Capello's departure seems to be a strange decision, given the fact that he brought the La Liga title in his first year (well, his first year of the second term at Madrid). But then, just like players, the manager job market is not like a standard labor market. So we need more than the standard labor economic analysis to understand what happens.
As Leo Tolstoy once said, "All happy families are alike. All unhappy families are unhappy in their on ways." All happy, job-secured managers have these conditions met: have a good relationship with the club, players and supporters, and is able to achieve the expectations of the club's stakeholders given the budget. With the exception of Jose Mourinho, Lose one of these conditions, and most likely you are heading somewhere.
That, perhaps, what happened to Capello. In the basic principal-agent setting, a manager is an agent acting on behalf the principal, who has some certain objectives. One may think that bringing the league title means that the objective is met. True, if it is the (only) objective. Looks like Madrid's board of directors has a greater set of objectives in their mind, which Capello could not deliver:
- A Champions League title
- Higher revenue (losing Beckham means losing a big source of revenue)
- A certain type of 'style' in playing football
- The directors' health. The board may be forward looking. If every year the title has to be won in the very last minutes, it would be bad for their heart condition, and the club's financial position if they have to pay the medical benefit. After calculating this potential expenses, even after considering the club's obligation to pay Capelllo's GBP 4m annual salary for the remaning 2 years of his contract, it is still beneficial for the club to terminate the deal.