The English Premier League (EPL) and English Football League are reportedly in discussions to change the way in which the top division distributes part of its broadcasting revenues to clubs in lower tiers. The discussions follow the results of an independent fan-led review of football governance which recommended, among other changes, a reform of the “parachute payments” structure in English football.

The EPL distributes most of its broadcasting revenues to clubs in the top tier of English football, while a small proportion goes to clubs in the divisions below. Parachute payments are paid to recently relegated clubs, and represent the vast majority of the revenue that the EPL redistributes to clubs outside the top division. The aim of this system is to soften the blow of dropping out of the top league and to help those clubs adapt to the lower revenue of the second tier of English Football (the ‘EFL Championship', or just ‘Championship’).

Gaining promotion to the Premier League presents a huge opportunity for clubs in the Championship due to the increased financial reward from broadcast revenues generated by clubs in the top flight, as well as additional commercial revenue opportunities. Even the bottom-placed team in the Premier League brings in around £100m in TV revenue (as of the 2020-2021 season), significantly more than what even the top-ranked Championship clubs generate from broadcasting.

Parachute payments affect the competitive landscape of the Championship. Clubs that have been relegated receive 55% of what a Premier League club receives, in their first season after relegation – which can be up to five times more than what other Championship clubs earn. As such, these clubs can afford to invest more in the transfer market, and pay higher salaries to players.

For example, in the 2018-2019 season (the last season unimpacted by COVID), the top four Championship teams all invested heavily in their squads – between £44m and £70m – with the aim of gaining promotion. The level of risk associated with this spending, however, differs noticeably depending on the revenue each club generates. Norwich and Sheffield United both spent more than double their total revenues in that season, while Leeds invested almost 1.75 times the amount the club generated. In contrast, despite spending the most out of the top four, recently-relegated West Bromwich Albion’s parachute payment meant the club brought in more than five times the TV revenue of the other three teams (£53m), so spent only 1.25 times its total revenues.

Norwich and Sheffield United were promoted in the 2018-2019 season, while Leeds saw promotion in the following campaign – dramatically alleviating the financial pressures of the heavy spending – but success is not always guaranteed.

For this reason, clubs in the Championship have an incentive to spend beyond their means to increase their chances of being promoted to the Premier League, being able to rely on parachute payments in the event of being relegated in subsequent seasons. This is a risky strategy, as there is no guarantee that greater investment will result in a promotion – and even missing out by a few points can result in huge financial losses. Derby County is an example of a club that has unsuccessfully invested to reach the promised land of financial reward in the Premier League, leading to damaging money troubles and potential administration.

Reports indicate that the parachute payment system might be reformed by reducing the amount paid to relegated clubs, and increasing the payment to clubs lower down the football pyramid. While this may require more careful spending habits among clubs relegated from the Premier League, such a reform might help rein in risk-taking behaviours among lower-tier clubs, thus potentially enhancing the financial stability and sustainability of lower-league football.