The Changing Economics of Baseball: How Much of An Advantage Is a Big Payroll?

[jon abbey]

First of all, apologies for the meh subject line, but this is a big topic that I've been itching to discuss in detail, and have broached on numerous threads already, so I thought it made sense to have one dedicated one...

Brian MacPherson wrote a piece in the Providence Journal this weekend titled:

'MLB teams continue to spend, despite evidence that it does not help them win'

http://www.providencejournal.com/article/20160109/SPORTS/160109365/14009

The key factoid within is:

"The correlation coefficient between payroll and wins — 1.0 represents perfect correlation, 0.0 no correlation whatsoever — was 0.47 in 2009, but it dropped to 0.3 in 2013 and 2014 and to a remarkable 0.21 in 2015."

Now there are obvious reasons for this, since steroids and greenies have been cracked down on, guys have peaked earlier and more and more pre-arb players have become major contributors quickly. By the time most guys get to free agency, their careers have likely already peaked, but the current CBA doesn't reflect this.

I think we're seeing more and more teams realize that the majority of FAs are bad investments, even millstones, and that roster flexibility is an asset (the fewer big money contracts you are locked into, the more roster flexibility you have). This is one big reason why there are still so many unsigned big name FAs out there, IMO.

So I guess my question is how will this be dealt with in the next CBA? Owners are making more money than ever before, but it doesn't make sense to invest that back into big salaries if they're going to hurt the team's performance and flexibility more often than not. So it would benefit both owners and players (the younger ones anyway) if players got a larger slice of the pie in their earlier team control years, but this seems like it would be very difficult to actually negotiate and implement.

 

[pokey_reese]

Well, it seems like there are a few things to this. If the question is "Does having a bigger payroll confer an advantage?" then I would still say yes, without question. The correlation between winning and payroll says nothing about advantage between the haves and have nots. Additionally, it seems like what they are getting to without intending is more a question of "are teams using their payroll advantages effectively?" which might be a little more debatable. As far as the changing economics of the game, I would say that the next CBA will definitely address this at least somewhat as the cap rises, because everything you read about these days says that teams are spending less money than ever on payroll relative to total revenues.

As far as the distribution of payroll within age brackets, I think that we are already seeing it equalize a bit, but it's also a choice that players make. For a long time, young guys saw that the big money to be made was in free agency as they approached 30, so they didn't want to sign extensions during pre-FA years for fear of leaving money on the table in exchange for security. If they see that teams are becoming less likely to give big money to older players, they might start being more willing to sign contracts buying out some FA years in exchange for upping the dollars they get in what would have been controlled years.

 

[jon abbey]

Yeah, it's still probably somewhat of an advantage overall (maybe I will tweak the subject line a bit), but on the flip side, roster flexibility is increasingly important and every roster spot filled with a big money guy is a guy who can't be optioned or released (I mean they can be released, but they virtually never are, except in rare cases like Josh Hamilton). This loss of flexibility is hard to measure and factor in, I think.

Edit: Title tweaked.

 

[Sampo Gida]

I have to question the initial premise. Over the last 16 years only 1 team in the bottom half of MLB in payroll won a championship. I believe the Royals moved into the top half last year with their late season splurge.

Roster flexibility and payroll limitations of many large market teams have been affected by the most recent CBA which has held the LT threshold steady and increased the cost of going over (higher tax and loss of revenue sharing rebates). MLB revenue growth has greatly surpassed payroll inflation as a result by keeping the large market teams on the sidelines more often than not. This might have skewed the payroll-win correlation in recent years with poor performance by some of the leagues highest payroll teams

Teams like the Yankees have a payroll that is 130 million dollars less in 2015 dollars than the Yankees had in 2003-2008 when adjusted for team revenues. Red Sox payroll has also failed to match revenue growth. Over the last 5 years the Red Sox and Yankees have rarely been big spenders in the same year. Coincidence or not, the Yankees have not won a playoff game in 3 years and have not broke 90 W's and the Red Sox have 3 last place finishes in 4 years, and made the playoffs only once in 6 years (yes, that was a championship). If both teams had matched their payroll with revenue growth, one might expect both teams would have fared a bit better than they have

Despite the Dodgers large payroll, they have not been major players for big name free agents under the new ownership, focusing mainly on acquiring other teams large contracts and extending their own (Kershaw). While they have not won a World Series the Dodgers additional spending has taken them to playoffs 3 straight years with 3 division titles.

There is truth about the lack of rewards in spending big money on free agents and extensions for older players, especially for hitters.

Hitters with 100 million dollar contracts or extensions since 2009 signed after age 25, fWAR avg in 2014-2015

Name-contract start date, avg fWAR 2014-2015

Ellsbury-2014, 2.5
Cano-2014, 3.7
Fielder-2012, 0.7
Pujols-2012, 2.5
Crawford-2011, 1.5
Choo-2014, 1.8
*Votto-2014, 4.2
Kemp -2012, 0.9
Tulo-2011, 3.8
Agon 2012, 3.3
*Posey-2013, 5.7
Wright-2013, 1.4
Werth-2011, 2.3
Howard-2012, -0.4
*Cabrera-2016, 4.8
Pedroia-2014, 3.3
Reyes-2012, 2.0
Braun-2016, 1.8
Zimmerman-2014, 0.9
Longoria-2017, 3.8
Andrus-2014-1.4
Teixeira-2009-2.0
Hamilton-2013-0.7
Joe Mauer-2011 , 1.0

Great 4+ 13%
Good 3-3.9 22%
Mediocre 2-2.9 20%
Bad 1-1.9 25%
Barf under 1 20%

This does not touch on the expected decline for most of these contracts and for a couple of players the numbers are affected by injury and suspension, but it is what it is. In 65% of those cases the last 2 years have been disappointing, and only 13% of those contracts are really producing much surplus value and less than half are at least break even.

Its not all age related decline either as many of these disappointments start very soon. My best hypothesis is players get off the juice or just stop working out hard in the offseason.

Its a different story for pitchers though. Here I use bWAR since I reserve FIP for projections and not past performance and use either the last 1 or 2 years depending on how many years into their contract they are


Name-contract start date, avg bWAR 2014-2015 (or just 2015 if that was first year of contract)

Kershaw-2014-8.1
Scherzer-2015-6.4
Verlander--2013-2.8
King Felix-2013-4.4
CC-2009-0.7
Tanaka-2014-2.6
Lester-2015-5.0
Greinke-2013-5.1
Hamels-2013=4.2
Lee-2011-1.0


Great 4+ 60%
Good 3-3.9 0%
Mediocre 2-2.9 20%
Bad 1-1.9 10%
Barf under 1 10%

Much better results here although the pitchers on a whole are not as far into their contracts as the hitters. Perhaps this is why so much of the FA money has gone to pitchers this year as GM's forget some of the past failures like Lackey (1.9 bWAR avg), Pedro 2 (2.0), Lowe (0.4), Beckett 2 (2.0) , AJ Burnett (1.7), Hampton (0.3), Zito (0.4). These numbers in parentheses are over the life of the deal, and of the 14 SP'ers who had an equivalent salary package of 100 million (adjusted to 2015 dollars based on payroll inflation). Only a bit more than 1/3 turned out really well, Pedro 1 (8.0), Cliff Lee (4.3 despite his bad ending), Kevin Brown (3.3), Chris Carpenter (3.4), and Roy Oswalt (4.2).

But before we weep too much for the owners, we must remember all the players they have making peanuts under team control and absorbing those losses, and then some. Then by the time they are FA owners say they are too old or too risky.

Seems to me the players should lobby hard to reduce the number of years of team control, perhaps to the point where they are willing to undergo a work stoppage.

 

[jon abbey]

Interesting split between hitters and pitchers, thanks for that. That may indeed be a main reason behind why FA pitchers doing so much better than FA hitters this offseason.

Seems to me the players should lobby hard to reduce the number of years of team control, perhaps to the point where they are willing to undergo a work stoppage.

Yeah, or alternately keeping team control the same but maybe making guys arb-eligible immediately (?). It's ridiculous that someone like Sonny Gray can put up 700 innings (500 previously and 200 more this year) of Cy Young caliber performance before hitting arbitration for the first time.

 

[EricFeczko]

For the title, how about: "The changing economics of baseball and its effect on payroll"? Or something like that. Grammar isn't my strongest suit.

In any case, I think this is a great thread for discussing how payroll usage has changed through the years, and how this change reflects shifting economics and/or strategies. I'm not sure I buy the downward trend in the correlation between W-L record and payroll. With only 30 teams per year, a lot of that correlation can simply be random fluctuation (e.g. the true relationship could be 0.15 or 0.45 in 2013). For example, if we simulated 10,000 sets of 30 teams W-L records and payrolls, and set the "true" relationship to be 0, we get a wide range of possible relationships for any given set:

A single year can show a very large positive or negative correlation, even if no true relationship exists.
That being said, the interesting question of how the changing baseball economic climate has affected payroll remains. I'm sure many on the board are already familiar with Phil Roth's MLB payroll visualizer.
Payroll has changed quite a bit over the past 16 years. The charts below use the 25 man payroll numbers provided by Cot's Contracts. For the most part, we've seen a spike followed by a reduction in payroll inequality.

The above chart shows the progression of average payroll per year (solid blue line), median payroll per year (dotted blue line), and standard deviation of payroll per year (solid black line). Because of the huge increase in average payroll over the past 16 years, medians and standard deviations were calculated on normed payroll, where each team payroll per year was divided by that year's average across all teams. As you can see, there was an increase in variance between 2002 and 2004, followed by a slow decrease through 2015, where the variance in team payroll is tighter than in 2000. The median payroll has declined, such that more teams are below the average payroll per year. Nevertheless, the median team in 2015 would still have twice as much payroll than the median team in 2000. Therefore, one trend to keep in mind is that the average/bottom teams spend far more on payroll than they did 15 years ago.

The chart above shows the maximum (red circles), minimum (red dotted line), and range (solid red line) for normed payroll (see above). Relative to the average payroll, the greatest deviation between the highest and lowest payroll was in 2005. Over the past ten years, the increase in average payroll was greater than the increase in the largest payroll. Furthermore, the smallest payroll didn't decline (one could argue that it has increased slightly, but it is hard to tell from the data whether this increase is real). As a result, the range between the largest and smallest payrolls is close to where it was in 2000. As with the chart above, this suggests that the increase in payroll over the past 16 years led to an initial spike in payroll inequality, but that inequality has largely diminished over the past decade.
In addition to teams getting smarter, one plausible result is that teams have greater financial flexibility, which enables them to keep players that would otherwise go to FA. As a result, you end up with increasingly weaker FA markets and an increasing number of young players locked up early, such as (to name a few) Mike Trout, Giancarlo Stanton, Freddie Freeman, and Andrew McCutchen.

 

[Harry Hooper]

In addition to teams getting smarter, one plausible result is that teams have greater financial flexibility, which enables them to keep players that would otherwise go to FA. As a result, you end up with increasingly weaker FA markets and an increasing number of young players locked up early, such as (to name a few) Mike Trout, Giancarlo Stanton, Freddie Freeman, and Andrew McCutchen.

Nice breakdown! Reading the 1st post, my immediate reaction was the talent pool available in FA had changed now that so many teams are doing extensions to lock up high-performing young players for late arbitration years and seasons beyond. As a result, it is hard to leverage higher payroll into wins as it used to be. While there is some risk to extending these long-term deals to young players, as yet it's hard to identify cases where teams have really been burned by this strategy. Maybe one more major injury to Longoria would have tipped that deal into a net negative for the Rays? More young players locked up for longer periods suggests less roster flexibility to add in FAs as well.

 

[wade boggs chicken dinner]

Nice breakdown! Reading the 1st post, my immediate reaction was the talent pool available in FA had changed now that so many teams are doing extensions to lock up high-performing young players for late arbitration years and seasons beyond. As a result, it is hard to leverage higher payroll into wins as it used to be. While there is some risk to extending these long-term deals to young players, as yet it's hard to identify cases where teams have really been burned by this strategy. Maybe one more major injury to Longoria would have tipped that deal into a net negative for the Rays? More young players locked up for longer periods suggests less roster flexibility to add in FAs as well.

Elvis Andrus was a pretty bad contract.

I've said a few other times that it will be really interesting to see how the best teams build their teams now that we have a "salary cap" for the US draft and should have one soon for the international draft. It's been noted for a few years that smart teams are locking up their young free agents, leaving more and more money chasing fewer and fewer worthwhile free agents.

But if the Red Sox don't spend on people like David Price, where are they going to put their money (certainly not by lowering ticket prices)?

I think MacPherson is correct that the one place that teams get equal or better value is the trade market, but it seems pretty risky to bet the future of one's franchise on one's ability to outsmart the other GM across the table. Those kind of trades don't come along very often and in fact, most GMs are on the wrong side of that equation more than once.

 

[nvalvo]

Seems to me the players should lobby hard to reduce the number of years of team control, perhaps to the point where they are willing to undergo a work stoppage.

Yeah, or alternately keeping team control the same but maybe making guys arb-eligible immediately (?). It's ridiculous that someone like Sonny Gray can put up 700 innings (500 previously and 200 more this year) of Cy Young caliber performance before hitting arbitration for the first time.

Or try to sharply increase the minimum salaries for 40-man and 25-man players.

 

[Lose Remerswaal]

Or try to sharply increase the minimum salaries for 40-man and 25-man players.

Or, better yet, invest in better minor league facilities, trainers, and dieticians, so our minor league players don't have to eat at McDonalds and have sufficient training staff and supplies to keep them healthy and strong.

 

[Sampo Gida]

*

Or try to sharply increase the minimum salaries for 40-man and 25-man players.

Yes, minimum salaries have grown at a slower rate than the increase in average salaries and FA salaries, and salaries for 40 man but not 25 man are less than 1/4 of the minimum, and about 2.5% of the league average salary. Expanded rosters should also be on the table

 

[Papelbon's Poutine]

Or, better yet, invest in better minor league facilities, trainers, and dieticians, so our minor league players don't have to eat at McDonalds and have sufficient training staff and supplies to keep them healthy and strong.

Yeah, but the MLBPA doesn't really give a shit about players in the minors because they're not paying dues - just like they allowed a draft slotting system to be implemented. I have trouble thinking Tony Clark is going to the table with that in his pocket. Their goal is to get more money into the pockets of their union members. So I definitely see the minimum salary rising. Beyond that, I'm not sure what really will change with the next CBA.

 

[timlinin8th]

Yeah, or alternately keeping team control the same but maybe making guys arb-eligible immediately (?). It's ridiculous that someone like Sonny Gray can put up 700 innings (500 previously and 200 more this year) of Cy Young caliber performance before hitting arbitration for the first time.

Related to this, the current rules regarding "service time" can be heavily manipulated by the teams / management. I've often wondered if instead of being based on service time (things like the "Super Two" rules where you hear about teams demoting players just so they can miss those cutoffs) trying to base it on some sort of performance metrics, or, if that is too unwieldy (I could see how it could be viewed as such and not beneficial to all players represented by MLBPA), make it so that teams risk losing a player with these kinds of paper moves... make players have to clear waivers earlier so teams trying to play these games could potentially lose a player, etc.

 

[nvalvo]

Or, better yet, invest in better minor league facilities, trainers, and dieticians, so our minor league players don't have to eat at McDonalds and have sufficient training staff and supplies to keep them healthy and strong.

Yeah, but the MLBPA doesn't really give a shit about players in the minors because they're not paying dues - just like they allowed a draft slotting system to be implemented. I have trouble thinking Tony Clark is going to the table with that in his pocket. Their goal is to get more money into the pockets of their union members. So I definitely see the minimum salary rising. Beyond that, I'm not sure what really will change with the next CBA.

A far-sighted MLBPA would want to make moves on behalf of the minor leaguers anyway, especially if there's anything they can do that would help the cause of minor league unionization, because a unionized minor leagues would seriously strengthen their hand going forward.

 

[Papelbon's Poutine]

A far-sighted MLBPA would want to make moves on behalf of the minor leaguers anyway, especially if there's anything they can do that would help the cause of minor league unionization, because a unionized minor leagues would seriously strengthen their hand going forward.

Of course, but how far sighted do you think the union is? I'd guess as far as the next expiration date on the newest cba.

The minors will never unionize. It's not plausible. And even if it ever did, it won't interact with the cba for MLB and the mlbpa. In all possible measures aside from affiliation it's a completely separate entity.

 

[Average Reds]

Yeah, it's still probably somewhat of an advantage overall (maybe I will tweak the subject line a bit), but on the flip side, roster flexibility is increasingly important and every roster spot filled with a big money guy is a guy who can't be optioned or released (I mean they can be released, but they virtually never are, except in rare cases like Josh Hamilton). This loss of flexibility is hard to measure and factor in, I think.

Edit: Title tweaked.

All thing being equal, a large payroll is a big advantage. And if you have a propensity to give out bad contracts, a large payroll is an even more significant advantage, because the team can absorb the mistakes without crippling the franchise. Roster flexibility only becomes a problem when you have so many bad contracts at the same time that you block younger players or have a massive amount of dead money sitting on the bench.

With all that said, It's important to understand that a large payroll is not the problem. Deploying that payroll effectively is the problem.

 

[JimBoSox9]

Or, better yet, invest in better minor league facilities, trainers, and dieticians, so our minor league players don't have to eat at McDonalds and have sufficient training staff and supplies to keep them healthy and strong.

Yeah, but the MLBPA doesn't really give a shit about players in the minors because they're not paying dues - just like they allowed a draft slotting system to be implemented. I have trouble thinking Tony Clark is going to the table with that in his pocket. Their goal is to get more money into the pockets of their union members. So I definitely see the minimum salary rising. Beyond that, I'm not sure what really will change with the next CBA.

I think PP is more or less right. Throwing more money at the minors to get better return on investment out of prospects is a crystal-clear no-brainer of a move that's badly in search of a lobby to support it. Either the union or any individual team could basically drive the rest of the league there on their own, but no owner wants to be the one to kick off that arms race, and the PA has demonstrated time and time again that they could give a hot shit about AAA. I posted about this question a bit on the .com a while back: http://sonsofsamhorn.com/baseball/minor-league/minor-league-facility-makeovers-the-unexploited-advantage/

The logic against treating minor leaguers better is among the last remaining holdovers from MLB’s glory days of viewing players as one step above indentured servants. They’re not; they’re incredibly valuable assets that could make or break future success. I suspect the inertia is nothing more than owners not really wanting to spend the money, and MLB’s half-assed system of affiliate relationships gives them solid cover to not do so.

 

[nvalvo]

Of course, but how far sighted do you think the union is? I'd guess as far as the next expiration date on the newest cba.

The minors will never unionize. It's not plausible. And even if it ever did, it won't interact with the cba for MLB and the mlbpa. In all possible measures aside from affiliation it's a completely separate entity.

I'm not saying that they would share a contract. But a (separately) unionized milb dries up the pool of potential replacement players.

 

[glennhoffmania]

All thing being equal, a large payroll is a big advantage. And if you have a propensity to give out bad contracts, a large payroll is an even more significant advantage, because the team can absorb the mistakes without crippling the franchise. Roster flexibility only becomes a problem when you have so many bad contracts at the same time that you block younger players or have a massive amount of dead money sitting on the bench.

With all that said, It's important to understand that a large payroll is not the problem. Deploying that payroll effectively is the problem.

Exactly right. You can lose roster flexibility by extending a bunch of younger guys for less than what FAs are getting too. Signing a high-priced FA alone doesn't limit flexibility any more than another long-term commitment. The difference is that rich teams can deal with a sunk cost much more easily. And rich teams can rebuild much quicker by signing multiple FAs to fill gaps that their system may not be ready to fill right away. The fact that the Royals have been good for the last couple of years doesn't mean that all of a sudden having more resources isn't a huge benefit.

 

[Hagios]

Yeah, but the MLBPA doesn't really give a shit about players in the minors because they're not paying dues - just like they allowed a draft slotting system to be implemented. I have trouble thinking Tony Clark is going to the table with that in his pocket. Their goal is to get more money into the pockets of their union members. So I definitely see the minimum salary rising. Beyond that, I'm not sure what really will change with the next CBA.

The only way it might change is if veteran players feel that they are losing jobs to cheaper players under team control. Would you rather have the 2 WAR guy who costs you $14 million AAV for four years, or the guy who costs you less than a million and who has minor league options? I don't know if the players have reached this point, but it may not be far away.