QUOTE (not the sons @ Jul 14 2008, 18:18)

Ah yes, the "smaller clubs". This is one that always gets rolled out at levels in the game when this is debated. What does "smaller club" actually mean? Does it not mean, in most cases, a club that fewer go to watch, with few fans and so with less money. Sometimes they strike it lucky, sign a"talented boy" and look to sell him on to a "bigger club",and that keeps them going for a bit. But lets look at this in a bit more detail.
First of all, often it is a matter of luck that they find a young player with talent. Often all the club does is give him the games and the opportunity to learn the game. Clubs talk about development costs, but especially at the Junior level, these are unlikely to be considerable. So what the "smaller club" is being compensated for is the matter of good fortune they had in siging the boy. One might call this a "finder's fee" - except this is a human being we are talking about, not a wallet or a set of car keys.
Have you even been involved in running a Junior club?
"Smaller clubs" like my own, put a lot of time , money and effort into developing our own players, as do a few other clubs at our level, as we simply cannot compete with the financial demands of signing experienced Junior pro players.
Even clubs who do not have youth systems in place, put in the time and effort in scouting youth/amateur games to find players and uncover that future talent. We give them the opportunity to cut their teeth in the game that they may not get with bigger clubs, which in turn helps develop their own game and attract interest from bigger clubs.
Clubs that do that deserve some form of compensation when that player decides not to sign a new contract as a bigger club has offered them a move, compensation money that can be re-invested into the youth system.
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Secondly, as you point out, some clubs depend on this money. Why? Should they not - as any well run club run will - depend on the support of their fans + other commercial ventures. Put directly, does the compensation scheme not prop up some clubs that should simply be allowed to fade away and just die? Clubs whose time will have come and gone. Clubs have gone to the wall before and will do so in the future. Yes, its sad, but should they be propped up by restricting the rights of players, most of whom will have relatively short periods the game.
No club I know of relies on transfer fees as no club knows when the they will uncover the next player that will be good enough to win a move to a bigger club/higher league. No club budgets based on future possible transfer fees. However, I know of clubs, my own included, who have went through sticky financial periods and have been able to sell on a player which has kept the club running, in your world I assume you would be happy to have seen us fold rather than take the fee?
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I'll leave it that, retentionstinks has made most of the other points that I would have made, particularly in relation to your fiction that players can sign for whoever they like. The compensation fee must put some clubs off a player who is out of contract and should be free to sign. Of course the wage he might be looking for might put them off as well - but that IS a decision for the player to take, which is how it should be.
Freedom of contract, as I have already said, should be brought in, however if a club has taken a player directly from youth football they deserve a compensation fee - as do the youth club whom the Junior side signed them from. That rule stands in Senior football and is enshrined in FIFA law I believe.