Salary Arbitration 101

Welcome class, to the first session of Purple Row Academy! I'm Jabberwocky, your instructor, and as the 2009 season rapidly approaches, we'll be covering a few baseball-related topics that often confuse even the most die-hard of fans. These topics will generally be more on the business side of baseball, as most Rowbots seem to have a pretty good grasp of the game itself. You'll laugh, you'll cry, and hopefully you'll learn something along the way.

First up: the complicated, esoteric field of salary arbitration in MLB. With arbitration hearings happening in the next couple of weeks for 24 players (at the time this article was written anyway--several will probably avoid hearings), you can impress your friends and foil your enemies with this information. I apologize in advance for the absurd length (seriously) of this column, but it was either that or keep you all in suspense by breaking it up into a lot of little chunks. In any case, you should come out of it well-educated about the arbitration process.

As I mentioned in my Rockpile yesterday, I was going to talk some more about the Garrett Atkins situation (and recommend that the Rockies not settle for the $7.3 million midpoint), but he has been signed to a more club-friendly 7.05 million dollar deal. As a result, this won't be a heavily Rockies-centric article.

As an organization, the Rockies have avoided arbitration like the plague, having only three hearings in their 16 years of operation: A loss against Dennys Reyes in 2002 over a $200,000 difference, a win against Sun-Woo Kim in 2006 with the same difference, and their victory over Brian Fuentes last year when there was a $1.45 million difference.

With Atkins, it was my opinion that the club would once again win the arbitration case due to Garrett's declining production and higher-end salary demands. I think that if the Rockies would have been willing to go through the arbitration process, they would have saved themselves $400,000--but I'm satisfied with the deal the Rockies got--a quarter million dollars less than the midpoint.

So, why is arbitration avoided with such fervor by clubs?

Answer (and so much more) after the jump...

Salary Arbitration History

Let's begin with a little history. In the early days of baseball, players were tied very tightly to their teams, thanks to the Reserve Clause. The Reserve Clause said that once a player's contract expired, the team still retained the rights to that player. Ballplayers were given an offer by their team, and if they didn't like it, that was tough luck. Those who refused their team's offer would be unable to play for any other team unless their squad released or traded them. This, of course, was a preposterous arrangement, one that ushered in the era of free agency in 1975. However, before this great step could occur, the introduction of salary arbitration was required. 

Salary arbitration was adopted by the owners and MLB commissioner Bowie Kuhn in 1973 as a response to droves of players simply holding out of their contracts. The arbitration process was proposed as a compromise to the MLBPA in lieu of free agency, but it was an arbitration case that gave the MLBPA the legal precedent to overturn the Reserve Clause two years after its introduction.

Eager to appease the players, the owners almost unanimously voted for the process. Charlie Finley and Dick Meyers, owners of the A's and Cardinals respectively, were vocal in their opposition of arbitration.

We’ll be the nation’s biggest [expletives] if we do this," Finley said at the time. "You can’t win. You’ll have guys with no baseball background setting salaries. You’ll have a system that drives up the average salary every year. Give them anything they want, but don’t give them [salary] arbitration."

Meyers, who had experience in arbitration, said it more darkly, "This will be baseball’s ruin."

Salary Arbitration Eligibility

Now that the history is out of the way, just who is eligible for salary arbitration anyway? The answer is not too complicated, actually. A player is not eligible for free agency until he has spent six years on the major league roster or the disabled list, provided that the player is drafted and is offered a contract by his drafting team (or any team he is traded to) each year. A player is eligible for arbitration if he:

1.       is ineligible for free agency (less than six years service time)

2.       is without a contract

3.       cannot agree with his current team on a new contract

4.       has been on a major league roster or disabled list for at least three years

In addition, teams may offer a free agent arbitration--important, as in order to get compensatory draft picks, teams must offer arbitration (à la Brian Fuentes).The exception to this rule, dubbed the "Super Two" rule, states that players who have at least two years of experience, meet the first three conditions above, and satisfy the conditions below are also arbitration eligible.

1.       Played in the majors for at least 86 days in the previous season

2.       Is among the top 17 percent for cumulative playing time in the majors among others with at least 2 years, but less than 3 years experience

For instance, Taylor Buchholz had only 2.144 years of service time this year, but met the Super Two criteria and thus was arbitration-eligible. In 2009, there were 111 players who filed for salary arbitration, up from 110 in 2008. Of those cases, only 24 remain unresolved at this time, meaning that already about 78% of players have avoided arbitration. More will doubtless follow in the coming days. This is in line with 2008, when only eight cases (7.2%) went to arbitration. But this is an article about salary arbitration, so let's examine next the small percentage of arbitration cases that do go to the hearing.

How a Salary Arbitration Hearing Works

If a case does make it to a salary hearing, a panel of three independent arbiters, recommended by the American Arbitration Association (try saying that five times fast), will hear the cases of both the club and the player. These arbiters are experienced in arbitration, but often are unfamiliar with baseball. What do these cases consist of? On the most basic level, the club disparages their player's ability while the player promotes his talent. In other words, it's not exactly the most ideal situation for either party--especially  for future salary negotiations between them. But the hearing is a little more complicated than that. Certain pieces of evidence are allowable in hearings while some is not. 

Basically, the criteria in principle for what is admissible in salary hearings is agreed upon in the Collective Bargaining Agreement--though in practice these criteria are fairly flexible. I'll list the things that are most often used in arbitration hearings. After that, I'll go through these criteria with a real-life case--Ryan Howard's.

1. Player Comparisons--either the club or the player will use the stats of other players at the same position with comparable service time, or in some cases, age. Looking at the stats of a player with more service time is permissible, but only the compared player's stats until a time equivalent to the arbitration player's service time will be allowed. This is called a look-back comparison. In the Garrett Atkins case, his agent sought to compare his client to Justin Morneau--which by conventional stats wasn't a terrible comparison--especially since in these statistical comparisons, sabermetric stats are generally not used. After all, the arbiters are not baseball people. As a result, this analysis primarily uses conventional stats--though some advanced stats are becoming more widely accepted in these hearings. Atkins' high batting average and RBI totals might have swayed the arbitration panel.

2. Contract Comparison--As the title suggests, the contracts for similar players are used to more firmly establish a player's value (akin to a legal precedent). Only one year deals are used, since multi-year contracts are structured very differently. Atkins once again positioned his contract demand so that his midpoint was a little lower than Morneau's salary.

3. Injury History (or lack thereof)--obviously a player with injury problems is at a disadvantage in these hearings. Atkins' lack of serious injuries is a point in his favor.

4. Intangibles--this is where it gets interesting. This most indefinable criterion is not given a whole lot of weight--especially those arguments that espouse a player's fan appeal. However, a player's intangible value (especially through the awards they've won) will be taken into account by the arbiters in their decision-making process. In Garrett's case, the fact that he played his home games at the supposed (and in a sense real) hitter's paradise, Coors Field, would have counted against him (probably more than it should) in his evaluation.

As for what is not admissible in arbitration hearings, this is the CBA's list:

(i) The financial position of the Player and the Club;

(ii) Press comments, testimonials or similar material bearing on the performance of either the Player or the Club, except that recognized annual Player awards for playing excellence shall not be excluded;

(iii) Offers made by either Player or Club prior to arbitration;

(iv) The cost to the parties of their representatives, attorneys, etc.

(v) Salaries in other sports or occupations.

 And now, as an example, I shall present Ryan Howard's case for his arbitration hearing, sticking to the criteria in the CBA. The reason that I picked Howard is that not only is his $18 million offer $4 million apart from his team's, but he has also already received a record-large $10 million settlement last year.

A Mock Salary Hearing

Player Comparisons: These two players play the same position and, in this study, have the same amount of service time. Only conventional stats were used, for the first three full years of each player's career (Howard has 3.145 years of service time).

Player A: .334 AVG, 114 HR, 367 R, 381 RBI, 227 K

Player B: .277 AVG, 153 HR, 303 R, 431 RBI, 579 K

Player C: .278 AVG, 112 HR, 277 R, 302 RBI, 380 K

Player A in this case is the player that Ryan Howard is trying to get paid $2 million more than in 2009, Albert Pujols--with Player B being Howard. Though these conventional stats do favor Pujols to an extent, the difference is not that stark. When advanced stats are taken into account, however, Pujols asserts his superiority with ease. Player C is another interesting case, Prince Fielder, who has similar service time and is considered a very similar player in build and philosophy to Howard. The biggest difference, for both Pujols and Fielder, is their age in their first three full seasons (21-23 and 22-24 respectively)--compared to Howard's 26-28 (he's older than Pujols). As a result, these two players have less risk of regression and more projectability, whereas Howard has probably already peaked. Many have said that they would rather have Fielder over Howard, and I agree.

The scary part, for the teams especially, is that the arbiters of this case are much more likely to be swayed by Howard's gaudy HR and RBI stats than they are to be dismayed by his huge K rate and lower average.

Contract Comparisons: In Howard's case, there are no comparable three year players that have signed such a large deal. However, Pujols and Fielder are again interesting comparisons for Howard-- Pujols signed his current multi-year deal after his third full season, while Fielder's two year, $18 million agreement is more conventional by arbitration standards. Pujols' salary for the first year of his seven year, $100 million contract was $7 million, while Fielder's will be $6.5 million. With age and production taken into consideration, Howard's demands are a little ridiculous.

Injury History: Howard has been on the DL once, and for only 15 days. Injuries are not a huge concern here.

Intangibles: This is the fun part. Howard has a whole boatload of intangibles that he brings to the table, and the impressionable arbiters might be swayed into his corner if they weight their decision heavily on this category. After all, Howard is not only arguably the face of the Philadelphia Phillies, but he's helped them to win the World Series and get in the playoffs in consecutive years. He won the 2005 Rookie of the Year trophy (despite playing only 88 games), the 2006 NL MVP trophy, and deserved or not, was 2nd in last year's MVP voting. Those are some pretty strong intangibles.

My Prediction: Given the evidence, Ryan Howard should lose this hearing easily--were the arbiters to be people who deeply understand baseball. However, my prediction is that the arbiters will be blinded by Howard's hardware and his league-high HR and RBI numbers, granting him the win.

What it All Means

So, have the doomsday predictions of Finley and Meyers come to pass? Well, let's investigate: since arbitration's inception in 1973 to 2008, there were a total of 485 cases brought before a panel of three objective arbitrators. The clubs have a .577 winning percentage in cases, winning 280 and losing 205. The problem with this, from the owners' perspective, is that player salaries have rapidly risen thanks to this system--and the fact that the arbiters are not "baseball people", as Finley opined, has helped the players' cause.

In 2008, those 110 players who filed for arbitration (many of which never went to the formal arbitration process) had their salaries rise astronomically--with an increase from an average salary of $1.38 to $3.04 million (a 120% jump). Heck, Howard received a 1011% raise last year when he won his case, going from $900,000 to $10 million. 

To be sure, while has hardly been baseball's ruin as Meyers feared, salary arbitration and free agency have been a big win for the MLBPA. Arbitration is an engine by which hundreds of players have received huge raises from their employers, driving up costs for owners--who have graciously passed those costs on to the fans--making sports consumption more and more difficult for the average family. The players and their agents are really the only ones that win in this process.

Sources and Additional Reading

I was assisted greatly by these sources in writing this article, as well as FanGraphs and Cot's Baseball Contracts:

Arbitration History and Mechanics--Maury Brown's article, from which I derived much of the material for this article, is a must-read for those interested in further reading on the subject of salary arbitration.

Rockies Arbitration History

Reserve Clause

Arbitration Eligibility

Arbitration Figures Tracker

Arbitration Filings Tracker

Well, I hope that you enjoyed the first session of PurpleRowAcademy--I warned you that it would be long! I will gladly take suggestions in the comments on future topics of instruction or criticism of my work. After all, I aim to please.

 

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