Debunking Salary Arbitration Myths - Part 2

Salary Arbitration: Battle of the Midpoint. Maury Brown’s article in a special to Yahoo Sports can be viewed here: http://sports.yahoo.com/mlb/news;_ylt=AqF3fSxVuGp1cB9h5WbNqv0RvLYF?slug=ys-arbitrationmidpoint012510&prov=yhoo&type=lgns

Mr. Brown writes:

“It’s this midpoint figure where a dollar one side or the other offers a moral victory. A dollar below, the club wins. A dollar above, the player gets braggin rights.”

While Mr. Brown’s article is excellently written, his ultimate conclusion, on a practical level, does not accurately reflect the basic notions of salary arbitration and midpoints. Salary arbitration is meant to determine a players’ actual value within the “salary arbitration system”, not his value with respect to the “midpoint”. The only time a midpoint has tangible effect is in the case of an actual hearing. While some agents brag about “above midpoint settlements” and certain teams take a hard line of “never settle above the midpoint” – this is mere puffery. Settlements rule the day, and most often, settlements reflect a players’ actual value within the system, irrespective of the midpoint.

The midpoint, is, as some have often described it, an ultimately arbitrary number. Players/agents and teams “guess” at what the other will file in an effort to create an equitable midpoint. However, the midpoint between a club’s submission and a player’s submission is not arrived at out of the ether. Clubs and agents make “educated guesses”, based upon a great deal of experience and negotiation, on what the opposition is going to submit as a filing number. On the basis on this “educated guess” numbers are submitted. The idea is to create a midpoint “in or around” the player’s value within the salary arbitration system.

For example, if a player (and his representative) believe that he is worth $3.1m in the current salary arbitration market, the player will seek to set up a midpoint at or around $3.1m. Let’s use Andre Ethier from last year as an example. Ethier filed at $3.75m while the Dodgers filed at $2.65m, resulting in a midpoint of $3.2m. Ethier’s representatives were aware of the filing numbers of Ethier’s main comparables, including Corey Hart, whom they also represented. Hart filed at $3.8m, while the Brewers countered at $2.7m, resulting in a midpoint of $3.25m. Also in the mix (among others) was Conor Jackson, who had settled at $3.05m. Ethier was statistically superior to Jackson, but the question was how much better?

Hart ultimately settled at the midpoint of $3.25m, while Ethier settled at $3.1, $100k below his midpoint of $3.2m, but $50k ahead of Conor Jackson’s $3.05m. Did Ethier “lose” because he didn’t settle at the midpoint? The simple answer is no. Ethier was behind Hart and ahead of Jackson on a statistical analysis, and he was more than $50k behind Hart (again, on a “drilled down” statistical analysis). So once Hart settled at $3.25m and Jackson at $3.05m, Ethier was placed in the position of having to settle below his $3.2m midpoint because, again on a statistical analysis, he was more than $50k behind Hart, but still slightly ahead of Jackson at $3.05m.

Good agents will often, in the case of a team that is not “file and trial” (I will address the “file and trial” strategy in another post), file somewhat high in an effort to push the midpoint up. Clubs, on the other hand, when faced with the same situation, will file somewhat lower, in an effort to push the midpoint down. However, the player’s actual value within the system is ultimately the most important number.

This is not to say that in certain situations, numbers are filed that create a significant leverage to either a player or a club. Take for example Neifi Perez in 2001. Perez filed at $3.95m, and the Rockies filed at $3.1m, resulting in a midpoint of $3.525m. In that same class/year, Deivi Cruz settled for $3.525, the midpoint in Perez. Perez was statistically superior to Cruz, and was thus able to obtain an above midpoint settlement of $3.55. The reason was simple – Perez had a better chance of prevailing at hearing given the Cruz settlement, so the Rockies, in an effort to avoid being an underdog at hearing, acquiesced, and paid Perez over the midpoint. Regardless of whether the settlement was “over the midpoint”, it was a factual matter that Perez was superior to Cruz, and thus should have been compensated higher. Teams have also employed this strategy to get players, like Ethier, to settle below the midpoint.

The goal in salary arbitration submissions to arrive at a player’s true value within the system. Sometimes, by virtue of overly aggressive filings on either the clubs’ or the players’ behalf, the midpoint becomes important with respect to a hearing. A bad midpoint, for either the club or the player can lead to a loss at hearing or an inequitable settlement. However, the majority of cases are settled pre-hearing, and the majority of those settlements, whether at, below, or above the midpoint accurately define the individual player’s value irrespective of the midpoint.

In the main, if a player settles below the midpoint, it is not a “loss”, as he usually receives what his true value within the system is. Likewise, if a player settles above the midpoint, it does not follow that it is a “win”. More likely, the above midpoint settlement is reflective of his value within the system. As stated, there are aberrations, and the “file and trial” aspect does not fit within the above-described model.

In conclusion, the midpoint is an arbitrary, yet in the main, intellectually arrived at number that has bearing on a players’ actual value within the salary arbitration system. The midpoint is one way of making that determination in that it is a “bargained for” number, but it is not usually the ultimate determining factor in a player’s salary. If a player settles below the midpoint, but is still compensated at a level that accurately reflects his value within the system – he has not lost.