Running head: PAYROLL DISPARITY AMONG MAJOR LEAGUE BASEBALL

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A Senior Thesis submitted in partial fulfillment

of the requirements for graduation

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______________________________

______________________________

Tammy Brown, DBA

Committee Member

David Schweitzer, Ph.D.

Assistant Honors Director

______________________________

Date

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Abstract

There has been an inequality in payroll among Major League Baseball teams for many years that

became increasingly evident in the late 1990s. Revenue disparities among teams cause a

small-market clubs to build a competitive team. There are a number of ways that small-market

clubs can build a competitive team despite limited resources, including employing the moneyball

hypothesis, quantifying market inefficiencies, utilizing the team’s farm system, taking advantage

of trade opportunities, and making intelligent contract decisions.

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Payroll Disparity Among Major League Baseball Teams:

Building a Competitive Team Despite Limited Resources

Introduction

players became increasingly apparent after the era of free agency, the formation of the Major

League Baseball Players’ Association (MLBPA), the strike of 1994, and the Curt Flood Act of

1998 (Grow, 2016; Krissoff, 2013). Studies have shown, as one would expect, that an individual

team’s payroll has a significant impact on that team’s success (Lu, Matthews, Wang, & Zhuang,

2018). In effect, this decreases the chances of small-market teams reaching and succeeding in

a revenue sharing program in an attempt to lessen the pay disparity among teams and improve

the competitive balance. While the plan does not make all teams equal, Rockerbie & Easton

(2018) found that revenue sharing produces significant utility gains at little cost. The agreement

intended to alleviate the growing inequalities found among large- and small-market teams and

improve the competitive balance within the league. Despite MLB’s implementation of revenue

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not the only contributing factor to a team’s success. There are a number of ways that small-

market teams can build a competitive team despite their low budget.

Payroll Inequality Among Teams

and only one team being valued at more than $4 billion: the New York Yankees at $4.6 billion

(“The Business of Baseball,” 2020). Four main occurrences contributed to the rise of player

salaries and the increasing disparity among team payrolls: the era of free agency, the formation

of the Major League Baseball Players’ Association (MLBPA), the strike of 1994, and the Curt

Flood Act of 1998. Lu et al. (2018) confirmed that when a team pays more to its players, it

salaries, persuading them to sign with them rather than with a small-market team.

Free Agency

The minimum salary for MLB players in 2020 is $555,000 (MLB, n.d.). This means that

every MLB player is in the top one percent of American households (Krissoff, 2013). However,

this has not always been the case. It took lengthy and extended labor negotiations and the

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open market (Krissoff, 2013). This clause made it necessary for players to accept their team’s

salary offer, or to not play. It wasn’t until the 1970s that the reserve clause was altered. In 1972,

the Supreme Court ruled against Curt Flood in his bid to become a free agent, but in December

for players to ultimately be granted free agency by transforming the reserve clause for future

players to have a say in what team they played for and how much they were paid.

MLBPA and the Strike of 1994

To offset the strength of team ownership, the Major League Baseball Players’

Association (MLBPA) was formed in 1954 (Krissoff, 2013). The negotiation of the first

strike during the 1994-95 season lasted 232 days and was quite costly to both owners and

players. Following this strike, owners and players alike realized how high the cost of cancelling

games was and acknowledged the need for negotiation and agreement between them (Krissoff,

2013). In 1996, the minimum salary for a player was about $108,000, and the collective

bargaining agreement negotiated that year increased the minimum salary to $150,000 for 1997.

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Curt Flood Act

Three Supreme Court decisions led to MLB’s exemption from antitrust laws with the

Court originally upholding in 1922 that professional baseball did not constitute interstate

antitrust exemption solely for purposes of allowing Major League players to file antitrust suits

against the league (Grow, 2016). The Curt Flood Act of 1998 allowed this and, therefore,

equalized the power between players and owners. Though the Curt Flood Act passed in 1998, it

started developing in the 1970s when Curt Flood lost his case for free agency. Shortly after his

case, in 1975, a ruling by arbitrator Peter Seitz granted Major League players the right to move

claimed that the reserve clauses in their 1974 contracts only allowed their teams to claim their

services for one additional year (the 1975 season) and that they should be granted free agency so

they may sign with whichever club they choose (Grow, 2016). MLB attempted to dispute their

interpretation, but a panel of arbitrators ruled in favor of the players, and they were granted free

agency for the 1976 season (Grow, 2016). However, owners tried to take this right away from

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agreeing to pay the affected players $280 million in restitution (Grow, 2016). Over the next few

years, owners and the MLBPA continued to disagree and could not come to terms on a new

collective bargaining agreement before 1993. This is what triggered the strike of 1994 and

MLB players under the antitrust laws giving them the same rights as other professional athletes

while the passage of the bill would not affect the antitrust laws in any other way (Grow, 2016).

This agreement is what eventually resulted in the passage of the Curt Flood Act in 1998.

Within Team Pay Inequality

While payroll inequality among teams seems to be the most evident factor in a team’s

found that there is a negative relationship between wage dispersion and overall team

performance. They concluded that increased wage dispersion leads to lower individual effort,

and consequently, lower team performance (Breunig et al., 2013). Their findings support the

theory that a small-market team with lower wage dispersion could perform better than a large-

market team with a high wage dispersion.

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earnings of each position, and the team-cohesiveness hypothesis suggests that narrow wage

differentials can improve cohesiveness and productivity in an organization (Tao et al., 2016). It

is common knowledge that players at different positions earn different salaries on all teams, so

paid players become unhappy with their salary. Tao et al. (2016) concluded that the team-

cohesiveness hypothesis is reasonable. The findings based on the team performance result

suggest that the team-cohesiveness hypothesis is supported over the tournament theory, but a

team’s payroll rank in MLB is still a stronger explanatory variable than a salary dispersion

variable is (Tao et al., 2016). Ultimately, the authors found that inter-team payroll disparity

Small-market teams cannot simply increase their team payroll to $200 million to compete with

the Yankees, Dodgers, and Red Sox, but what they can do is minimize the intra-team salary

dispersion. Rather than compiling a team of mostly players that earn the minimum salary per

year and adding one or two all-stars that earn tens of millions of dollars per year, a team that

focuses on decreasing the range of individual player salaries would expect to perform better than

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performance. This approach, first used by Oakland Athletics’ GM Billy Beane and his assistant

Paul DePodesta led the Oakland Athletics to high winning percentages despite the team’s low

payroll by analyzing statistics about a player’s walks and on-base average, rather than what

a former aerospace engineer turned baseball writer, wrote that fielding was “at most five percent

of the game” (Lewis, 2003, p. 58). The rest was pitching and offense (Lewis, 2003). At the

time, good pitchers were usually valued properly while good batters were not. Lewis (2003) cited

Walker as having stated, “[The] most critical number in all of baseball is 3: the three outs that

define an inning. Until the third out, anything is possible; after it, nothing is” (p. 58). He went

inning (Lewis, 2003). This simple observation was overlooked by almost all general managers

in MLB at this time. GM’s also tended to overvalue RBIs, the runs batted in statistic. RBIs were

treated as an individual achievement. However, in order to hit runners in, there must be runners

on base when a player comes to bat. A player’s ability to hit base runners in and receive credit

for an RBI, is heavily based on the achievement of others and/or luck. Bill James, an American

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during this time overvalued a player’s batting average and RBIs and undervalued a player’s on-

base percentage and slugging percentage.

According to Lewis (2003), James also observed that a hitter should be measured by his

of runs a team creates can be. James built a model to predict how many runs a team would score

given its number of hits, walks, stolen bases, etc. He achieved this essentially by predicting the

past. Using the statistics of the 1975 Red Sox, he determined the relative importance of what

players did at the plate and on the base paths to the team’s scoring patterns and assigning weights

to outs, walks, steals, singles, doubles, etc. The first version of what James called the Runs

Runs Created = (Hits + Walks)  Total Bases / (At Bats + Walks)

The accuracy of this equation revealed that baseball professionals, owners, and general

managers did not place enough value on walks and extra base hits, which are featured

correlation between runs scored and linear combinations of on-base and slugging percentage.

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Looking at a team’s on-base percentage and slugging percentage compared to their opponent’s

on-base percentage and slugging percentage, can explain 88.5% of the variation in winning

percentage (Hakes & Sauer, 2006).

contribute to winning games. They found that the incremental salary impact for one-standard

deviation increase for slugging percentage in the first four years (2000-2003) increases from

$0.52 million to $0.70 million, and they are three to four times as large as the incremental impact

of a standard deviation increase in on-base percentage which only increases from $0.14 million

to $0.19 million (Hakes & Sauer, 2006). However, in 2004, the duo found that the value of one-

walks validates the systematic approach taken by the Oakland Athletics in identifying such

players, and thereby winning games at a discount relative to their competition” (Hakes & Sauer,

2006, p. 179).

Though Hakes and Sauer (2016) suggested that market inefficiencies have corrected

since the publication of Moneyball, Baumer and Zimbalist (2014) refuted that the relationship

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was higher than it was in the 1980s and early 1990s, it was much lower in the 2000s than it was

in the late 1990s (Baumer & Zimbalist, 2014).

Farrar and Bruggink (2011) also used the moneyball approach to show that MLB general

increases salary (Farrar & Bruggink, 2011). They found that a 10 unit increase in team on-base

percentage brings in an additional 28.5 runs, and a 10 unit increase in team slugging percentage

results in an additional 17.4 runs (Farrar & Bruggink, 2011). The player salary model shows that

the 10 unit increase in individual on-base percentage costs $370,500 while the 10 unit increase in

individual slugging percentage costs $369,800 (Farrar & Bruggink, 2011). These results show

slugging percentage is overvalued. The moneyball hypothesis seems to have been accepted by

teams, baseball professionals, and fans throughout all of baseball. However, as these two studies

reveal, it is not fully implemented and utilized to its full potential. Today, employing only the

moneyball hypothesis does not give a team much of an edge over other teams as it did for the

Oakland Athletics in the late 1990s. There are many other strategies that small-market teams can

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Utilizing the Farm System

An additional way small-market teams can build a competitive team despite their low

budget is to utilize the farm system and the annual draft. Every MLB team has minor league

The MLB First-Year Player Draft is held every year in June and all thirty Major League

Clubs participate. The teams take turns selecting players in reverse order of their win-loss

records at the close of the previous regular season. In other words, the team with the worst

record from the previous regular season selects the first player in the draft in the following year.

Additionally, the order is based off regular season records; the postseason has no effect on the

full seasons. After these three seasons, a team must decide to place the player on the team’s 40-

man roster, meaning that the player has a major league contract, or the player becomes eligible

for the Rule 5 Draft

become eligible for free agency until he has at least six years of service time on a major league

team. Specifically, the player must have six years of service time on a major league 25-man

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The Rule 5 Draft, held every December at the annual Winter Meetings, allows teams without a

full 40-man roster to select non-40-man roster players from other clubs (Major League Baseball,

2020b). It is organized similarly to the First-Year Player Draft as clubs draft in reverse order of

the standings from the previous regular season.

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roster or disabled list. Thanks to this, a club can essentially have control over players that they

draft for the first nine years of their careers, if the club decides to do so.

Trades

certain player or desperate to decrease their payroll. Trades always involve at least two players,

but often times they include more than two players and sometimes cash. Though they are less

common, three-team trades also occur. One small-market team that successfully utilized trading

in recent years is the Tampa Bay Rays. On July 31, 2018, the Rays traded right-handed pitcher

Chris Archer to the Pittsburgh Pirates for right-handed pitcher Tyler Glasnow, rookie outfielder

incredibly promising young players. The Rays, however, turned Glasnow into a starting pitcher

and added a middle-of-the-order bat with Meadows. Then, in 2019, the Rays placed second in

the division clinching a spot in the postseason. The team went on to beat the Oakland Athletics

in the American League Wild Card game but lost the Division Series to the Houston Astros.

Making strategic trade decisions during the offseason, throughout the season, and before the July

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Contract Negotiations

Contract negotiations are vital for small-market teams. Contract extensions are the most

common form of contract negotiations and are the form that small-market teams need to take

contract extensions take the player beyond the point of free-agent eligibility. In free agency, he

can offer his talent to every major league team and take the highest bid, increasing his salary

tremendously and becoming too expensive for a small-market club. If the player enjoyed his

service time with the team, there is a good chance that he will agree to a contract extension rather

than enter free agency. Unlike in some leagues, MLB contracts are guaranteed, meaning that any

teams have little control over.

Arbitration. Along with contract negotiations comes arbitration. Players become

eligible for arbitration when they have three or more years of major league service but less than

six years of major league service and if they do not already have a contract for the next season.

Arbitration essentially means that if the team and the player cannot agree on a contract, the team

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enters arbitration and loses, they are bound to the higher paying contract. However, arbitration

contracts are not guaranteed, as a club can release a player during Spring Training and be

responsible for only a prorated amount of their arbitration salary (Major League Baseball,

Baseball, 2020b). It would be best for small-market teams to avoid arbitration by negotiating

with the player and agreeing on a contract without the use of an arbitrator.

Long-term contracts. Avoiding long-term contracts is a simple way a team can prevent

themselves from wasting financial resources in the future. Signing players to long-term contracts

is typically attractive to a team because that means they have the security of having that player

future seasons as they did the season before signing the contract. Performance is not guaranteed

over an extended period of time. Take Chris Davis, for example. After leading the league in

home runs and putting up an OPS+ of 147

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in 2015, Davis, who would be entering his age-30

season in 2016, signed a $161,000,000 seven-year contract. He has received and will receive a

base salary of $17 million each year from 2016 to 2022, and the remaining $42 million is

OPS+ normalizes a player’s on-base plus slugging percentage across the entire league. A score

of 100 is league average, and a score of 150 is 50% better than the league average (Major League

Baseball, 2020a).

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over the next three years as well as $42 million when he will not even be playing for them. After

his impressive 2015 season, his statistics got progressively worse over the next three seasons

with a slight improvement in the 2019 season. Even with the slight improvement, he still slashed

salaries. Deferring a player’s salary can sometimes be useful to a team when they have a higher

team payroll in the current year than what they are expecting in future years. For example, if a

team has a highly compensated player that will soon become a free agent but also want to sign

another player, they can defer the new player’s salary into future years where they will not have

the obligation to the impending free agent. Keep in mind that MLB teams must show that player

more on a player than expected or assumed. Take Bobby Bonilla for example. Bonilla received

his deferred salary from a buyout. Deferred money can come from a buyout or from contract

negotiations. In 2000, the Mets opted to pay Bonilla an annuity from 2011 to 2035 rather than

paying the salary they owed him that year. The Mets thought that the money they would save by

not paying Bonilla in 2000 would earn a higher return than the eight percent interest rate offered

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Performance incentive bonuses. Small-market teams should also consider including

bonuses in player contracts as incentives. Bonuses cannot be based on batting or pitching skill or

where the club finishes in the standings. However, a bonus can be based on number of days

Slugger, and/or being named to an all-star team (Phil, 2012).

History of Successful Small-Market Teams

Although it has been challenging and rare for small-market teams to succeed in MLB,

some clubs have made it happen. Only one small-market team has won the World Series in the

last twenty years. The Florida Marlins had a payroll that ranked 25

out of 30 and did not even

The Pittsburgh Pirates reached the postseason three years in a row from 2013 through

2015. In 2013, they had the fourth lowest payroll in the league but won the National League

Wild Card game and advanced to the Division Series. The club had the fourth lowest payroll

again in 2014, but they still managed to make it to the Wild Card game again, though they lost to

the San Francisco Giants who became the World Champions that year. In 2015, the Pirates had