A Radical Proposal for Fixing Arbitration

Major League Baseball’s salary-arbitration process is a pretty ridiculous exercise. A player and team each submit a figure for how much that player should be paid the following season. At some point not long after that, each party argues in defense of their figure, employing an array of statistics that front offices don’t even use for the purposes of evaluation.

If a team’s representatives successfully make their case, then a panel of arbitrators chooses the number they’ve submitted. If the team fails to sufficiently badmouth their own player, then the panel of arbitrators chooses the player’s chosen figure. Even in the best-case scenario — i.e. when the player and team agree to terms before arbitration — they still arrive at that agreement based upon what would would transpire at a hypothetical arbitration hearing. There has to be a better way.

Travis Sawchik recently proposed the introduction of restricted free agency to baseball, an approach that would likely eliminate arbitration, allowing teams to match offers made by other franchises. Like Travis, I would like to see arbitration abolished. Also like Travis, I am concerned about the middle class of players who seem to be shorted in the current system.

I agree that something needs to be done and that restricted free agency represents a better approach than the one currently in place. That said, I do think there might be a better solution, one that doesn’t entirely dismantle the framework of the present system and yet allows players to receive compensation proportional to their talents.

I think the adoption of a new arbitration-type system might benefit from greater use of a mechanism that was first introduced during the 2012-13 offseason — namely, the qualifying offer.

Currently, teams can offer free-agents-to-be a one-year deal equivalent to the average of the 125 highest salaries in baseball. This year, for example, that figure was $17.4 million. I think that figure could serve as a basis for determining arbitration salaries, saving both players and their clubs from the indignity of arbitration itself.

Here is my proposal:

1. Players still have the right to enter free agency after six years.
2. Players also still enter an arbitration-type process after having accrued three years of service. But!
3. Under these new rules, players with more than three years of service time, but less than four years of time receive 40% of the qualifying offer if tendered a contract.
4. Players with more than four years of service time, but less than five years receive 60% of the qualifying offer if tendered a contract.
5. Players with more than five years of service time receive 80% of the qualifying offer if tendered a contract.
6. Players in the current Super-2 category receive 20% of the qualifying offer if tendered a contract.
7. Players not tendered a contract become free agents.

Under the current arbitration system, players are rewarded for their accomplishments, but not necessarily accomplishments that align closely with on-field value. Relievers who’ve compiled a number of saves, for example, are awarded considerably higher salaries than relievers who’ve been just as effective but have pitched mostly in the eighth inning. Hitters who’ve compiled a lot of home runs and RBI, meanwhile, are more richly compensated than those whose value is concentrated largely in their defensive contributions. With the institution of this modified arbitration system, players would be more accurately compensated for their on-field contributions.

To better understand the implications of this proposal, let’s look at some actual numbers. As they do each offseason, MLB Trade Rumors has compiled projected arbitration estimates for 204 players this winter. The current crop of arbitration-eligible players totaled just over $800 million entering the offseason, or around $4 million per player. In exchange for that $800 million, arb-eligible players are projected for 271 WAR in our Depth Chart projections. Teams, in other words, will pay around $2.97 million per win for players in arbitration, roughly one-third of what a win costs even in this potentially depressed free-agent market. We can increase that figure a little bit without making drastic changes to the current salary structure.

The big winners in this modified system would be baseball’s middle class of player. They would either (a) get paid more during arbitration years or (b) earn the right to become free agents, able to sign with any team for market value. The losers, relatively speaking, would be baseball’s best team-controlled players, who would be compensated a little less under the terms of this system. The other likely losers would be the owners, who shift about half a billion dollars to the players in this scenario.

Instituting such a change all at once would naturally create a fairly drastic shift — although not as drastic as I initially supposed when I began my calculations. Naturally, the changes would become less dramatic as the years move on. To see how things would play out this winter, I went through, player by player, to see what a everyone’s new salary would be under my proposed system, or if they would be granted free agency.

Of the 204 players included in MLB Trade Rumors’ arbitration-eligible sample, I identified 65 who’d likely become free agents under the new system. Close to two-thirds of these would be relievers, by my reckoning. Some of them would likely re-sign with their own teams at a reduced rate (if probably also a slightly higher rate than they would have received in arbitration), while others would join the free-agent market and sign their own deals.

While flooding the market with a greater number of free agents seems like it might lead to the depression (and not increase) of salaries, keep in mind that relievers are the one commdodity for which teams have been paying over the past two offseasons. Introducing more relievers to the market might stabilize matters some and bring reliever prices closer in line with the salaries received by everyone else.

As for the non-relievers granted free agency in this experiment, most are utility types, either infield or outfield, and would hit free agency a bit earlier than their higher-priced colleagues, allowing them to maximize their role or salary, and increase lifetime earnings. A handful of players — namely Lonnie Chisenhall, Jordy Mercer, and Adeiny Hechavarria — are among those starters a year from free agency whose clubs might not award them an amount equivalent to 80% of the qualifying offer ($13.9 million by the current calculation) under the terms of the new system. That said, those players would still be well positioned to earn more than the $5 to $6 million they get under the present system. These players are scheduled to receive $150 million for about 16 WAR, which is close to free-agent pricing, anyway.

As for the 139 players I estimate would be offered contracts, the average increase in salary would $3.5 million, the median $4 million. Only four players, by my calculation — Jose Abreu, Kris Bryant, Josh Donaldson, and Manny Machado — would see their salaries decline by more than $2 million. Meanwhile, 104 players would benefit from an increase of more than $2 million.

It should be noted that the players who’d lose money in this hypothetical new system the same ones who benefit most from free agency as presently constructed. Under the old system, these players would have been paid $656.3 million for a projected 254.8 WAR, a bargain at just $2.6 million per win. These 139 players aren’t stars, averaging about 1.8 projected WAR (1.7 median WAR), but they are valuable. Changing the system gets these players $1.147 billion dollars, still a bargain at $4.5 million per win.

This system doesn’t touch the minimum salaries that small-market teams need desperately to survive. Most of the salary increases aren’t particularly large and wouldn’t factor heavily into team spending. Eliminating arbitration isn’t going to change the magical six years needed to get to free agency. It simply pays the majority of players with two to six years of service time a little bit more money and gives a few marginal players an earlier shot at free agency.

This is the type of change for which the union should be fighting. It would help the vast majority of its members without major harm to the best of the best. The owners would push back, but they would push back on any system that transfers more of their money to the players. Most of the concessions the players received in the last CBA were related to their standard of living, while MLB owners gained more financially with an increasingly stagnant and harsh competitive-balance tax. The salary arbitration system isn’t broken. It just doesn’t make a whole lot of sense when it comes to appropriately valuing baseball players. It is time for a change.