Debunking Salary Arbitration Myths - Part 1

Regarding the upcoming salary arbitration hearing between starting pitcher Wandy Rodriguez and the Houston Astros, Greg Lucas of FSN-Houston wrote:

Rodriguez doesn't lose no matter what the decision is. He made about $2.6 million in 2010. No wonder an awful lot of baseball owners rue the day they agreed to arbitration to settle contract disputes. The players always win. The owners offer raises-in Wandy's case almost doubling his salary--but may have to pay even more if the arbitrator rules such.The scoreboard may show the owners "winning" a decent percentage of the actual arbitrator's decisions, but they still pay out more money than they had the year before.

http://www.foxsportshouston.com/pages/landing?Rockets-reeling-Rodriguez-playing-hardba=1&blockID=168875&feedID=3803

Maury Brown of the Business of Sports Network and contributor to Yahoo!Sports writes:

Last year, Red Sox closer Jonathan Papelbon(notes) reached a $6.2 million settlement deal ahead of exchanging figures. The deal was the largest ever offered to a first-time salary arbitration eligible closer, and the third highest in history behind Howard’s $10 million arbitration award in 2008 and the $7.4 million awarded to Miguel Cabrera(notes) after he won his case in 2007. To place that in perspective, it was a 700 percent raise from the $775,000 Papelbon made in ’08. As for Howard’s award in 2008, his increase from the $900,000 he made in 2007 was 1,011 percent. As one executive replied when asked about salary arbitration: “Honestly? What’s to like about it?”

http://sports.yahoo.com/mlb/news?slug=ys-maurybrownarbitration011910&prov=yhoo&type=lgns

Mr. Lucas, Mr. Brown, and many others in the media, seem to miss the point of salary arbitration (SA), and more importantly, players’ rights (as well as clubs’ rights) under the Basic Agreement. A player with 3 or more years but less than 6 years of Major League Service (MLS) is eligible for salary arbitration (SAE) pursuant to the Basic Agreement. In certain circumstances, a player with 2+ years of MLS may also be eligible for salary arbitration as a “Super 2”. There is also a provision which allows certain free-agents to submit to the salary arbitration process, but that provision is not relevant to this entry. The Basic Agreement can be viewed here: http://mlbplayers.mlb.com/pa/pdf/cba_english.pdf

Salary arbitration is a collectively bargained for process. Owners and players originally agreed to the salary arbitration process in 1974, and little has changed in the process since. While Messrs. Lucas and Brown (and others) focus on the “raises” that salary arbitration eligible players receive, they miss the significant benefits that the salary arbitration system bestows upon clubs.

How does a club benefit in the salary arbitration system? The answer is simple. A club that has a SAE player controls that player throughout that player’s SA eligibility (at least 3 years, and in the case of Super 2s, 4 years), in addition to the 3 years of service prior to salary arbitration eligibility, for a total of 6 years. The club can choose whether to tender that player a contract, thus making him salary arbitration eligible. If that player’s expected salary in the salary arbitration system exceeds what the club believes his value to be, the club can simply non-tender the player, thus making him a free-agent.

A recent example of this is the Pittsburgh Pirates’ decision to non-tender Matt Capps, the Pirates’ closer for the past 3 years. http://mlb.mlb.com/news/article.jsp?ymd=20091213&content_id=7805258&vkey=news_mlb&fext=.jsp&c_id=mlb

The Pirates made the decision that they could find a comparable player to Capps in the free-agent market at a lower price than Capps’ salary arbitration value. Capps was due a raise from his $2.35 million salary, and the Pirates ultimately determined that such a cost outweighed Capps' value.

The Pirates eventually signed Octavio Dotel for $3.5m to be their closer. The Pirates thought that Capps was not worth his “arbitration value", and non-tendered Capps. That decision was club’s, and not the player’s. It certainly remains to be seen whether the Pirates’ “valuation” of Capps was correct. Given that he signed with the Nationals for $3.5m with performance bonuses in the free-agent market, one could conclude that the Pirates incorrectly gauged the “market” value for Capps.

Even more beneficial to the clubs is the fact that salary arbitration contracts are usually non-guaranteed. The guarantee is matter of negotiation, but the majority of salary arbitration contracts are non-guaranteed. Thus, if a player fails to perform in spring training (or engages in some prohibited activity which results in injury), the club has the right to terminate the contract and pay 1/6 of the value of the contract to the player.

In my opinion, the salary arbitration system protects clubs to a greater extent than players, given that the decision to tender a player a salary arbitration contract is always in the clubs’ hands. To debunk Mr. Lucas’ notion that players cannot “lose” in the salary arbitration system, let’s take a look at what Wandy Rodriguez, a 2nd time salary arbitration eligible starting pitcher, could have received if he was a 2010 free-agent, and not a 2010 salary arbitration eligible player. In this analysis, I’ll use John Lackey, who was 2010 free-agent. Below is a comparison between John Lackey’s and Wandy Rodriguez’s 2009 statistics. Clearly, Rodriguez is statistically a better pitcher in 2009, yet because Rodriguez is salary arbitration eligible, and not a free-agent, he will get paid either his submission of $7.0m, or the club’s submission of $5.0m. In the meantime, Lackey, as a free agent, was able to obtain a 5 year $83.0m contract, with an average annual value of $16.5m.

Platform Year Comparison
Name YR TM MLS W L WP % ERA G GS QS IP
Rodriguez, 2009 Astros 1.000 14 12 .538 3.02 33 33 23 205.7
Wandy
Lackey,
John 2009 Angels 1.000 11 8 .579 3.83 27 27 16 176.3


Why is Lackey able to earn $16.5 per year over 5 years, and Rodriguez is only able to earn either $5.0m or $7.0m? It’s simple – Lackey is a free-agent and able to freely negotiate with other clubs, whereas because the Astros control Rodriguez this year (and the next 2 years, as Rodriguez is a Super 2) in the salary arbitration system. Therefore, the Astros are paying much less for Rodriguez in the salary arbitration system than they would if he were a free-agent. If Rodriguez was a free-agent, he might well get a contract in excess of Lackey on the basis of a pure statistical analysis.

And just in case you thought that Rodriguez was a “1-hit” wonder with respect to Lackey, here are their 2 year numbers:

Two Year Comparison

Name YR TM MLS W L WP % ERA G GS QS IP
Rodriguez, 2008 Astros 1.000 9 7 ..563 3.54 25 25 10 137.3
Wandy
Rodriguez, 2009 Astros 1.000 14 12 .538 3.02 33 33 23 205.7
Wandy
TWO YR TOTAL 2.000 23 19 .548 3.23 58 58 33 343

Lackey,
John 2008 Angels 1.000 12 5 .706 3.75 24 24 16 163.3
Lackey,
John 2009 Angels 1.000 11 8 .579 3.83 27 27 16 176.3
TWO YR TOTAL 2.000 23 13 .639 3.79 51 51 32 339.7


The salary arbitration system does benefit players in that they are able to compare themselves to other players in the salary arbitration system and receive higher salaries than they were receiving prior to salary arbitration eligibility. They are no longer subject to the bargained for contract renewal provision of the Basic Agreement, which is at the clubs’ discretion. Keep in mind that prior to salary arbitration eligibility, clubs are able to renew players at the minimum salary ($400,000) or above (at their sole discretion), no matter the quality of performance. For example, Tim Lincecum was paid $650,000 in 2009, despite being the 2008 Cy Young Award winner on the basis of these statistics:

Career Totals

Name YR TM MLS W L WP % ERA G GS QS IP
Lincecum,, 2007 Giants 0.148 7 5 .583 4.00 24 24 16 146.3
Tim
Lincecum, 2008 Giants 1.000 18 5 .783 2.62 34 33 26 227.0
Tim
CAREER TOTALS 1.148 25 10 .714 3.16 58 57 42 373.3

In 2010, Lincecum is salary arbitration eligible. He has submitted a demand of $13.0m, and the San Francisco Giants have submitted $8.0m, with a midpoint of $10.5m. Let’s take a look at Lincecum compared to C.C. Sabathia, who last year signed a 7 year $162.0m contract (with an AAV of $23.0) as a free-agent:

Platform Year Comparison

Name YR TM MLS W L WP % ERA G GS QS IP
Sabathia, 2008 Indians 6 8 .429 3.83 18 18 10 122.3
CC
Sabathia, 2008 Brewers 11 2 .846 1.65 17 17 23 130.7
CC
Sabathia, 2008 1.000 17 10 .630 2.70 35 35 25 253.0
CC

Lincecum,
Tim 2009 Giants 1.000 15 7 .682 2.48 32 32 26 225.3


It is arguable that Lincecum is statistically superior to Sabathia. Regardless, Lincecum will earn somewhere between $8.0m and $13.0m in 2010, while Sabathia will earn $23.0m. Why? Because again, Sabathia was a free-agent, while Lincecum is salary arbitration eligible. The San Francisco Giants are the beneficiaries of the salary arbitration system in this analysis. If Lincecum was free-agent eligible, he most likely would command a salary of $23.0m (Sabathia) or above. In addition, the Giants are protected throughout Lincecum’s salary arbitration years in that if he fails to perform or is injured, it will be reflected in his future salaries. In contrast, if Sabathia fails to perform to expected standards or is injured, by virtue of his guaranteed contract, he will continue to earn $23.0m every year for the length of his contract (unless, of course, he violates certain terms of his contract). As it stands, Lincecum has to go year by year for the next 4 years (Lincecum, as a Super 2, will have 4 years of salary arbitration eligibility).

As stated, players benefit from salary arbitration, but clubs certainly benefit in that they have choices with respect to a salary arbitration eligible player: they can choose, at their sole discretion, whether to tender a player a contract, or not to tender him a contract. In addition, clubs are protected. A player’s salary arbitration salary will fit within the confines of similarly situated players that have gone through the system or are currently going through the system. In the salary arbitration context, clubs do not have to concern themselves of free market forces that could push the player’s salary higher. The salary arbitration system protects both players and clubs.

In response to Mr. Lucas, certainly Wandy Rodriguez can lose. If he were a free-agent coming off of his 2009 season, he’d make far in excess of either $5.0m or $7.0m, and most likely have the security of a guaranteed multi-year contract. Should Rodriguez fail to perform this year, or is injured, it will be reflected in his 2011 salary (should the Astros again tender him a contract, at their discretion). Rodriguez has no security in a 1 year salary arbitration contract. I’m sure that if Rodriguez had his druthers, he’d choose to be a free-agent as opposed to salary arbitration eligible.

In response to Mr. Brown, who seems to embrace the thoughts of the unnamed executive who proclaimed “Honestly? What’s to like about it?” What’s to like about it from the club perspective is that salary arbitration is a 3 year (or 4 year in the case of Super 2) club option, wherein the club decides at its sole discretion whether a player is worth his value within the salary arbitration system. If the club does not believe that he is, it can non-tender the player. In addition, with the exception of 3rd/4th time salary arbitration eligible players (who, by virtue of the criteria set forth in the Basic Agreement can compare themselves to free-agents), clubs can take comfort in the fact that players are limited by the salaries of similarly situated players within the system. Players within the salary arbitration system cannot negotiate with other teams, thus reducing leverage that would otherwise be present in a free-agent context.

The end result is that salary arbitration benefits both players and clubs. There are no “winners” and there are no “losers”. It is a contractually bargained for process by which the club maintains control over the player throughout his eligibility while in turn, the player can finally contractually compare himself to similarly situated players and is freed of the clubs' discretionary renewal power.