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Everything You Thought You Knew About Baseball Salaries Is Wrong

The narrative surrounding baseball salaries is as follows:

Owners are generally being cheap with spending on player salaries

Player salaries are being held down.

The purpose of this article is to evaluate player salary data and investigate these claims. I will argue that these claims are generally false. I will also give my thoughts on what is actually happening and try to explain the fact set.

Myth #1 Baseball Salaries Have Flattened or Are Declining

The following is a chart of baseball salaries over time:



As we can clearly see: 1) salaries continue to increase. 2) The 5 year growth rate (compounded) has actually increased in the last 3 years.

This article (https://www.theringer.com/mlb/2018/2/21/17035624/mlb-revenue-sharing-owners-players-free-agency-rob-manfred) also shows that monies spent on players has remained largely flat as a percentage of revenue over the past 8 years (although it is off by a few percentage points since 2003).

Myth #2 Increased Tanking Is Causing Downward Pressure on Payrolls

There is borderline hysteria that teams are increasingly tanking and depriving players of their deserved compensation. As we can see from the following chart, the bottom 10 teams are actually spending closer to league average in 2018 as compared to 2008. Their payrolls have increased from 60% of league average to 66% over that time frame. The cheapest team in 2008 only spent 24% of the league average as opposed to 50% in 2018.

The issue (for players) is that the top teams are not spending more than league average as much as they did. The average of the top 5 teams fell from 165% of league average in 2008 to 144% in 2018.



Fascinating Fact Set #3: The Rich Are Not Getting As Rich As Much

Everyone is focused on the difficulties that top players are having in getting the contracts that they “deserve.” The downward pressure on the salaries of top players seems to have some validity. Alex Rodriguez led the majors in salary from 2008 – 2013 and actually presided over a decline in the top salary over that period. We can also see that over the period below, the ratio of the highest salary to the average peaked at 11 in 2009 and has since fallen by 28% to 7.87 in 2018. This is very significant.



Some Thoughts on the Great Leveling

There appears to have been a leveling of salaries both between teams and between players. Some thoughts on this are listed below.

“Baseball Socialism” Is Narrowing the Spending Gap Between Teams. Basically, team payrolls have converged towards average over the past 10 years. This makes sense given that top teams are forced to give away revenues to lesser teams. “Baseball Socialism” has pushed everyone towards the middle. But the bottom line is that the net effect of more spending by the bottom teams and less spending by the top teams is still that payrolls have continued to increase as we saw in Myth #1. If you are a Yankee fan, this obviously stinks.

Moneyball Is Helping the Nonstars. Anyone can figure out that a great hitter has value. Baseball has measured hitting statistics since the beginning. And great hitters have always gotten paid (at least relative to their peers). The genius of Moneyball was that it enabled teams to measure things that were harder to measure and understand the impact and value of those things. Heck, the Yankees just paid $12 million a year to a utility guy (DJ LeMahieu). And it makes sense if he can get 400 plate appearances and deliver 1.5 wins over what a replacement player would. Non-closer relievers are getting $10 million per year and teams are loading up on them. General Managers can measure every component of value and are willing to pay for it even if those skills (walking, defense, base running, 60 appearances in the 7th inning) are not as sexy as hitting home runs.

Did Alex Rodriguez Help Kill Star Salaries? The Yankees paid A-Rod around $241 million over 10 years (he was suspended for one year) and he contributed 22.3 wins over that period. That’s $10.8 million per win which is a pretty awful figure for a contract signed in 2007, not to mention all of the distractions and bad press. The A-Rod contract, combined with several other bad deals, helped cripple the Yankees for several years. I’d bet that the phrase “we don’t want an A-Rod situation” has been repeated by many a General Manager to an eager owner over the past decade.

Big Contracts Create Big Risks. We know that General Managers of today understand how to assemble a winning team. Let’s say that you are 5 wins from competing for a playoff spot. If you can buy a 6 win player or three 2 win players, which is the riskier strategy? If the 6 win player gets hurt or under performs (e.g. Jason Heyward) you are wasting a good chunk of $30-35 million a year. If one of your three 2 win players goes on the DL for half of the year, you can still make the playoffs if the other two perform as expected. And with big contracts costing $25-$35 million per year, that’s a big percentage of every team’s budget.

Stars Will Be “Underpaid.” I could make the case that Manny Machado should be paid $50 million per year on a 7 year deal. He should deliver 40 wins over 7 years and should be worth about $9 million per win ($360 million over 7 years). It does not appears that Machado will earn anything close to that. Teams do not appear to be enthused about locking up that much salary with one player. It is an interesting open question if a contrarian strategy of signing a few stars makes sense. If you can get them at $6 million per win, it might make sense.

It’s a Great Time for Baseball’s Formerly Underpaid Middle Class. If a baseball player can contribute to a team’s success, he will be appreciated and paid accordingly. I’d say that this is a good thing.

The Inmates No Longer Control the Asylum. The good old days of Scott Boras getting on a plane and convincing some uninformed owner to pay his client twice what they are worth appear to be over and done with. Contract decisions are made by technocratic general managers supported by legions of analysts who stare at databases all day. It’s the new reality and that’s a good thing. It’s good unless, of course, you are Scott Boras and the guys he pays to produce those 100 page bound books filled with inflated projections.

#FreeAgents #LuxuryTax #Salaries

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