Pay rises for footballers - penalties for CEOs

Top of the pay league in the 2007/08 football season were Chelsea, whose £172 million spend easily outstripped that of Manchester United (£121 million). Other top spenders contributing to the £1.2 billion total were Arsenal (£101 million), Liverpool (£90 million) and Newcastle United (£75 million).

Despite the massive increase, wages continued to account for 62% of total revenues in the Premier League - down from 63% the previous year, according to Deloitte's Annual Review of Football Finance (external website). Money for the increase - amounting to £342 million over the past two years - came from a £351 million boost to revenues from broadcasters.

Lower down the football pecking order, wage costs in the Championship increased by 12% to £291 million - the second consecutive year of double-digit growth. Things looked rather less bright for the clubs than for the players, though, as revenues have risen rather more slowly, resulting in a salary bill that now represents 87% of club incomes.

Worse still, although the report shows a fairly clear correlation for Premier League clubs between wages and footballing success, there is no obvious link between the two at Championship level - so the high payers may be wasting their money. Which probably raises the question of why any football club would pay people as much as they do.

Traditional economic theory would tie individual wages to output. If bricklayer A could lay twice as many bricks in a day as bricklayer B and there were no other factors (such as the quality of bricklaying), then bricklayer A should be paid exactly twice as much. Any more than that would be a worse economic choice than employing two people of bricklayer B's standard; any less would encourage another employer to step in and replace two bricklayer Bs with bricklayer A.

In some cases, however, this approach falls down and a piece of economic thinking known as tournament theory comes into play. This basically says that because employers find it hard to compare and value the exact output of each employee they pay wages based on relative standing instead - so that bricklayer (or footballer) A gets more than bricklayer B, but to a degree which is less linked to actual performance and more to the perceived consequences of not having bricklayer A in the team any more.

There is a certain logic to this in football, where the winning team only needs to score one more goal in each match to win every time and scoop the financial benefits. No point paying a footballer who scores twice the number of goals twice the salary - all they need to do is score one more than their opponents and the money rolls in. So being a 2% better player might justify a 100% higher salary.

Funnily enough, tournament theory also appeals to those setting the salaries of very highly paid chief executives and similar types, who argue that the difference between chief executive A (or, indeed, Premier League striker A) and chief executive B is not one of degree but of life or death, and that they therefore need to be paid vast sums to ensure the continued survival or success of the company/club.

This argument may be more difficult to make with a straight face in the City these days, although the penalties imposed on some CEOs whose companies have failed to weather the economic storms might suggest it works just as well to justify pay cuts and the withholding of bonuses. But it would appear that it still makes sense in Premier League and Championship club boardrooms.