Money is a constant throughout our American lives as we pursue the American dream but in professional sports, the numbers get blown to a rarified air that only a very small fraction of one percent of all people in this country get to experience. Amongst professional sports, baseball is unique in the way the money is dispersed. In the NFL, for example, the difference in costs and revenues between a large market team like the New York Giants and a small market team like the Jacksonville Jaguars is relatively small. In baseball, the difference between the New York Yankees and the Tampa Bay Rays is extremely large.
In the coming lines and paragraphs, I’d like to examine the financial structure of Major League Baseball through a lens adorned with good old dollar signs and see what comes up. This is not going to be a normative piece; I am not going to postulate the way that MLB should run their business. Rather, I am going to simply look at their model and draw a few conclusions and hopefully leave you (my loyal reader) more thoroughly educated than you were when you clicked on this link.
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We all know that baseball salaries are ridiculously higher today than they ever have been in baseball history. In 1990, one of the first years with reliable salary data on baseball-reference.com, the 26 teams in MLB spent a combined $346,626,190 on player salaries. To show you just how ridiculous contracts can get, if he hits all of the milestone incentives, Alex Rodriguez’s current contract will end up being worth $305,000,000.
To start into the economics lingo, the Consumer Price Index (CPI) is one of the tools used to measure inflation and in doing so, it also helps give us an idea of how much a dollar is worth at one point in time versus another point in time (to attempt to restore some sanity to the number, Alex Rodriguez’s salary last year would be $2.63 million in the season that Babe Ruth hit 60 home runs).
The US economy has gone through periods of high inflation and even a few periods of deflation since 1913 (when the CPI was first tracked). The average inflation rate over that 97 year period is a very modest 3.24% and that figure is even more impressive when you consider that national economies that lack the discipline of the US have experienced hyperinflation rates of 24,000% (as Zimbabwe did in February of 2008).
So why am I talking about inflation rates? Because salaries in MLB have gone up and it’s irresponsible to look at those numbers without taking inflation into account. For instance, in the 15 year period from 1995-2010, total player salaries in MLB increased an average of 8.45% every year. Over that same time period, the CPI increased by an average of 2.42% per year so we can clearly say that there is more going on here than just inflation. But before we go too far into evaluating why salaries are increasing at rates higher than inflation, we have to make sure we’re comparing Fujis to Fujis instead of Fujis to Galas. A dollar in 1995 had more buying power than a dollar today. Using the CPI figures, we are able to evaluate salaries with a common frame of reference.
As economists would say, this is the difference between “nominal” salaries and “real” salaries. In short, nominal salaries are the actual numbers printed on the checks while real salaries normalize those values with a common frame of reference in mind. When you throw all this in the hopper, what you get is that the average salary per team increased from $25.8 million in 1995 to $87.1 million in 2010 (or increasing by 8.45% per year, as mentioned above) in nominal terms. In real terms, and 2000 dollars, average team salary has increased from $29.2 million to $68.8 million, or 5.89% per year.
The end result is that the average inflation rate has been 2.42% and the average inflation of MLB salaries has been 5.89% from 1995-2010. Now we can go back and ask the question; what is causing this? There are many different things that can affect the cost of labor for a company and at its simplest, that is what players are to the MLB. However, there is one that has a greater effect that any other; revenue.
If a company isn’t making a lot of money, they won’t pay high salaries (even though the NBA is doing its very best to do just that). According to MLB, in 1995 their collective revenue was $1.4 billion and in 2010 it was a record $7 billion. If we put the numbers through the same analysis as the salaries, we find that while player salaries have increased 5.89% per year from 1995-2010, league revenue has increased an average of 8.70% per year over the same time period.
Before you yell and scream too much about the ridiculous amounts of money that players are being paid, remember that they get that much money because the market will bear those salaries. If the owners start making less money, they will start to hand out smaller and smaller contracts.
INDIVIDUAL VALUE
At this point, I’d like to narrow my focus a bit and explore the meaning of value when it comes to players. Sabermatricians have worked tirelessly over the past few years to come up with new ways to evaluate players and near the forefront of this revolution is one of my favorite metrics, Wins Above Replacement (WAR). This extremely complex metric takes into account as much as is possible in order to boil down a player’s contributions into a single number adjusted for the era they play in, the individual ballparks they played in, and even the teams they played against.
But the question that nagged at the back of my mind for countless hours is how much bang do owners receive for their buck? How often does a big contract pay off and how often do owners reap the rewards of a team friendly contract for a player that exceeds everyone’s wildest expectations?
And so those questions provided the backdrop for my research. I examined the salary figures and WAR values from 2000-2010 in an attempt to draw some conclusions about trends when it came to the contracts that owners gave certain types of players and certain patterns started to emerge. A question that I’d like to pose to you at this point is what type of player do you think is the most valuable to an MLB franchise? Please allow me to be a bit more specific with my definition of value in this context. What group of players has maximized on field production while minimizing their salary? Yeah, I apologize, that’s still a bit vague.
Young players.
In the height of the Steroid Era, which I will say happened roughly from 1996-2003 (ish) older players were far more valuable and indeed put forth some of the best seasons in MLB history. Barry Bonds had a five year run from 2000-2004 that is one of the best collections of seasons ever. In 2000, his WAR was a very good 8.7 but that was just his jumping off point. His next four seasons produced WAR values of 12.5, 12.2, 10.3, and 12.4. So what’s the big deal? For those five seasons, he was 35, 36, 37, 38, and 39 years old, an age where the vast majority of professional athletes begin to break down and become a shell of what they were at a younger age.
In the years since the Mitchell Report, congressional hearings, and perjury and obstruction of justice cases, players have gone back to aging the way they always used to; poorly. There has been an incredible youth movement in the past five years that has not only restored some sanity and equilibrium to the way talent evaluators look at players of a certain age, but has also reinvigorated America’s interest in baseball. After all, when the details of the Steroid Era started to come out, fans became very cynical about players and how they went about achieving their accomplishments. People also became cynical about the motives of the players who were bulking up and becoming huge and putting forth huge number while filling their bank accounts with a king’s ransom.
Today, it is the young players that rule baseball. There are still greedy men throughout baseball but there is a sense that the playing field is far more even and players are succeeding based on talent and hard work rather than what pharmacist they know. In my opinion, this has instilled once again a sense of the purity that once made baseball America’s pastime so long ago.
All you have to do to know that I’m right is look at the roster and salary breakdown (by age) of nearly any team that plays their home games outside of the Bronx or Boston. In 2000, 29% of salary money went to player under the age of 30. The 30-34 age brackets earned 50.3% while players over 35 earned 20.66% of salary money. From 2001-2004, the breakdown of salaries skewed towards older players with the three demographics earning 32.7%, 45.3%, and 22.0%, respectively. Before you dismiss this relatively small increase as trivial, realize that over those 4 years, roughly $7 billion was paid in salary so that represents an increase in salaries for players over 35 of $23.9 million per year.
Last year, those demographic breakdowns were 32.8%, 49.6%, and 17.6%. Money is no longer being given out to older players and it is instead being used on younger who provide much more performance per dollar spent. But what about those seasons from Bonds that I just mentioned and the excellent seasons that Roger Clemens had even after turning 40? That certainly proves that older players can still have some value, doesn’t it?
Yes, it does. The problem isn’t the Bonds’ and Clemens’ of the world. It’s Carlos Lee, who last year (at the age of 34) put forth a season in which he was worth 2.5 wins LESS than your average replacement player… while earning $19 million. When you look at the worst seasons of the last ten years given a combination of poor performance and high salary, the average age of the 50 worst player seasons is 33.8 years old. The average of the top 50 is 25.4 years old.
The following is a graph of average salary and average WAR by age. Given how much noise there is in the data below the age of 24 and above the age of 40, I simply eliminated those. Given how few players fall into those two categories, the sample size isn’t large enough to draw significant conclusions.
This graph says it all; once players turn 30, general managers across baseball are taking their chances with many players. Before they turn 30 there is a large disparity between their performance and their salary but why does this happen? LeBron James had a contract worth more than $20 million before he took the court for the Cavaliers and Sam Bradford had a contract guaranteeing him more than $50 million before he took a snap for the Rams.
The NBA and NFL pay much more on potential at first and then only later is actual performance taken into account. In baseball, draft busts are costly because of the actual pick and not as much because of the money that was invested in the picks. If Stephen Strasburgh doesn’t pan out for the Washington Nationals, they are out $15 million, which is a lot of money but imagine if he had become a Cy Young candidate in his first few years.
One of the most famous examples of this is Albert Pujols. In his first three years with the Cardinals, he was valued at 6.9, 5.8, and 10.9 WAR; in short, he had three incredible seasons given that he was 21-23 years old for those seasons. Here’s the ridiculous part; he was paid a grand total of $1.7 million for those three seasons.
Baseball is alone in that you have to make it to the highest level of the sport and perform before you get your big payday. Granted, there are always stories of unheralded players coming out of college in the NBA or the NFL who hit it big once they make it to the pros but those are few and far between. No matter how much fanfare a player receives after being drafted, few baseball players have the paychecks to match their skill sets until they do well in the majors. For every example like Evan Longoria (who signed a 6 year, $17 million contract very shortly after reaching the majors) there are countless examples of players who played for less than $1 million and were All-Stars before being paid like them.
I’ve been talking about the value of players given both their salary and WAR and I want to explain briefly how I arrived at the figures. Essentially, I gave each player season a percentile rank given the best and worth performance and then gave them a percentile rank given their salary. The twist is that instead of the highest salary having a percentile rank of 100, I gave the lowest salary that rank. I don’t want us to confuse value with worth. In 2003, Albert Pujols was worth more than his $900,000 salary and given that he produced 10.9 WAR that season, he was extremely valuable to the Cardinals because of his combination of high production and low cost. I’m not making a value judgment about the salary structure in baseball; I’m just trying to find patterns. Once I got these two values, I simply averaged them, giving me a scale of value from 0-100.
This is a graph of the results of this analysis, plotting salary on the x-axis against total value on the y-axis. I understand that there are a ton of dots on the graph (8,840 to be exact) but don’t miss the forest for the trees. What this essentially shows is that significantly higher total value is found in the players earning less than $5 million in a season.
Also notice that amongst the 7,153 players who earned less than $5 million in a season, there is less variance than among the 1,687 players who had seasons earning more than $5 million. The highest total value by a player earning over that threshold was 85.3 while the lowest was 21.6. For the players below that threshold, the limits were 94.0 and 46.6. All that this basically says is that younger players are surer bets and if they don’t work out, it’s not like you were paying them much to begin with.
So what does all this mean in the grand scheme of Major League Baseball? Is it only a matter of time until draft picks are given contracts of $50 million over a number of years? Doubtful. However, there will always be owners and general managers that will thumb their nose at the conventional wisdom and give a 31 year old player a 10 year, $275 million contract when there are no other bidders in the auction.
I believe that cooler heads will exert more influence in the coming years and the number of players that are grossly overpaid will decrease. You already have an organization that is famous for not ever wanting to give a contract longer than three years to a starting pitcher in the Philadelphia Phillies. Despite the fact that they’ve violated that rule twice recently, they still gave two of the best pitchers in the game contracts of four years (Roy Halladay) and five years (Cliff Lee). If Halladay had reached the open market and Lee had taken the best offer, they both would have signed for much longer for many more dollars.
Teams are beginning to realize the benefits of taking a chance on young transcendent players because in the long run, that allows them to sign these players to less than their market value if they were to hit the open market. As out of whack as the recent extensions given to Ryan Braun, Troy Tulowitzki, and Carlos Gonzales seem, if they became free agents in three years after 3-5 years of extremely good production, they all could have commanded $20 million per year. None of their deals have an average annual value close to that.
There will always be teams willing to pay a premium for the best talent but I believe what you will find is small market teams that are building around young players will have their day in the sun and will compete with the big boys and that is just one small part of what makes baseball grand.
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Thank you for sticking it out this long with me; I know I was more than a bit long-winded this time around. Hopefully you enjoyed what you read and found it somewhat informative. If you are interested in the raw data that I used to draw these conclusions, just let me know and I can provide it. All salary and WAR figures were found on baseball-reference.com.
Until next time, enjoy the baseball!
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