January 22, 2012

Salary Arbitration: Owners vs. Players

With salary arbitration hearings beginning on February 1st let’s take a look at the winners and losers of this process. 

Before we look at winners and losers it is first important to understand the process.  A player becomes arbitration eligible twice under his entry-level contract:  Once in his 3rd or 4th year, depending on when he is called up during a season, and then two years after that.  So a team essentially holds the rights to a player for six years after he is drafted.  If a player becomes arbitration eligible and does not come to an agreement with his club, then both the club and player submit a salary number that they feel is fair and a panel will hear the case.  The panel then decides which salary number best reflects the player’s worth and that is the amount he will earn in the upcoming season.  A player can also be offered arbitration if he is a free agent and the club and player do not come to an agreement before the arbitration period.

Salary arbitration in Major League Baseball started in 1974 with the purpose of adjusting player’s salaries to better represent their play on the field while still under an entry-level contract.  This offseason, 142 players filesd for arbitration.  Most of these players reach agreements with their teams before the process reaches the point of having a hearing, but since 1974 there have been 495 cases heard by arbitration panels.  The process has clearly become a big part of the MLB offseason so who are the real beneficiaries of it: the players or the owners?

When looking at the process from a numbers standpoint alone the players obviously benefit.  In 2010, the 128 players that filed for arbitration had an average salary increase of 107 percent, meaning that on average players were making over double what they were in the previous season.  However this number is very skewed by players who have seemingly reached the primes of their careers early.  Take the Giant’s Tim Lincecum for instance who received the biggest raise during the arbitration period of any player in 2010.  Lincecum’s salary increased from $650,000 to a two-year, $23 million dollar contract.  Lincecum was seeking $13 million in arbitration while the Giants offered $8 million, but like most cases there was an agreement before a hearing.  This increase in salary was 1,131 percent.  This is a huge number that may come off as unfair to the owners because of his age at the time, but Lincecum’s case is unique because of his two Cy Young awards.  Because Lincecum only signed a two-year deal, he is again arbitration eligible in 2012.  He is asking $21.5 million which is just short of Roger Clemens record request of $22 million in 2005, while the Giants have offered $17 million.  The $17 million the Giants offered broke the previous record of the $14.25 million the Yankees offered Derek Jeter in 2001.   The arbitration benefits players who have enjoyed early success greatly because they could still be making a salary around the league minimum ($480,000) and consequently hurts the owners for the same reason.

As steep a price the owners may have to pay, they are still the main beneficiaries of the process.  There is no better system for owners in professional sports than the MLB’s arbitration process.  In the NFL first round picks have previously been guaranteed north of $50 million dollars and fizzled out before doing anything productive in the league.  The MLB arbitration process allows for six years of evaluation of a player before a team has to commit to him long term.  And if during those six years there has not been major progress in a player’s development, his annual salary will hover right around the league minimum.  Every once in a while there is a player who develops into a stud long before he is supposed to, which makes owners cringe at the process. But in reality they are the party with all the leverage.

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