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The latest Deloitte Annual Review of Football Finance highlights the ever-increasing size of footballer pay packets: a growth of 12% last year to £1.6bn across England's four divisions. The size of a club's wage bill is an important topic, and not just for the local Ferrari dealer.
Paying too much is dangerous, as evidenced by more than 120 European clubs going into insolvency since 2007. At the same time, an overly cautious approach will also be damaging. There is a strong correlation between wages and wins, a topic most recently addressed in the excellent The Numbers Game, an invaluable introduction to the potential of analytics in modern football released this month by two jocks turned geeks (the Ivy League professors Chris Anderson and David Sally).
Clubs face a classic catch-22. Outside the intervention of a wealthy benefactor (an approach now limited by the introduction of Financial Fair Play) there is very little they can do to increase the amount available to pay players. The key ingredient to grow revenues is success, but success usually costs a lot of money. Given the difficulty of growing more revenue than your rivals, clubs naturally focus on where the money is spent.
They invest in academies and scouting networks to try to get more bang for their buck and, at least in England, they hire and fire managers based on their perceived ability as canny transfer window operators.
The amount of wages paid and to whom is clearly hugely important. What doesn't receive as much attention is how that money is paid. It's here that progressive clubs can gain an advantage.
Remuneration strategy has become a discipline of its own in the corporate world and it has an obvious application in sport. Without necessarily paying more, clubs can increase player motivation, better align interests between club and player, and improve player satisfaction and the team dynamic.
The knee-jerk reaction to performance-based pay is that players and agents won't accept it. The received wisdom is that players are risk averse and will insist on guaranteed pay. I've spoken to a number of leading agents, however, and all of them agree that most players will be open to performance-based pay provided, of course, that the contract properly balances the interests of club and player. The contract can't just hedge against the club's downside; it needs to offer the player a realistic opportunity to earn more than his "market value".
Ferran Soriano faced similar opposition when he introduced performance-based pay as Barcelona's finance director. In his book, Goal, Soriano notes that "a lot or people in the know said the players wouldn't accept it. They said we were deluded and inexperienced" – but Soriano's model was accepted and remains that of Barça.
Goal sets out the approach in considerable detail: pay is two-thirds fixed and one-third variable based on the success of the team and a player playing at least 60% of first-team matches. Unsurprisingly, given its success, Soriano has now transplanted the approach, to the letter, to his job as Manchester City's chief executive.
A huge wage packet may attract a player to a club but it won't necessarily keep him motivated and satisfied. Guaranteed income can have a negative impact on motivation and even a huge salary can cause unhappiness if it happens to be less than a team-mate of perceived similar ability. Banding groups of players of similar ability/importance and keeping salaries relatively close within the bands eliminates a common source of dissatisfaction. This is not a "socialist" approach, however; genuine star players can be accommodated with higher salary bands.
In contracts, the most basic approach to pay, and that currently adopted by the vast majority of English clubs, is for the players to earn a set salary per week guaranteed over a three-to-five-year period. To the extent that bonuses are used, they are often inefficient because they incentivise the "wrong" behaviours, or are set too low to incentivise correct behaviours.
The current bonus schedule at one of the "big" Premier League teams provides for a bonus of £950,000 to be split pro rata between the squad if Champions League qualification is achieved. It is simply not enough to positively affect a Premier League player's level of motivation or satisfaction. The club should either add a zero (still a relatively modest sum when compared with the minimum direct benefit of £25m that comes with Champions League qualification) or scrap the bonus schedule altogether and spend the money on something that will bring a benefit to the club.
A handful of clubs are taking a more sophisticated approach, however, and it was interesting to read Ivan Gazidis's recent acknowledgement that analytics play a part in helping to set Arsenal's wage structure.
The next level is for clubs to use contracts split between a guaranteed basic and a significant amount of variable pay based on team success. This is the approach advocated by Soriano and used, in various formats, by about a quarter of the Premier League clubs.
This approach is based on a club evaluating the value of "performance" – say £125m for promotion to the Premier League, £25m for Champions League qualification, £750,000 per Premier League place etc – the cost of "underperformance" (relegation or failure to qualify for Champions League, depending on stature of the club) and structuring the contract accordingly.
A similar approach can be used to pay managers, incentivising success in the medium term (even if the manager is fired in the interim) to prevent the short term approach to decision-making that is endemic given the limited life expectancy of managers in England.
Soriano's view is that they cannot, and that "a team sport such as football requires group rewards". Certainly it is fraught with difficulty. Goal bonuses can lead to strikers shooting instead of passing to free team-mates. Assist bonuses can lead to the opposite, as has been noted with point guards in the NBA.
Bonuses for ground covered, or even number of high-intensity sprints, can lead to a lot of aimless running. Even seemingly non-controversial cleansheet bonuses (more valuable than a goal as demonstrated in The Numbers Game) taken alone can influence full-backs not to push forward as often as they should.
Identifying the correct behaviours to incentivise is key.
Given the nature of the sport, it is unlikely that a particular undervalued skill will be discovered (in the way that On-Base Percentage transformed player valuations in baseball post Moneyball).
The key, therefore, will be the development of composite analytics to accurately measure a player's overall contribution to team performance. Farhan Zaidi, Billy Beane's right-hand man at the Oakland A's, believes that football analytics' holy grail is the development of a stat for "goal-probability added".
Even that might be a little narrow. I recently discussed this topic with Blake Wooster, a consultant on performance analytics in football. His vision is a composite metric to calculate a player's "contribution to winning". Suffice to say, the development of analytics has a way to go before these metrics can be used as contractual incentives.
"Pay more" will always be the strategy most likely to lead to success. In the Financial Fair Play era, however, all clubs would be well advised to pay smart.
First published in The Guardian on 10 June 2013