Notes on Training Compensation and Solidarity: The Impact on MLS

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Earlier this week, MLS Commissioner Don Garber commented on whether MLS will begin participating in FIFA’s solidarity mechanism. In relevant part, Garber said the following:

I’d like to see [MLS] be able to participate in [solidarity payments]. It’s not because MLS doesn’t want to, it’s because there are issues as it relates to the labor laws and antitrust laws in our country that don’t fully accept that if compensation is going to someone other than the player, that there are issues with that.

I want to be very clear, MLS is a winner in the solidarity payment world, and I have no objections to it. But we need to be sure we’re in a situation where we’re not running afoul of getting sued. Our players union isn’t supportive of it. I’ve got great faith in them and I think if we can all come together and find a way to accept the fact that this is a positive for the sport, we should be able to manage our way through it.

Let’s dissect some of the issues Garber’s comments raise.

Would MLS be a “winner in the solidarity payment world?”

Solidarity payments could benefit MLS, but the extent is debatable. Again, solidarity kicks 5% of every transfer fee back to the player’s training clubs (clubs that registered him between ages 12 and 23). This applies every time the player is transferred for money, even if he is older than 23 when the transfer occurs.

Garber’s theory appears to be that MLS teams could earn solidarity when their former players (whether academy or first team) are transferred. As MLS does not participate in solidarity now, any future participation would yield at least some bump in revenue.

That said, two factors could restrain the impact. First, if MLS teams received solidarity, they would also have to begin conceding solidarity to non-MLS teams. This could cost the MLS teams money they would otherwise collect. The Seattle Sounders’ sale of DeAndre Yedlin illustrates the point. Seattle sold Yedlin to Tottenham for a reported $4 million. Seattle collected the entire transfer fee. In the “solidarity world,” this would not happen. Instead, Tottenham would set aside approximately $200,000 (5%) of the fee for Yedlin’s training clubs. Similar portions would be carved out of each transfer fee an MLS team received. In the end, teams would have to weigh these losses against any gains from receiving solidarity.

Second, solidarity only applies to a narrow subset of players: those transferred for money. In addition, when a club transfers a player, effectively, any solidarity it earns from that transfer is baked into the transfer fee. Thus, practically-speaking, teams only get solidarity off subsequent transfers of the player.

For MLS teams, this means they would only get solidarity when a former player is transferred from one non-MLS team to another, for money. Few of these occur. So the opportunities for solidarity may be limited.

All told, MLS may “win” by adding solidarity payments. But it is unlikely to win big.

Solidarity would not protect MLS from losing academy players for free

Earlier this year, I discussed a significant hole in MLS’ youth development: Unless a team signs one of its academy players to a pro contract, a foreign club can poach him without compensating the MLS team. Solidarity would have no direct effect on this problem.

If an MLS academy player, who has not signed a pro contract, leaves for a foreign club, it is a free transfer. By definition, solidarity does not apply to such transfers. The only way for the player to generate revenue for his former MLS team through solidarity would be if the foreign club then transfers him for money.

The Weston McKennie example is instructive. McKennie spent seven years in FC Dallas’ academy, without signing a pro contract. At age 17, he left Dallas for a German club, Schalke. There was no transfer fee, meaning Dallas lost McKennie for nothing. With solidarity, Dallas would only make money off McKennie if Schalke transferred him to a different club for money.

Training Compensation would offset MLS’ losses, but it could backfire

Solidarity’s sister provision, training compensation, would help MLS teams offset losses like Dallas suffered with McKennie. But it carries risk that may make the league apprehensive about using it.

Training compensation applies when a player signs his first professional contract or, if he is already a professional, when he’s transferred prior to age 21. In general terms, when a player signs his first professional contract, his current club pays compensation to his training clubs, based on a set formula. (See a description here). Unlike solidarity, training compensation is not extracted from a transfer fee. Rather, it is an additional payment that can apply regardless of whether there is a fee or, in some cases, a transfer. Put another way, when a club acquires a player, solidarity does not require it to pay more than the agreed-upon transfer fee. Conversely, training compensation results in an extra fee that the club would otherwise not have to pay.

For this reason, MLS may not be as eager to adopt training compensation as solidarity. From the league’s perspective, the issue would be that receiving training compensation, requires MLS to pay it. And the financial hit could be substantial.

Most notably, some players leave foreign academies in their late teens to play at American colleges. If an MLS team drafts and signs one of these players, it could owe training compensation to the clubs that registered him from ages 12 to 18 or 19. In some instances, the compensation fees would be high. For example, a player who spends ages 16-to-18 in a foreign academy would earn his former club a six-figure payout. In 2018, at least four players taken in the first round of MLS’ SuperDraft fit this description. So the draft alone could stick MLS with $500,000 or more in training compensation each year.

Also consider that MLS has encouraged its teams to sign more young foreign players. Even though some of these players are already professionals, MLS teams acquiring them could still owe training compensation to their most recent clubs. As these are often later teen years, the fees are higher. So these signings may also raise MLS’ training compensation bill.

At bottom, for MLS, training compensation is only a net win if players leaving the league’s academies generate enough money to overcome the losses from new players MLS acquires. This may be possible. But it is far from clear.

Training compensation and solidarity in US soccer extends beyond MLS

Garber’s comments about solidarity (and the same would apply to training compensation) only address MLS’ participation. They do not address other US clubs’ participation. Often, American youth players who go abroad leave non-MLS clubs. Theoretically, these clubs do not need approval from MLS or its players’ association to accept solidarity or training compensation. In fact, several US youth clubs are attempting to do just that.

  1. For small clubs, the boost from training compensation or solidarity can be substantial. For example, in 2015, Barcelona transferred then-28-year-old striker Pedro to Chelsea for the equivalent of $31 million. Approximately $350,000 of the fee went to Spanish fourth division team, Raqui San Isidro, where Pedro played until he turned 17. At the time, Raqui had a debt of close to $345,000. It used the entire solidarity payment to put itself in the black.
  2. FIFA-mandated training compensation and solidarity only apply to international transactions. That said, FIFA’s Regulations on the Status and Transfer of Players (from which both mechanisms derive) encourage each national association to adopt its own “system to reward clubs investing in the training and education of young players.” (See RSTP Art. 1; Par. 2). These govern purely domestic transactions. An example is American midfielder Emerson Hyndman’s move from Fulham to Bournemouth (both clubs are English). Hyndman had been with Fulham since age 15, eventually, graduating from its academy to the first team. In 2016, when his contract expired, he left for Bournemouth on a free transfer. Still, based on England’s domestic compensation rules, Bournemouth paid Fulham a development fee of almost $1 million.

Founder of Terry Brennan Law (terrybrennanlawyer.com). Ex-college athlete (well, runner). Here, I write about soccer: law, market and data. Try my website too.