"They [Bristol] are probably still in the salary cap, but it is madness. Madness. All the clubs are losing millions and it is a false number in the Premiership,'' said Diamond.
"Piutau must be the highest-paid player by a country mile. A good player that he is, I think they have paid him half a million quid too much."
All Blacks legend Dan Carter is the world's top-earner on £1.4m a year - but the World Cup winning first five-eighths is leaving French club Racing 92 this season for Japan.
"A lot of rugby clubs are losing money, we are losing a bit still, so we need to get that right and run it like a business.
"Those wages do inflate things, but we have to be careful of as owners and people who run the clubs as every time money comes in through broadcasting rights, players' salaries go up.
"Of course players' salaries are important. They earn a lot of money, but the businesses have to be solvent for us to grow the sport. We spend the last in the competition by a mile. We still only get crowds of 5-6000.
"We are spending more year-on-year and are trying to supplement that with our own youth. All the desire here for everyone is to be a top-four side in the next few years."