Salary Structure in Major League Baseball

In light of the fact that we might be within a year of having the upper end of the salary scale in Major League Baseball redefined, I wanted to throw out two statements. The point of these statements is to get you in the right frame of mind for the numbers that I’m going to be throwing at you.

The salary structure in Major League Baseball is absurdly out of hand.

A salary cap would go a long ways to helping fix MLB’s salary problem.

THE NUMBERS

In 2001, Major League Baseball teams spent $1.66 billion on payroll and in 2009 the teams spent $2.23 billion, an increase of 34.2%. Considering that this represents an increase in average team payroll from $55.4 million up to $74.4 million, it doesn’t really sound like an extraordinary increase. However, when its compared with the Consumer Price Index, one of the most commonly used tools to measure inflation, that rate of payroll increase is well over the increase in the CPI (20.6%).

Does this mean that MLB salaries are getting too high? Not necessarily. Over the same time period, NFL payrolls have increased by 55.7% while NBA payrolls have gone up 69.8%. The difference between Major League Baseball and those other two leagues is that they have a salary cap while baseball does not. So why then are their payrolls numbers rising faster than the league that has no salary cap?

Is it because revenue streams are better in the NFL and the NBA? Not really. Major League Baseball has had record setting revenues the past few years. Is it because of labor uncertainty that has caused baseball owners to be more reluctant to hand out dollars to players? Nope. In fact, Major League Baseball is the only of these three leagues that is not heading into uncertain waters with regards to labor negotiations between the players and the owners. It is entirely possible that the dramatic rise in payrolls figures in the NBA and NFL are contributing to their current labor situations.

Basically what all of that says is that if the Major League Baseball salaries are rising at alarming rates, then salaries in the NFL and NBA are rising at an even more alarming rate. So then the question becomes whether or not there is any truth to the first statement above and most of that answer depends on what your definition of “absurdly out of hand” is.

In that case, why have salaries been in the news so much in the past few years? Well, a lot of it has to do with the Yankees and other than that, it mostly has to do with the high profile signings of the past few years. Joe Mauer, Ryan Howard, Matt Holliday, Cliff Lee, Carl Crawford, and Troy Tulowitzki are just a few of the players who have signed contracts or contract extensions worth an amount in excess of $100 million. On top of that, three high profile players are going to sign very large contracts within the next year; Adrian Gonzalez, Prince Fielder, and the man who will be resetting the curve when it comes to large contracts, Albert Pujols.

Maybe this is the question we should be asking. Overall payrolls in Major League Baseball have been climbing at a much steadier rate through the past ten years than those of the NBA or the NFL. However, the higher end of MLB contracts has skyrocketed to the point where the highest paid player now makes roughly ten times the league average. Is the payroll situation in baseball getting its reputation because of the aristocratic class of players that are getting paid much more than the league average?


FORMATION OF AN ARISTOCRACY?

In 1997, Albert Belle became the first player to earn $10 million in a single season and he earned exactly that amount. In 2010, 79 different players were paid at least $10 million and Alex Rodriguez was paid more than triple that amount ($33 million). Over that time period, the overall salary figure in MLB has jumped from $969 million to $2.61 billion, an increase of 169.5%.

That’s great and all but the active roster of a Major League Baseball team is 25 players and if we assume that as many as 8 or 9 players get included into the payroll numbers, that still gives us a pool of roughly 1,000 players. If only 8% of players are earning that amount of money, can it really skew the payroll numbers that much? The answer is absolutely.

If we assume that there is a pool of 1,000 players that go into baseball-reference.com’s payroll numbers that means that 999 players earned less than $10 million in 1997 and that number shrunk to 921 by last year. In the past 14 years, the amount of money paid to those players has gone up from $959 million up to $1.46 billion. This represents an increase of just 52.7%, far below the overall increase.

Here’s the amazing part. Last year, the 79 players who earned over $10 million were paid a grand total of $1.15 billion, or 43.9% of the total money paid out in salaries. In 1997, that was just 1.03%.

An aristocracy is a system of government where the power is consolidated amongst a few of the citizens. If the question is whether or not a sort of aristocratic class has developed in Major League Baseball, the answer is an emphatic yes. If there is a problem with the salary structure in baseball, it lies in the fact that the top 8% of wage earners are earning 44% of the money being paid to players.

Is a salary cap a solution to this “problem”? The problem with imposing a salary cap on Major League Baseball is that it provides no disincentive to teams wanting to sign a player to a contract worth $20 million per season. Teams will simply start paying one player that much money and the rest of the roster will be filled with players somewhere on the lower end of the payroll spectrum. If they want to reduce the salaries of the top tier of players, they would need to institute rules in the collective bargaining agreement limiting the maximum size of a contract a player can sign, much like the NBA. Being the highest paid player in the NBA isn’t that big of a deal anymore because the amount of money the top tier of players are getting paid is all the result of an equation based on how long they’ve been in the league.


CONCLUSION

Does the salary structure in baseball need fixing? In my opinion, it does not. Teams that have enormous revenue streams from ticket sales, merchandise sales, advertising, and broadcasting contracts can spend whatever they want on a team. However, if they spend too much too often, they have to pay the luxury tax which goes to teams that do not have the type of revenue streams that the Yankees and Red Sox have.

This system works for baseball and would not work as well for the NBA or the NFL. In the NBA if you have the best player at every position, you’re probably going to win 75 games and win the NBA title. If you have the best player at every position in the NFL, you’ll win 14-15 games every year and play in the Super Bowl more years than not. If you have the best player at every position in baseball, it will give you an excellent shot at the playoffs every year but not necessarily the World Series. From 1996-2001, it can be argued that the Yankees didn’t have one player on their roster that could be considered the best at his position and they won four World Series title in those six years and played in another. Baseball is all about having good players at every position with as few holes as possible. In other words, no matter how much money you spend on putting together the best roster in the history of baseball, it still doesn’t guarantee you a World Series title.

For all of you out there who think the system is broken and a salary cap is necessary, don’t forget that in the last ten years, only one team with the highest payroll in baseball has won the World Series (the 2009 Yankees).

The system isn’t broken, it just might need a tweak or two…