MLB Players' Salaries as a Share of Revenues: Laying Out the Issues

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The chart above clearly explains what the issue is.  Major League Baseball players' salaries have decreased relative to the league's revenues. The players' shares of the revenues used to hover above 50%, but have since fell to around 40%. As a point of reference, all of the other North American major professional sports leagues have collective bargaining agreements that guarantee players approximately 50% of revenue.

In terms of real dollars, the difference is more striking. MLB revenues were over $8 BB last year.  That means every  percentage point in 2013 represents about $80 MM in salaries. That's close to $100,000 per player.  And that's just for one percentage point of revenues.  If players were receiving the industry standard of 50% (a gain of ten percentage points), that would mean closer to a billion more dollars going towards salaries.

Some people may not think that this is a problem. Players salaries have still been increasing rapidly, even relative to inflation, when most peoples' wages have remained stagnant. Most of the world's workers are not losing much sleep over how athletes may be missing out on a few hundred thousand dollars.

Team shareholders and MLB officials also probably don't see what the problem is.  After all, this is extra cash going into their pockets.  It's a transfer of wealth from millionaires to billionaires, and most fans probably don't care.

But for players and their agents, this is a real problem.  In fact, this might be the biggest challenge the MLB Players Association has faced in a generation.  And while a significant number of players do earn generational wealth playing the game, many fringe major leaguer's never make that kind of money. For them, even a small change in salaries could make a real difference.

But the big question is "Why has the players' share of revenue decreased?" This is too big a question to answer in one post, but I think it is important to lay out the major issues that need to be addressed.  I have organized my thoughts into four major points, that will each be the subject of its own post.  Two are listed as "Player-side issues" meaning that they are most affected by the actions of players (or perhaps agents and the MLBPA as well).  The other two are listed as "Management-side Issues", since they revolve more around the behavior of teams and the league.

Remember, we are trying to explain hundreds of millions of dollars in lower salaries, so it's probably not just one thing. And if it is just one thing, it would have to be a pretty big thing. Before I get into the issues that I will be addressing, I'll mention a few other alternatives.

Some could claim that revenues and salaries are not being measured accurately, or consistently over time. If that were true, this may not be as big of an issue, but there's just no way that the we are off by such a wide margin to explain the relative decrease in salaries.

One other interesting possibility that I didn't list below is if the supply of baseball labor had changed in some significant way. More precisely, if there was less variation in talent, in say, the top 5000 baseball players in the world, then MLB players would have less leverage in negotiating salaries.  Since the quantity of players demanded has been static since the late 1990's, this could be answerable by looking at the data.  Until I see empirical evidence, I'm not giving this scenario serious consideration.

Matt Swartz's latest works on The Hardball Times were not the first pieces to call attention to the players' share of revenue, but they were the most helpful in getting started.  Cot's Baseball Contracts and Biz of Baseball are valuable resources for anyone looking to do research on the topics. Also, Tom Tango's (and his esteemed readers') comments were really what got me thinking about the issue.

So I've already used a bunch of words, and I haven't gotten to the main issues, so here they are. They'll be a post on each one, but for now I've just written enough to clarify what I mean.

Player-side Issues

1. Players are not optimizing their compensation. 

Basically, players and agents are losing many more contract negotiations than they are winning.  The main theory is that early career extensions have been lopsided in favor of teams.  More players are willing to bypass arbitration and prime years of free agency in favor of relatively less rich extensions. Some would argue that this phenomenon can even affect players who haven't received extensions. Jeff Passan of Yahoo Sports thinks this issue is very important, and wonders if less players are looking out for the "next guy". These extensions are certainly a far cry from players' fights against the reserve clause and collusion.

2. Salary is a relatively less important piece of player's compensation packages.

Another possibility is that players as a whole are placing less of a value on salary when signing contracts.  In this scenario, a relative decrease in salary isn't necessarily a problem for the MLBPA.  Players, like workers as a whole, may be increasingly factoring in location, career development, or "fit", when considering offers. In baseball terms, this could involve working with particular coaches,  being a part of a certain team chemistry, or even "playing for a winner". While this likely wouldn't explain a huge change in salaries, it could be a part of the trend.  We may also be missing out on the value of small items such as health care and the players' pension plan.


Management-side Issues

3. Teams have become more efficient in the way they compensate players.

A generation ago, teams were only effectively able to limit pay via collusion.  Today, there is a common framework that executives can use to put a value on every player.  Every team is at least aware of the market $/WAR.  Additionally, newly available statistics and more modern thinking may have led to cheaper, younger players occupying more roster spots relative to older, more expensive players. Regardless, the increase of business-minded management teams have led to more sophisticated roster construction.

4. The revenues of teams are now less dependent on team performance (and how much they spend on players).

Of all the issues, this has the most potential to impact salaries.  It would also be the most difficult problem for the players to address.  As gate revenue, and other revenue related to team success (merchandise, concessions, parking, etc.) have decreased as a share of total revenue, teams have less incentives to spend big on winning teams.  With most teams locked in on long-term local TV deals, short-term winning is also somewhat less important. National TV money, and other centrally distributed revenue (revenue sharing funds, MLBAM earnings), is earned regardless of team performance. Finally, the competitive balance tax acts as a disincentive for teams with the highest marginal revenue products from spending freely on players.

Additionally, across all sports, the business operations of teams have become more professionalized. Every team business official I've talked to has described the importance of separating financial success from on-field success.  With revenue targets that must be met regardless of winning or losing, perhaps a larger share of MLB's revenues should be going to the front office folks who are finding better ways to capture every last dollar (at least in the short term).

So those are what I consider to be the main factors.  I think that my individual posts will be more content-filled and incisive, but I needed this post to lay out the issues.  Hopefully it helped line things up for you as well, and let me know if I missed anything.

The Weekly Rant: Qualifying Offer Trends

The qualifying offer has been talked about a lot lately.  Everyone has ideas on how to change the QO system so that it is more fair for players or teams or both.  While I think that there is plenty of room for improvement, I wanted to take a look at some data that incorporates the qualifying offer.

If you are nor familiar with the basics of the system, here's a good primer from MLBTR. So far, 23 players have received QO's, and 23 have rejected them. 10 players in 2012, and 13 players in 2013.  The chart below shows all of the the players, along with information related to the team that extended the QO:

Player	Year	Old Team	Payroll	Wins
Michael Bourn	2012	Braves	83.31	94
Nick Swisher	2012	Yankees	197.96	95
Adam Laroche	2012	Nationals	81.34	98
Rafael Soriano	2012	Yankees	197.96	95
BJ Upton	2012	Rays	64.17	90
Kyle Lohse	2012	Cardinal	110.30	88
Josh Hamilton	2012	Rangers	120.51	93
David Ortiz	2012	Red Sox	173.19	69
Hiroki Kuroda	2012	Yankees	197.96	95
Curtis Granderson	2013	Yankees	230.84	85
Robinson Cano	2013	Yankees	230.84	85
Ubaldo Jimenez	2013	Indians	80.26	92
Nelson Cruz	2013	Rangers	129.07	91
Shin-Soo Choo	2013	Reds	107.98	90
Mike Napoli	2013	Red Sox	151.15	97
Brain McCann	2013	Braves	92.25	96
Carlos Beltran	2013	Cardinals	117.69	97
Jacoby Ellsbury	2013	Red Sox	151.15	97
Hiroki Kuroda	2013	Yankees	230.84	85
Kendrys Morales	2013	Mariners	81.53	71
Ervin Santana	2013	Royals	84.07	86
Stephen Drew	2013	Red Sox	151.15	97
Averages			125.20	90.82

*Payroll Data from USA Today

As you can see, teams that extended qualifying offers were pretty well off financially and competitively. The average payroll of the teams for each of the free agents is over $125 MM (the Major League average team was spending around $105 MM per seasons during these years). The teams extending the QO averaged nearly 91 wins the previous season.

These numbers are a little higher than I would have thought.  We would expect good/higher-spending teams to have more players likely to receive large contracts than the rest of the league. But this data shows that bad/lower-spending teams have hardly participated in the process.  The only losing teams to make QO's are the under-performing 2012 Bobby V Red Sox (David Ortiz) and last year's Mariners (with the slightly anomalous Kendrys Morales).

Overall, better performing/higher-spending clubs are more likely to extend a qualifying offer, and are therefore more likely to receive benefits from the system.  These teams either receive draft pick compensation or increased leverage in retaining the player. If the qualifying offer was meant to benefit small market teams and competitive balance, there is no evidence that it does so.

Now let's look at the data on teams who have signed players under this system.  In this table, I have used the payroll and win amounts from the previous season for each team.  (For example, the Indians signed both Nick Swisher and Michael Bourn after each had turned down a qualifying offer following the 2012 season.  Therefore, the Indians' 2012 Payroll and Wins totals are listed.)

Player	Year	New Team	Payroll	Wins
Michael Bourn	2012	Indians	78.43	68
Nick Swisher	2012	Indians	78.43	68
**Adam Laroche	2012	Nationals	81.34	98
Rafael Soriano	2012	Nationals	81.34	98
BJ Upton	2012	Braves	83.31	94
Kyle Lohse	2012	Brewers	97.65	83
Josh Hamilton	2012	Angels	154.49	89
**David Ortiz	2012	Red Sox	173.19	69
**Hiroki Kuroda	2012	Yankees	197.96	95
Curtis Granderson	2013	Mets	75.40	74
Robinson Cano	2013	Mariners	81.53	71
Ubaldo Jimenez	2013	Orioles	99.83	85
Nelson Cruz	2013	Orioles	99.83	85
Shin-Soo Choo	2013	Rangers	129.07	91
**Mike Napoli	2013	Red Sox	151.15	97
Brain McCann	2013	Yankees	230.84	85
Carlos Beltran	2013	Yankees	230.84	85
Jacoby Ellsbury	2013	Yankees	230.84	85
**Hiroki Kuroda	2013	Yankees	230.84	85
*Kendrys Morales	2013	None
*Ervin Santana	2013	None
*Stephen Drew	2013	None
Averages			136.12	84.47

*Remains unsigned
**Re-signed with original team

From the chart, 5 players resigned with their former teams, while 3 players from this class remain unsigned.  But we still have some interesting numbers.  The average payroll of the teams signing these players was in fact higher than the teams that extended the offer.  However, these clubs had won 6 fewer games on average than the previously mentioned teams.  Overall, we still find that most of the teams who have participated in the the QO system are good/higher-spending.

Some have theorized that free agency hurts competitive balance, while previous studies have shown increased parity in the free agency era. This data does suggest that in the short term, premium free agents have moved from good teams to less good teams.  But in the long term, the flow of draft picks in the opposite direction could counteract or overwhelm the positive contributions of free agents. And again, it is mostly higher-performing, higher-spending teams that are involved in the first place.

It will be interesting to see how the qualifying offer will play out in future seasons.  There really isn't enough data to draw any solid conclusions.  But at the moment, it is hard to imagine the qualifying offer having any positive effect on competitive balance.  It seems that as  many commentators have stated, that the QO exists only as way to suppress free agent salaries.

The Weekly Rant: A-Rod and Arbitrators

 

 

We learned late last week that Alex Rodriguez's suspension had been cut to 162 games. Commissioner Bud Selig had originally banned the former star for 211 games, but arbitrator Frederic Horowitz decided on a reduced sentence, although not as reduced as A-Rod and his team would have liked. The decision generated a great deal of buzz because Rodriguez is still baseball's most famous active player, and because many people are interested in the Yankees. 

 

Critics of Major League Baseball immediately pointed out how much more severe this punishment was than suspensions for other players who violated the Joint Drug Agreement, including those who attempted to mislead investigators.  The JDA levies penalties of 50 games for a first-time, 100 games for a second-time, and a lifetime ban for a third-time violation. Ryan Braun accepted a 65-game ban after repeatedly lying about and concealing his use of PED's. Besides Braun, all violators had received penalties in accordance with the JDA.

 

But baseball obviously decided that A-Rod's actions constituted more than just using banned substances.  Selig used his powers as commissioner to dole out punishments for actions detrimental to the good of baseball.  While this power has traditionally been used for lifetime bans, MLB officials saw no reason it couldn't be used for lesser suspensions as well. The MLBPA filed a grievance on Rodriguez's behalf, and he went to an arbitration hearing armed with his private legal team, after pushing away his own union.

 

Much of the writing about baseball out there is done by, you know, baseball writers.  But there are some people who weigh in on baseball's legal and economic aspects that know what they are talking about.  Wendy Thurm at Fangraphs is one of these people. Thurm's well-researched and well-written pieces are truly must-reads.  That's why I was a little disappointed in her last post, Arbitrator’s Decision On Rodriguez Suspension Leaves Bad Taste.

 

The writing had an almost accusatory tone to it.  While it was factually correct, Thurm didn't really clarify who she was criticizing for the decision.  Her biggest criticism concerned the lack of precedent for the length of the suspension, and the specific violations A-Rod was being punished for. Since the JDA only accounts for 50 games (or possibly 100 if MLB successfully argued multiple violations), then the suspension must also have considered additional language in the CBA. And to go from 65 games (Braun) to 162 games (Rodriguez) is quite a big gap. So while I agree with Thurm that the arbitrator's decision was kind of dramatic and somewhat surprising, I still have faith that Horowitz made a good decision.

 

Horowitz had access to evidence and testimony that we may never see or hear, and ruled that most of the suspension would remain intact.  To argue that his decision leaves a bad taste would imply that he is either incompetent or lacked impartiality.  I don't think it would be fair to say he was incompetent, especially since he had more information than us.  To say that he was not impartial would ignore the realities of arbitration.  Arbitrators must be impartial or else they do not get hired again. 

 

The one possible critique of baseball arbitrators that may have some credence is a tendency to split the decisions between labor and management.  While I have never seen data to support this theory, anecdotally it could be true that after a big win for the employees (the case where the drug tester improperly handled Braun's urine sample), then arbitrators may lean more towards employers in the next decision. 

 

But if we assume Horowitz is impartial, than who could be blamed for the bad taste of the decision?  If the MLBPA was heading A-Rod's case, then it may have been plausible that they didn't deliver a just defense.  But it was Rodriguez's lawyers that defended him, so I assume they were putting in a good effort.

 

Could Selig and MLB be at fault for the bad taste of this decision? They of course went all out to make this suspension stick, and they must have done a pretty good job. If they did anything in poor taste, it would have been up to A-Rod's lawyers to exploit it, and up to the arbitrator to ultimately decide. 

 

I guess I just have more faith in binding arbitration than Thurm does. In all fairness, her writing may have been just pointing out that it's not good to have your most famous player suspended for a whole season.  Nor is it good for the next potential commissioner (Rob Manfred) to be paying drug dealers for evidence against a player.  Nor is it good that we are still talking about performance enhancing drugs so many years into the "new" Joint Drug Agreement.  I think all of those statements are more fair than criticizing an arbitration decision. 

 

Most people agree that Rodriguez will not be able to win a favorable decision in federal courts.  He may receive an injunction if there is a sympathetic judge out there.  But that will just allow him to be a side show for a little longer.  Much like Bonds, Rodriguez has been turned into a great villain.  Whether you think he did it all to himself, or if you think baseball, the union, or even an arbitrator were out to get him, it's a very sad baseball story. Thurm was certainly right that something leaves a bad taste.