I've heard and read several times that this is the reasoning behind them, to compensate financially for dropping a league:
http://en.wikipedia.org/wiki/Premier_League%E2%80%93Football_League_gulf
Granted they don't always work. Look at Leeds, but that is ALWAYS the way anyone has explained them to me.
One of the best articles I have read about them was from a few years back in WCS:
http://www.wsc.co.uk/content/view/472/29/
And I don't get the last bit. How can they be to try to compete when they get promoted, if you only get them when you come down?
Well they allow you to pay the wages to compete without the fear of financial meltdown within a year if it fails.
Look at burnley as an example, although they've hardly gone silly wages wise, how much would an increase in your average wage from 7k to 10k+ a week, with a couple of extra players (hardly what you would call frivolous) affect a club like that if they did go down?
the parachute payments give you a year of 2 to get your house in order and cut your cloth accordingly.
Now I understand that thats in principle, and that in practice they dont really work like that (see leeds, charlton, southampton, birmingham, sheff utd as examples of clubs who have used them to finance another promotion push) which is wrong.
and dotn get me wrong, jsut because I can see things objectively doesnt mean im necessarily a fan of parachute payments. but in theory I do think they are a good idea, in practice they are fucking disgusting.
Also, one other benefit that may be overlooked (and its kind of alluded to in that article) is that they can redistribute some of the wealth (albeit in a funny and very capitalist way).
For instance, would we really have got the "club saving" 4.5m from Boro for SSL without parachute payments in place? Remember Brum going down and spending 4m on Jerome thats helped Cardiff to push on to realistic promotion contenders?
Also like when Birmingham went up season jsut gone we receive a cut of the untaken Payments too.
Like I say, not a fan, but I can see why benefits of them. In theory. Plus, arent there Parachute payments for every division? I dont see peopel crawing about how unfiar it is for L1 clubs?