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Monday, 25 January 2010

When two passions collide

Two things happened last week that caught my attention the first was that Northern Rock agreed to continue its sponsorship of Newcastle United. The second was Billy Bragg's refusal to pay tax if RBS continued to pay bonuses totalling £1.4 billion.

Both RBS and Northern Rock as I’m sure you’re aware are publicly owned and for all intent and purposes could be controlled by Government.

And yet here we have two cases of very public non-interference by the controlling interest.

Now I could start off on the rights and wrongs of a government sponsoring a privately owned football team or indeed funding the hyper-inflated salaries of Investment Bank fat cats, but that’s not my point. What did catch my train of thought was the similarity between these two disparate sectors, there are in fact a huge number of parallels between them.

Both sectors rely on continual success whether on the pitch or share price to maintain their position in their respective leagues, and both have to pay heavily for the best talent available.

While we may baulk at the thought of paying footballers £150,000 per week salaries the truth is that that’s what economists call market forces, the old supply and demand thing to you and me.

In fact, teams that pay more are investing in their success, no matter what Deloitte may say about Brian Laws, sorry another football finance link!

Banking and finance like football is a fine balancing act and some get it wrong, Portsmouth like RBS invested heavily, but relied upon short term funding which has left them in a precarious position. Others like Manchester United have had to restructure their debt, not dissimilar to Lloyds current rights issue and so it goes on an on.

What of a resurgence amongst the mutuals? Well again you can look at the Real Madrid operating company, which is a supporter-owned, not-for-profit business. This has looked to grow through acquisition and merger borrowing heavily to buy the talent of the likes of Ronaldo, Kaka and Benezma

Well back to the things that started me thinking, if we took Mr Bragg's advice and refused to pay the £1.4billion which is mostly paid to front line staff who earn on average less than £20,000 per annum, this I believe would have a knock on affect and ultimately hurt the performance and competitiveness of the business.

The last analogy I’d like to make is that the premiership is seen by many as the best football league in the world and if we want to maintain that place then we need to reward and invest. It’s a hard fact that the Financial Services industry and the banking sector still account for about 15% of UK GDP. If we don’t invest we’ll relegate ourselves to the third division of banking, playing amongst the Accrington Stanley’s of Building Societies and not the Premier league of BoA, BNP Paribas or Santander.

As for the sponsorship of Newcastle by Northern Rock I can’t believe that it has been allowed, I see it as a ludicrous and outlandish waste of taxpayers money, which financially supports the privately owned the rising stars of the Championship… Well what did you expect from a die hard Chelsea supporter ;)

Extract from Myths and Facts About Football

Fact: Player performance is strongly affected by relative income

Or in other words, when a player's salary rises (or drops) relative to his team-mates' pay, his performance improves (or declines). German and Swiss economists demonstrated this by studying goals, assists and ball usage (and salaries) of players at 28 clubs in the German Bundesliga between 1995 and 2004. The "robust findings" show the relationship is not simply that "better players earn more" but that the "causality runs from pay to performance, not the other way round". Willingness to perform, as in many jobs, depends on relative pay.

David McCann
Planning Director

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