A Deep Look Into Baseball’s Salary Arbitration System

Ed Edmonds of Sports Law Blog has an good piece in the Marquette Sports Law Review titled, A most interesting part of baseball’s monetary structure – salary arbitration in its thirty-fifth year.  Since deciding that I wanted to be a sports agent, I have studied baseball’s system of final offer arbitration as much as possible.  I see it as a system that really aims to create settlements, but allows lawyers and expert negotiators who happen to be agents, the opportunity to shine in a somewhat legal setting (should a case actually make it to a hearing).

Edmonds starts his article by looking back to the very first arbitration hearing in Major League Baseball, between pitcher Dick Woodson and the Minnesota Twins.  While teams have a better record in arbitration hearings than their players, Dick Woodson won this round, giving the players an early 1-0 lead.  That first arbitration season; however, the teams would win overall by a count of 16-13.

Here are a couple of sentences in Edmonds’ first section that I feel deserves to be quoted.

To fully understand the salary structure of a MLB team’s roster, one must appreciate the component parts and the impact of the arbitration-eligible players’ place within that structure. Players in this category occupy the middle group between players with no leverage and those in the free agent group with substantial leverage.

Something I did not know – It was not until 1995 that hearings were decided by panels of three arbitrators (before it was decided exclusively by a single arbitrator).  It started off as an experiment that eventually became a permanent change in 2000.

One point that many people forget is that salary arbitration is not only for players who are super-twos or between 3 and 5 years of Major League service.  Those who have 6 years of service and may attain free agent status, may also accept arbitration from the team they played for last year (if the team offers it).  Most of these players offered arbitration prefer to decline and test the free agent market.  If the player declines the arbitration offer, he is then ranked as a Type A (the top 20% of a position grouping), Type B (the top 40% of a position grouping who are not Type A), or unranked free agent.

I thoroughly enjoyed reading about salaries for players who have not reached arbitration eligibility.  Edmonds discussed Prince Fielder, Albert Pujols, Tim Lincecum, and Evan Longoria.  Fielder missed out on being a super-two, and felt that he was underpaid as the Brewers kept signing him to low paying 1-year deals until he was arbitration eligible.  Pujols received more than Fielder prior to arbitration (much more than minimum salary), but still less than $1 million per year.  Lincecum barely made more than minimum salary after his first year, and received a modest increase the year after, before becoming arbitration eligible.  The Rays and Evan Longoria took an interesting approach.  Instead of signing Longoria to year-to-year deals before he reached arbitration eligibility, they signed him to a 6-year deal worth a minimum of $17.5 million and a maximum of $44 million.  Encompassed in that deal were small salary figures that Longoria would have received in the years prior to arbitration, had he not signed the long-term deal.  It was definitely an interesting approach.  One question that I wonder after reading this section is what determines the amount of money given to players before they reach arbitration eligibility?  Why not force all restricted players to take minimum salary?  Is it the team trying to keep the player happy and create good will so that that player doesn’t ditch the team as soon as he becomes a free-agent?  Is there a concern that the player might take an offer overseas in Japan?

There is a huge distinction between being a player who has not yet reached arbitration eligibility and one who has.  That’s why many players hope to become super-twos and become arbitration eligible one year earlier than most of their colleagues.  Teams are smart, though, and may limit a star player’s MLB time when he is young, to prevent him becoming arbitration eligible as a super-two.  Case-in-point is how the Rays acted with David Price.  Those Rays are also known as one of the few teams that subscribe to a file-and-go strategy, which means that once figures are exchanged by team and player, the team will proceed to the arbitration hearing without any future attempt to negotiate a settlement.  Besides the Rays, the Marlins and Astros are known to be supporters of this strategy.  That does not mean that the teams will not budge at all from that stance.  In fact, the Rays did sign Dioner Navarro to a multi-year deal after he and the Rays submitted figures leading up to a potential arbitration hearing.  The two sides had such a small gap between their numbers in the first place.

One thing many of us forget is that the true purpose of making the process bound by final offer arbitration is to actually encourage settlements before a hearing is necessary.  Both sides incur costs of preparation and actually performing at the hearing, not to mention the psychological cost of the player hearing about why he is not worth what he thinks he is worth.  Interestingly, there have been more multi-year deal settlements between player and team that exchange figures, compared with the past.

Very few settlements (roughly 10%) are above midpoint (the number between the team’s and the player’s exchanged figures).  You better believe that agents who are able to secure deals above midpoint try to use that to their advantage in the recruitment of potential future clients.  Most settlements actually occur below the midpoint, not even at the midpoint.  This could either be based on the player’s submitting a figure that is a little bit far from realistic, or the fact that teams do so well in arbitration hearings that it may be worth it to settle just below midpoint and avoid a hearing.

Discussing the few arbitration eligible players who went to hearings in 2009, Edmonds points out that parties rarely discuss multi-year deals to try to win their case.  Instead, they try to focus on players who are comparable in statistics and have signed one-year deals, for the most part.

Overall, I enjoyed reading the article.  If you want to pull it up on LexisNexis or Westlaw, the citation is: 20 MARQUETTE SPORTS LAW REVIEW 1 (2009).