In this week's Purple Row Academy, it's a walk down memory lane as I revisit my first ever session, the complicated field of salary arbitration. In that link I geek out on the mechanics and history of the subject pretty hardcore--this time I'll talk a little more about the meaning of arbitration (okay, a lot more).
Why am I doing this? Well, not only is it the arbitration hearing season (February 1st through 21st), but also to remind everyone just how expensive arbitration is for teams. Further down, I'll look at how arbitration affected the Rockies this offseason as well as the cases of division rival players Tim Lincecum and Edwin Jackson.
I don't expect you to go back and read my entire arbitration article (though it would be helpful to understand what follows because there's a lot more detail there), but here are some things you need to know about arbitration:
The arbitration process, in the words of arbitration guru Maury Brown (emphasis mine):
Cutting to the chase, the salary arbitration process is designed to come to an agreement – a contract reached by the club and the player, mostly of the single-year variety. After filing for eligibility, a player with his agent, file a salary figure that they are seeking as salary for the upcoming season. In turn, the club the player plays for files their salary figure that they believe the player is worth for the same period; the upcoming season. After the figures are filed, there is a period of time in which negotiations occur to reach a contract ahead of a hearing to determine one figure or the other – there is no middle ground.
To be eligible for salary arbitration, a player needs to be:
1. ineligible for free agency (less than six years of service time)
2. without a contract
3. cannot agree with his current team on a new contract
4. on a major league roster or disabled list for at least three years
Another extension of eligibility is the "Super Two" rule, which 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
This is the situation that Lincecum (2.148 ML service time) and Jason Hammel (2.153), along with 16 others, found themselves in going into this offseason, eligible for four years of arbitration instead of three. Next year Ian Stewart will likely be a Super Two.
In addition, teams may offer an outgoing free agent salary arbitration--important, as in order to get compensatory draft picks for losing that free agent to another team, teams must offer that player arbitration (à la Rafael Betancourt this year). Of course, offering arbitration runs the risk of that player accepting and perhaps getting a much larger salary than he would have on the free agent market.
This offseason, of the 128 filings for salary arbitration (out of 210 potential filings), including nine by Rockies players, only 44 cases even made it to the point of exchanging figures. Huston Street (wanted $8.35 million, club offered $7.1 million) was the only Rockie among those and he quickly agreed to a three year, $22.5 million deal. So far, only 2 have gone to arbitration (Corey Hart and BJ Upton), with 10 more cases unresolved.
Why do so few teams go all the way to the arbitration hearing? Probably because the process is fraught with more peril than Sir Galahad the Chaste can handle. I'll explain after the jump.
Problems with Salary Arbitration
There are a number of problems with salary arbitration, but one of the bigger ones with the process is one that Brown knocks out of the park:
As background on the process, it is the last bastion in MLB where advanced statistics are not used. The reason is simple: a player’s "case" if it goes to hearing is heard by a 3 member arbitration panel from the American Arbitration Association; they are not "baseball people". While the panel members are familiar with baseball statistics, the "old reliables" are still the focus. No WHIP. No VORP. No WAR. Instead, ERA, AVG, IP, Ks, BBs, etc. are the focus. In plain terms, simple is better in salary arbitration.
In other words, players with fantastic 5x5 fantasy stats are valued very highly (see Howard, Ryan), often more so than those who may have actually contributed more value to their team as perceived by WAR or even OPS (see Utley, Chase). In the world of salary arbitration, Howard (3.3 WAR in 2008) is valued higher than Utley (8.1 WAR in 2008). For now, it's the world that we live in--salary arbiters dig the long ball. That's the problem that I have with the system--that it improperly values players.
Another problem is that the arbitration hearing is not a pleasant process for either the player or the team. The team's goal, in order to save itself some money, is to bring out all of the negative aspects and flaws of a player as both a baseball player (can't hit a curveball) and on occasion as a person (arrest record, etc.). Getting too personal in these hearings could really dampen the relationship between player and club when their free agency filing date comes closer.
However, the biggest problem that owners/GMs have with the system is that it's so darn expensive. In theory, a player will receive 40% of his value if he were on the free agent market his first year of arbitration. then 60% and 80% the following two years of arbitration. However, in a bear free agent market such as 2008 and 2009, marginal arbitration eligible players have been getting paid more in arbitration than they would have on the free agent market.
Case in point: if Garrett Atkins had gone to arbitration this offseason (his third and final year) instead of being non-tendered by the Rockies, the lowest salary he could have garnered per the CBA would be $5.64 million--well above the $4 million contract he signed on the free agent market with the Orioles--and the arbitration award would likely have been more like $8 million.
Heck, Corey Hart received a $1.5 million raise in his second year of arbitration (to $4.8 million) after posting a 0.7 WAR season. Hart had one very good year in 2007 (4.5 WAR), but his salary as increased astronomically through arbitration as his production has decreased (from 1.0 to 0.7), like Atkins but seeming even more like a flash in the pan. Arbitration eligible players can live high off the hog for the duration of their eligibility from one good year in the past.
On average, including multi-year deals of arb-eligibles like Howard's 3 year, $54 million, the 111 players that filed for salary arbitration in 2009 received a 172% raise from the previous year. Here's how the Rockies fared this offseason:
| Player Name | ML Service Time | 2009 Salary | 2010 Salary | Diff. from 2009 |
| Huston Street | 5 | $4,500,000 | $7,200,000 | 60% |
| Jorge De La Rosa | 5.015 | $2,000,000 | $5,600,000 | 180% |
| Rafael Betancourt | 6.079 | $3,350,000 | $3,775,000 | 13% |
| Clint Barmes | 4.122 | $1,625,000 | $3,225,000 | 98% |
| Chris Iannetta | 3.029 | $415,000 | $2,000,000 | 382% |
| Jason Hammel | 2.153 | $422,200 | $1,900,000 | 350% |
| Ryan Spilborghs | 3.072 | $415,000 | $1,300,000 | 213% |
| Taylor Buchholz | 3.14 | $1,055,000 | $1,055,000 | 0% |
| Matt Belisle | 4.019 | $800,000 | $850,000 | 6% |
| Randy Flores | 5.025 | $600,000 | $650,000 | 8% |
| Total | $15,182,200 | $27,555,000 | 131% |
As you can see, the Rockies paid on average a 131% raise to their arb-eligible players this offseason, causing a jump in salary obligations of about $12.4 million without signing any new players. If you take out Belisle and Flores, who were journeyman players that retained arbitration eligibility but had very little leverage, the Rockies gave an average arbitration raise of 162%. So yes, the arbitration process is expensive for teams, especially those small and middle market teams like the Rockies who rely heavily on the production of non-FA eligible players.
Colorado has gotten around this by locking players up through their arbitration years (they'll only have three true arb-eligibles, plus Belisle and Flores, next year), but the fact remains that the salary arbitration process artificially inflates salaries, much as the first three years of team control artificially deflates salaries. However, the inflation of salaries due to the process far outstrips the actual rate of inflation--it's an unsustainable economic model in which reform (perhaps a free market system or pegging to the rate of inflation) is needed.
To hedge against the negatives of the salary arbitration process, teams have taken it upon themselves to settle somewhere in the middle in order to avoid the possibility of both losing the case to the player and to avoid alienating that player for future negotiations--which ends up making the process that much more expensive.
The Curious Case of Tim Lincecum
Since Lincecum already signed a two year, $23 million incentive-laden contract on Friday, this case becomes hypothetical in nature. Too bad, because Lincecum is an extraordinary player and it would have made for a very interesting hearing. This is true not just because of the high numbers involved.
The potential hearing also represented a macro struggle between MLB and the player's union. If Lincecum had won his case and received $13 million for 2010, he would have set a new precedent upon which all future cases would be judged against--and in turn would have led to an accelerated increase in player salaries, which is after all the goal of the player's union. Meanwhile, even had the Giants/owners "won", they would still be paying a player with less than three years of service time under his belt $8 million, an 1131% raise from last year. So yeah, either way the Giants were going to lose--and with four years of salary arbitration eligibility, they would likely lose again and again. However, in this situation the Giants got insanely lucky.
First of all, they offered a number that was way too low for Lincecum's services. As the Baseball Analysts' Chris Moore writes, per game theory, in a zero sum game such as salary arbitration the number that is closest to a player's true value would win the case. In Lincecum's case, the player probably even underestimated his value at $13 million (he was worth $37 million in 2009 according to Fangraphs, so 40% of that is $14.8 million), so when the club filed at $8 million, they placed their number too far away from Lincecum's arbitration worth to have a good shot at winning the case. As Moore argues, if the Giants had placed their offer at $10.5 million instead, closer to Lincecum's arbitration value, they would have had a much better chance of winning the case. The economist in me loves this lesson:
Sometimes it is a better strategy to offer to pay more for a good or service. Sometimes a high initial bid will result in a lower long-term cost.
Indeed, on the whole Lincecum's chances of winning the case seemed to be excellent--and yet the Giants somehow managed to steal two years of arbitration eligibility for below market cost.
For those legal types out there, here are the basic mechanics of how the salary arbitration hearing would go:
Writing before the two parties exchanged figures, Brown recommended that Lincecum file for $16.8 million, giving the argument that not only was Lincecum a two-time Cy Young Award winner and the best pitcher in the NL (by a wide margin in my opinion), but also an incredibly popular figure that brought in over 1300 extra people to home games on days that he started and helped the team draw 39% more eyes for Giants television broadcasts--not to mention the fact that he was on the cover of MLB 2k9 and was the subject of national advertising. The Freak could argue that he wasn't just a superstar--he was an icon.
Meanwhile, all the Giants would have in ammo against him were velocity drops in his FB/CH, a slight back issue in September after which he was slightly less effective, and his arrest for marijuana possession (which they probably wouldn't use due to lack of relevance). In other words, Lincecum was likely to win his case.
For some commentary on the actual deal, Rob Neyer talks about why Lincecum took the deal while Brown calls the deal a head scratcher. And to be honest, I'm on Brown's side here about the deal. When you're Tim Lincecum, with an unprecedented level of success for a first year arbitration eligible player, you've got to maximize that opportunity.
I mean, the contract Lincecum signed is basically what Matt Holliday signed after 2007 to buy out his last two years of arbitration (2/$22.5)--not what you'd expect a two-time Cy Young Award winner to receive. Not only that, but the $8 million he'll be paid this year will be the figure that helps determine his salary two years down the road, potentially hurting him in the long run too. It just seems mystifying to me that Lincecum would do this--I understand the injury risk factor, and $23 million is a lot of money, but when you're the best you really should seek to be compensated accordingly.
Of course, my ulterior motive in wanting this case to get to the hearing is the fact that one of the Rockies' divisional rivals would have reduced payroll flexibility and potential animosity between them and their best player. The flip side to this is that by settling more a below market deal Lincecum slowed the inflation of arbitration salaries, which is good for baseball as a whole.
Edwin Jackson's Got Next
In the category of arbitration eligible players that still haven't settled with their teams, Arizona's recently acquired All-Star RHP, Edwin Jackson, is prepared to go into salary arbitration for against the Diamondbacks on February 17th. Jackson, who went 13-9 last year and a 3.62 ERA, 4.37 xFIP, 4.39 tERA, and 3.5 WAR, has filed at $6.25 million while Arizona has countered with $4.6 million--a difference of $1.625 million (Clint Barmes' salary last year). Of course, of those stats I just mentioned, only the first two will be of any use to Mr. Jackson--well, that and the fact that he had 161 Ks and an All-Star berth. Arbiters eat that stuff up, doncha know.
Jackson, a second year arbitration eligible player, probably is worth what he's asking for (60% of 2009 value is around $9.5 million)--if he can repeat 2009. Weighting in past performance a little bit more means that valuing Jackson is a little more dicey--can he maintain this new level of performance? Even with this uncertainty, it is apparent to me that given the criteria arbiters look at, Jackson will probably win his case and earn a 184% raise. That's good news for Rockies fans who would like to see Arizona lose some payroll flexibility--which unfortunately didn't happen as I had hoped with the Giants due to the Freak taking a below market deal.