Evolution of salary arbitration: an ironic tale

Somewhere in the afterlife, Charlie Finley and Dick Meyer must be shaking their heads and muttering “we warned you.” Back in 1973 they predicted what would happen if owners abandoned a take-it-or-leave-it stance with players and agreed to salary arbitration. Maybe it was inevitable. Maybe free agency was inevitable as well. But this scrawny, long-haired San Francisco Giants pitcher they call The Freak could increase his salary 20-fold in one year. What would Tom Seaver have earned after going 25-7 in his third season?

Until ’73, players were all but bound to accept the contracts set in front of them because the constraints of the reserve clause prevented free agency. But the system was cracking. In an effort to abolish the reserve clause and leverage higher salaries, players began conducting holdouts on contract renewals. The owners and commissioner Bowie Kuhn, realizing the wolves were at the door, voted 22-2 to allow salary arbitration as a way of stopping the holdouts, and rationalized that, in the long run, it might prevent free agency. Only Finley, the flamboyant owner of the Oakland Athletics, and Meyers, an expert on baseball labor issues and a consultant to the owners, voted against adding the process.

Giants pitcher Tim Lincecum was 15-7 in 2009 with a 2.48 ERA.
(Justin Sullivan/Getty Images)

Meyers said at the time, “This will be baseball’s ruin.”

Finley said something more colorful: “We’ll be the biggest [fools] if we do this.”

Do it they did. And yes, that long-haired pitcher, Tim Lincecum(notes), might get a salary increase from $650,000 to $13 million in 2010, a possible 1,900 percent increase.

HOW ARBITRATION WORKS

The salary arbitration process has changed little since it was put into practice in 1974. In a nutshell, players with three to five years of Major League service are eligible for arbitration. In addition, a handful of players with less than three years of service time that rank in the top 17 percent in total service time in that bracket are also eligible. The cutoff point generally falls between two years, 128 days of service and two years, 140 days, and those players are classified as Super Twos. This year, the key Super Two is Lincecum, a back-to-back Cy Young award winner who could set a new record for a first-time salary arbitration eligible player, surpassing Philadelphia Phillies slugger Ryan Howard’s(notes) $10 million award in 2008. How much will Lincecum land? He filed for $13 million on Tuesday, while the Giants countered with an offer of $8 million. Even a pre-hearing compromise at the mid-point would cost San Francisco $10.5 million. The choking you hear is from Giants GM Brian Sabean. Welcome to the salary arbitration game.

There is an additional definition of salary arbitration. Clubs can offer arbitration to players with over six years of service time whose contracts have expired. The player has the option of accepting salary arbitration or opting for free agency. Of the 23 free agents offered salary arbitration this year, only Rafael Soriano(notes) (Braves), Rafael Betancourt(notes) (Rockies) and Carl Pavano(notes) (Twins) accepted. Given that the free-agent market has waned due to the economy, the players who accepted salary arbitration may have landed better one-year deals through arbitration than they would have gotten in free agency.

But the more prevalent salary arbitration is for players who have been under team control for the first three years of their careers, making the standard amounts of as little as the $400,000 minimum as a rookie, approximately $475,000 as a second-year player and $500,000 to $600,000 as a third-year player who is not a Super Two. As a fourth-year player eligible for arbitration, it’s time to cash in.

The 10-day salary arbitration filing process ended Jan. 15, and a flurry of deals were brokered leading up to Tuesday, when the next phase in the process began.

The real action in salary arbitration occurs when players and clubs exchange salary figures (see current salary arbitration tracker, and figures from last year). If players and clubs do not reach an agreement by a designated date the sides exchange salary figures. Over the next two weeks, players and clubs will try to hammer out deals, mostly of the one-year variety, that land in the middle of the two figures. As we’ll see in part two of this three-part series, the art of analyzing like players with like salaries and like service time to determine a fair price is a lot like high-stakes poker. If a player files too high or club too low, the outcome can cost either side millions.

Should the sides not reach a deal, the process moves to a salary arbitration hearing, which this year will take place the first three weeks of February in St. Petersburg, Fla. The player and the club make their case before a three-member panel of the American Association of Arbitrators, which chooses either the asking or offering figure. There is no middle ground.

MAKING THE CASE

Arguments center on whether the player’s worth is closer to the asking or offering figure based upon, as the collective bargaining agreement defines it, “the quality of the Player’s contribution to his Club during the past season (including but not limited to his overall performance, special qualities of leadership and public appeal), the length and consistency of his career contribution, the record of the Player’s past compensation, comparative baseball salaries.”

Since the arbitrators are not baseball experts, no advanced metrics are used to make a case. No WHIP, WAR, WARP, etc. Instead, the use of on-base percentage and on-base-plus-slugging (OPS) numbers might be as advanced as it gets.

Ryan Howard increased his salary 1,011 percent in 2008.
(Jed Jacobsohn/Getty Images)

In part because clubs need to make a case that a player is not as good as he may believe himself to be, few cases make their way to a hearing. Salary arbitration may be all business, but that doesn’t mean players don’t feel the sting at hearings. Last year, only three cases went to a hearing with the owners winning one (the Rays $2.1 million asking figure was selected over Dioner Navarro’s(notes) $2.5 million), while two players won theirs (Shawn Hill(notes) was awarded $775,000 over the Nationals’ $500,000 and Dan Uggla(notes) was awarded $5.35 million over the Marlins’ $4.4 million). From 1974 to 2009, the owners have won 280 hearings to the players’ 207 (see complete historical details)

The process has changed little over the years, but that does not mean salary arbitration hasn’t been a major game changer in how clubs factor their payrolls.

In 1974, the first year salary arbitration was in place, the gaps between offering and asking figures were relatively small. Star reliever Rollie Fingers asked for $65,000 while the A’s offered $55,000. The year prior, Fingers had pulled in $48,000, so by winning his case he received a salary increase of 35 percent. The biggest case that year involved slugger Reggie Jackson, who was awarded $135,000 after making $75,000 in ’73, an increase of 80percent. Those increases pale to what is transpiring now.

Carlos Quentin(notes) and the Chicago White Sox, for example, just reached a $3.2 million salary arbitration agreement well ahead of a hearing. Quentin made $550,000 in 2009, so his raise was 482 percent.

Last year, Red Sox closer Jonathan Papelbon(notes) reached a $6.2 million settlement deal ahead of exchanging figures. The deal was the largest ever offered to a first-time salary arbitration eligible closer, and the third highest in history behind Howard’s $10 million arbitration award in 2008 and the $7.4 million awarded to Miguel Cabrera(notes) after he won his case in 2007. To place that in perspective, it was a 700 percent raise from the $775,000 Papelbon made in ’08. As for Howard’s award in 2008, his increase from the $900,000 he made in 2007 was 1,011 percent. As one executive replied when asked about salary arbitration: “Honestly? What’s to like about it?”

Maury Brown is the founder and president of the Business of Sports Network, which includes BizofBaseball.com.


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Updated Tuesday, Jan 19, 2010