in League One with a budget up to eight times that of other clubs in the division.

Inequality has always been part of the game of course, and Championship clubs often come down to League One with bloated budgets, especially the double-drop merchants still enjoying Premier League parachute payments. The difference with the new regulations is that by preventing existing League One clubs from spending more than £2.5m on wages to compete, it is cementing that inequality in law, giving relegated clubs a much greater chance of instantly bouncing back into the Championship.

It will also make it even less likely that lower league clubs will make meaningful progress in the League and FA Cups, further sanitising those competitions and ensuring that an ever-narrower selection of ‘usual suspects’ will lift the trophies.

Finally, without caps in the top two divisions, players in League Two and League One will become much cheaper in wage terms for Premier League and Championship clubs. In the future it will be even easier those clubs to pick off the best players from the bottom two divisions, and the lower league clubs will be powerless to prevent it.

So what should the EFL have done?

Of course, it’s easy to sit back and criticise. Accepting that financial sustainability is a pressing issue, what should the EFL have done instead?

Simple: link a club’s wage spending to its income. Limiting wages to a percentage of income would mean that that the more a club made from ticket sales, sponsorship and advertising etc. revenues, the more they could spend on player salaries. That’s pretty much the definition of sustainability.

Does that sound like a crazy idea? Well, actually, such a structure exists already; it’s called the Salary Cap Management Protocol (SCMP), and it’s the framework within which League One and Two clubs were supposed to be operating until last week. Under the SCMP, a League One club can only spend 60% of its normal income, which includes ticket sales, other matchday income, broadcasting and commercial revenue, plus 100% of any ‘fortune income (profits on transfers, prize money, parachute payments and equity investment by the club owner) on player wages.

While there were always clubs that tried to get around the controls, the classic scam being to generate funds by selling the stadium to the club’s owner for an inflated price, there’s no reason why it could not have been a workable solution. The EFL obviously embraced the idea of relating expenditure to income, or they would not have set up the SCMP in the first place. Replacing it with wage caps doesn’t mean they now think it was a bad idea, it’s just an admission that they have been unable to enforce the rules and have given up trying. Which is pretty shocking, really.

Football certainly does need to get its financial house in order, but salary caps are the wrong solution. While they might constrain excessive spending in the short term, they don’t tackle the root cause of the sport’s financial woes, namely the failure of clubs to cut their cloth according to their means. And they will also contribute to the widening gulf between the top and bottom two divisions in English football. How long before we see Premier League One and Premier League Two, with no promotion and relegation between them and the two lower divisions?