Football used to be a sport and for many it still is but at the top levels of the professional game, it is now undeniably a business. Love it or loathe it, or hopefully just accept it, the “beautiful game” is now dominated by finance. And that is why terms such as “wages to turnover ratio” or “profit and sustainability rules” stimulate almost as much debate in the pub as VAR, the nocturnal leisure pursuits of the referee and why your club have just signed yet another useless striker.
Unfortunately lots of terms get bandied around without much explanation or understanding. So if you are unsure what the term “wages to turnover ratio (WTR)” refers to, you are certainly not alone and we suspect there are plenty of so-called expert pundits who do not fully understand it either. That said, it is relatively simple and so even if the only real acquaintance you have with wages is the knowledge of how they seem to disappear so quickly, and turnover is something your Gran occasionally bakes, we’re confident that you’ll be fully up to speed by the end of this “fascinating” piece on footballing finance!
The Key Terms Explained
Anyone with a very basic understanding of business terminology will understand what wages to turnover ratio means because it is a self-explanatory term in many ways. Of course, that doesn’t help the majority of people who have never studied business, finance or accounting, or worked in those fields. What’s more, when the phrase is used in relation to football, it means something slightly different to its conventional business usage, so all you accountants and business owners should perhaps not get too cocky.
Whatever your understanding of the phrase, let’s start with the very basics by looking at the three key terms individually and explaining what they mean, both generally and, if there is any difference, specifically in relation to football.
Even those lucky enough to be either too young or too old to be overly concerned about wages will probably be familiar with the term. With regards to football and this article, the wages means the total wages of the entire club. Naturally this total is dominated by the earnings of the players, with the average Premier League salary estimated to be just over £60,000 per week back in 2019.
That average has almost certainly risen since then and is based on a first team squad member. If we say that each of the 20 teams has 25 players in their first team squads, that means they are spending around £80m each on wages annually. And that is just an average figure, from 2019, based on the core playing staff. Add on inflation, the fact that many clubs have much larger squads, as well as younger players on not insubstantial salaries, and the high salaries of the top managers, coaching staff and support teams, and the figure at many clubs is often much higher.
Indeed, more recent data showed that the highest wage bill in the Premier League was a massive £355m at Manchester City, with the likes of Man United and Chelsea not too far behind. Anyway, no matter what the number is, the term wages in this context refers simply to the total of all the club’s staffing costs.
Whilst an apple turnover with a scoop of vanilla ice cream is a wonderful thing, it is not going to help you understand turnover in a financial sense. In the very simplest terms, turnover can be viewed as all the money coming into a business, or in our case, a football club. Depending on the business it may be called sales, income or possibly gross revenue but call it what you will, it is essentially all the money a business generates. It takes no account of money going the other way, out of the business or club, so should not be confused with profit.
There is no official way a club has to break down their revenue in their annual report and accounts and clubs do it differently. For example, if we look at the 2020/21 report for Everton we can see that they list:
Sponsorship, Advertising and Merchandising
Other Commercial Activities
Other clubs may use more categories, providing more detail on the source of the club’s income, or they may use fewer (for example by putting the last two listed above together under simply “Commercial Activities”). We will use the 2020/21 Everton accounts as our exemplar throughout this piece as they are an excellent illustration of a bad wages to turnover ratio.
Returning to the issue of turnover, however, it doesn’t matter how a club breaks down their income. All that matters is the total of all their different sources of revenue and these combined are the turnover.
Ratio is a word in common usage and whilst it can have a number of slightly different meanings but the one relevant here is what Merrian-Webster describe as “the relationship in quantity, amount, or size between two or more things: proportion”.
Unsurprisingly the two things in question here are a club’s total wage bill and their turnover. So in football terms “wages to turnover ratio” looks at the size of the former in comparison to the latter.
How Does The Ratio Work?
Now we know what the three key words mean it becomes apparent that the WTR is a simple comparison between how much a club earns and how much is spent on wages. As said, this includes all the club’s staff but given most players earn more in a week than most non-playing staff do in a year it is really a consideration of the cost of player wages. That said, it should be noted that Steven Gerrard has a 30-man support team at Villa. And that Pep Guardiola is said to earn £19m a year at City – more than £350,000 per week.
The importance of how much a club spends on wages is increased because in football these are typically the club’s biggest outgoings. In many businesses, something physical is sold and so the actual cost of the item is often a large part of the company’s outgoings. For example, as a general rule, a restaurant might aim to spend roughly a third of their turnover on wages, a third on the cost of the food and drink that they sell and take a third in profit.
However, whilst a football club obviously has costs beyond their wage bill, there are no major costs associated with what they “sell”, certainly not in terms of buying it. Of course, merchandise sold in the club shop, and food and drink sold on match days will be expenses but these are relatively small.
What all this means is that wages really are the major outgoing a club has to deal with and for this reason, much emphasis is placed on keeping them in check. One of the simplest financial metrics to consider when looking at the economic health of a club is to see what proportion of their income is taken up by wages, hence the importance placed on the wages to turnover ratio.
How Is It Calculated?
It is straightforward enough to calculate a club’s wages to turnover ratio assuming we have both of those figures. If we imagine that a Premier League club has a modest turnover of £200m and their total wage bill is £100m, we simply work out what the latter is as a percentage of the former. 100 is 50% of 200, so in this case the club has a ratio of 50%.
If we return once more to Everton’s 2020/21 accounts we can see that they listed the following stats:
Broadcasting – £146.4m
Gate Receipts – £0.2m
Sponsorship, Advertising and Merchandising – £35.5m
Other Commercial Activities – £11m
Total Turnover – £193.1m
Elsewhere in the report “staff costs” – in other words wages – are reported as £182.6m and the accounts state, therefore, that “The Club’s total wage to turnover ratio has increased from 89% in 2019/20 to 95% in 2020/21”. It does not take an Alan Sugar wannabe or graduate of Harvard Business School to realise that both of those figures are very high.
With 95% of the cash coming into the club goes out on wages, this leaves just 5%, in this case £10.5m, left for all other expenses. Whilst football clubs do not place the same emphasis on their overall yield as a traditional business, they do still, ideally, seek to make healthy earnings to keep the club afloat. However, in Everton’s case, as their accounts show, this very high WTR inevitably led to a loss.
The Merseyside team detailed “other operating costs” of £25.4m, this figure including various costs associated with hosting games, as well as the costs of merchandise sold and other items. In addition, there was expenditure on their new stadium, leading to an operating loss of £29.1m.
However, this figure did not take into account various other outgoings, the largest of which was on player and management trading (essentially buying players and any non-wage costs involved with recruiting – or sacking – managers). With tax as well, plus various more complex financial calculations, the Toffees reported a statutory loss of over £120m, reduced to an underlying loss of £106.1m due to some losses related to the pandemic.
As we can see, when the WTR becomes too high, it becomes almost inevitable a club will make a loss, no matter how parsimonious they are in other areas. The only real way to avoid making a loss would be continued success in the transfer market. By buying low and selling high, either through excellent scouting, player development or both, clubs could, in theory at least, turn a consistent profit from their recruitment and trading.
This is hard to do though and once again explains why the WTR is considered so important. Keeping it at a manageable, sustainable level is one of the key aims for any club, but what is sustainable?
What Is A Good Wage To Turnover Ratio?
If it is clear that a WTR of 95% is bad, the obvious question is what is a good level for this metric? There is no universally accepted answer but most experts on football finance seem to believe that less than 70% is manageable. Others believe that 60% is more desirable, whilst there have been rumours of UEFA introducing a rule that would require clubs not to exceed 70%.
Whilst no figure is set in stone, we can probably state with some confidence that any figure over 70% starts to become concerning. In general, the lower the ratio the better, as it gives a club more chance to make a profit and more scope to invest in things other than wages – such as youth development, new playing or training facilities and, of course, buying new players.
Of course, the caveat to this is that performance on the pitch must be maintained. Showing the accountants a WTR of 35% might look good but if the league table has a side in the relegation zone that positivity rather goes out of the window. Aside from the fact that relegation is bad per se, it is sure to lead to a huge drop in revenue and thus that WTR may soar the following season as income drops but players remain on their lucrative contracts.
Is WTR Part of Financial Fair Play?
At the current time there are no rules in the Premier League, or at UEFA or FIFA level regarding WTR. As said, this is reported to be a consideration but for the time being many clubs can operate as they wish. In fact, it may surprise many to learn that there are no real requirements for a club to publish their WTR.
These figures will typically be included in their annual reports, or at least the two figures, turnover and wages, will be. But there is no official way of measuring what is included or how both numbers are calculated, with some subtle differences sometimes distorting the reported figures.
Indeed, according to a 2021 Statista report, in 2019, only 58% of Premier League clubs used the wages to turnover ratio as a KPI (Key Performance Indicator). By our maths, that means that 11.6 clubs did, which makes us a little dubious about the information but we’re sure the geeks at that site can explain it! (Editor’s note – the stats relate to the percentage of respondents, as presumably the clubs were asked if they used it as a KPI. If we assume one side did not respond, the 58% – rounded up a shade – would tally with 11 clubs using it and eight not using it).
So, if we accept the stats, then that means that eight or maybe nine Premier League clubs were unconcerned, at least publicly, by this metric. We find it hard to believe they disregarded it entirely but either way, this is something that could well change if rumours of a mandated WTR maximum prove to be true.
La Liga already uses some form of salary cap which is set by the league administrators and was introduced to try and avoid clubs getting into financial difficulties since the events of 2020. It varies club by club, with some huge disparities, with Real Madrid’s set at over €700 for 2021/22 whilst Barcelona’s was set at just €98m! Although these are not strictly determined by using a wages to turnover ratio, they are based on these principles, with clubs submitting their expected revenues and general expenses.
It essentially equated to a 70% limit but it was reported that even after ditching Lionel Messi, Barcelona’s ratio would still be more like 95% than 70%. These are the sorts of issues Premier League clubs could soon be grappling with, with Ligue One in France already well on the way to introducing one too.
Wages To Turnover Ratio Of Premier League Clubs
Now that we understand what the WTR is and how it is not something that is officially controlled, for now at least, let us look at what sort of figures we see in the Premier League. We already know that the latest stats for Everton show them with a perilous WTR of 95% but what about other clubs in the English top flight?
There is a delay in reporting these stats as companies do not have to file their accounts at the same time and nor do they have to report them as soon as their financial year ends. It is also interesting to see how the stats have changed over time, even in just a year or so.
According to a report in The Sun for the 2018-19 season (and in the case of Newcastle and Crystal Palace for the campaign earlier), Spurs had the best WTR in the top flight. They managed to keep their wages under control at an excellent 38% of turnover. Cardiff City showed that you do not need to be a “big” club to stay on top of things though as they were next best at 42%.
Ten sides had a figure below 60%, with Man City sneaking in at 59%, but seven surpassed the 70% mark we have mentioned as being likely to be damaging. Those seven were:
Crystal Palace 78%
West Ham 71%
By the 2019/20 season, a report by Deloitte, experts on football finance, showed that the average Premier League WTR was over the 70% threshold, standing at around 72%. This was caused by slight wage growth but the first-ever drop in PL revenue, caused by games being played behind closed doors.
That was the aggregate WTR, with total club turnover down from £5.2bn in 2018/19 to £4.5bn in 2019/20, but wages up from £3.2bn to £3.3bn. Based on those stats, the WTR rose from around 62% to 73% (note that some discrepancies are caused by rounding issues). Much of that can be put down to the events that swept the globe from the start of 2020 but even so, growing WTRs is a trend that predates this one seasonal comparison.
It is not a particularly easy time to make comparisons due to the very specific and unpredictable events that have hit most businesses since 2020. However, whether FIFA, UEFA or the Premier League introduce a maximum limit for a club’s WTR or not, we feel sure that this is a metric clubs are going to be monitoring very closely in the years ahead.
WTR Outside Football
It is worth noting, should you see wages to turnover ratio discussed in a broader business context, that outside football it is often a slightly different thing. Even then, it may be applied slightly differently according to the sector or intended use of the data.
It is often used as a way of looking at the efficiency and effectiveness of the staff, in a similar way that productivity stats do. One small business website described it as a basic “accounting calculation that allows a retail business to determine the value of its workforce as a function of its revenue.”
In this sense, it would be calculated by working out the “hourly wages divided by hourly gross sales, times 100.” For example, if a shop had a weekly take of £5,000 and staffing costs of £1,000, this would deliver a 20% WTR. This would be taken to mean that it took £20 in staff costs to generate £100 of sales.
In some senses, this is the same calculation as we have looked at in relation to football. However, the emphasis of the ratio is different and so is how the information is used, so this is worth being aware of should you come across WTR away from football, in business – where some purists would say such terminology belongs!