Baseball’s Wage Scale: An Argument for a Safety Net

Over the weekend, Pirates ace Gerrit Cole expressed some unhappiness with the organization based on his 2016 salary.

On Saturday, Cole grudgingly signed a deal for $541,000 in base salary. That’s the same amount he made last year — $531,000 in base pay play a $10,000 bonus for making the All-Star team.

According to Cole, the team’s initial offer last week was for $538,000 – which was less than his total pay last year. The team refused to go higher than $541,000.

“They even threatened a salary reduction to the league minimum if I did not agree,” Cole said.

As a pre-arb player, Cole’s salary is dictated to him by management, and per the rules of the Collective Bargaining Agreement, he has no recourse but to accept whatever they offer. If he chose not to sign for the $541,000 they offered him, they had the power to unilaterally renew his contract at whatever price they wanted, even down to that $507,500 league-minimum number. Until a player reaches arbitration eligibility, they have no negotiating power whatsoever, so even elite players like Cole make something close to the league minimum.

MLB’s pay scale is intentionally designed to restrict the earnings of young players, with the resultant savings being passed on to veterans who are free to negotiate their wages in free agency. As with many unions, length of service is a larger factor than performance in determining wages, with younger players subsidizing the wages of older workers. Cole understands this system, and his grief doesn’t appear to be with the wage scale itself, as much as the Pirates’ implementation of their system of pre-arb raises.

Many organizations have created algorithms that generate a number for pre-arb players based on their prior season performance, so that they can remove the human variable from the equation and simply say that every player’s pre-arb contract is handled objectively. As GM Neil Huntington said in response to Cole’s public comments:

“Gerrit strikes a note that most people can empathize with,” Huntington said. “I’m sure there are many people in this world who don’t feel they are adequately compensated for what they do. The challenge we have is there is a collectively bargained system in place and it’s been in place for years.

“Once you make an exception, how do you draw the line?” Huntington said. “If it’s only for MVPs, what if someone wins a Cy Young? Or what if someone finishes fifth in the Rookie of the Year voting? Some clubs have the ability to go in different directions, higher or lower. We believe our system is consistent and it’s the right way to do things for us.”

Of course, he also notes that because they feel Cole made “a fair point,” they’ve manually adjusted his salary up to the $541,000 he earned a year ago, and with the same $10,000 bonus for reaching the All-Star Game, so Cole could make up to $551,000 this year. The Pirates clearly don’t want their ace to be venting publicly about his earnings, but at the same time, they don’t want to establish a precedent where they’re raising their own costs during the period of time in which the system gives them the most latitude in minimizing their expenses.

But this brief spat shines a light on a larger issue, which I tackled in some depth in my Hardball Times Annual piece this year, which just happened to run over at THT today. Baseball is undergoing a dramatic demographic shift right now, with more and more value being created by young players, and teams are shifting their resources away from 30-plus players in a significant way. Borrowing a table from that THT piece:

PERCENTAGE OF SALARY, BY AGE GROUP, 2004-2013

Year	25 & under	26 to 30	31 to 35	36 & up
2004	3%	35%	40%	22%
2005	3%	33%	41%	22%
2006	3%	32%	48%	18%
2007	4%	30%	47%	19%
2008	4%	28%	47%	21%
2009	4%	32%	50%	15%
2010	3%	33%	50%	14%
2011	4%	36%	44%	16%
2012	4%	40%	41%	15%
2013	4%	42%	38%	16%

In 2003, players 31 and older made 62% of all the money paid to players in MLB; by 2013, that number was down to 54%, with almost the entirety of that shift going to players in the 26-30 bracket. These numbers reflect the trend of locking up players to long-term extensions before they reach free agency, guaranteeing them more money during their more productive years in exchange for not having to sign on for as many unproductive years at the end. Essentially, the teams and players themselves decided to shift the wage scale, moving more money into the earlier years of a player’s career.

With the current CBA expiring on December 1st, the wage scale is likely to get more attention than it has in other years, as the player’s association has to decide whether they want to continue to back a platform that intentionally takes money from younger players and gives it to older players at the same time that teams are attempting to take money from older players and give it to younger players. But, as I noted in that THT Annual piece, the issue isn’t solved by simply raising the minimum salary.

This is the same issue the league would likely raise if the players asked for a higher league-minimum salary. A significant increase in the minimum salary would act as a regressive tax, increasing the marginal costs for the lowest-spending teams more than the teams in large markets with plenty of disposable income. While the minimum salary is likely to increase in a significant way, using a league-wide increase in the baseline salary of all players would make it more difficult for the league to sustain the current level of competitive balance; the Dodgers and Yankees can absorb an extra $10 or $15 million in mandatory spending a lot easier than the A’s or Rays can.

The wage scale issue is inextricably linked to the competitive balance issue, and any move towards flattening the pay between young and old players will directly benefit larger-revenue organizations, as they will be the ones benefiting most from a decrease in free agent prices. If you double the league-minimum salary, the teams operating on payrolls under $100 million will be most heavily impacted, especially given that arbitration salaries will also rise if the minimum salary goes up.

The current evolution towards production from younger players has been a driving force in the parity the game has experienced lately, as lower-payroll teams have been able to find and develop elite players before they get too expensive, and the decreasing production of older players has made it harder for high-revenue teams to simply buy elite performance on the open market. But that strategy becomes more difficult if players cost more before they reach free agency, and MLB is likely not in a big hurry to implement financial advantages for high-revenue clubs, which may erode the parity that they’ve worked so hard to achieve.

So if you can’t flatten the wage scale without harming competitive balance, but the changing demographics of the sport are incentivizing teams to reduce spending on older players, how do we reconcile these competing ideas? In the THT piece, I put forth a suggestion for a broad safety net, something akin to worker’s compensation, as something to consider.

If an increase in revenue sharing proves too difficult, the MLBPA may have to get creative. One interesting suggestion I’ve heard bandied about, albeit as a long-shot possibility, is that MLB could fund a comprehensive insurance plan for all players—similar to worker’s compensation—providing a significant benefit to players whose careers are prematurely derailed by injury. Currently, players are able to buy individual insurance policies, but they are prohibitively expensive and often don’t provide payouts unless it is proven that the injury sustained is career-ending. These policies are often of little help to a pitcher who undergoes Tommy John surgery, missing out on years of prime-aged earnings, but has no desire to retire after one elbow problem.

With the significant increase in Tommy John surgeries, pitchers are particularly harmed by a system that limits their earnings until the second half of their careers, so a comprehensive insurance plan that paid out a percentage of expected earnings while a player is rehabbing may be one way to not only distribute a higher percentage of revenues to the players, but to compensate the players who carry the most risk.

Additionally, a comprehensive insurance plan would limit the needs of players to self-insure by signing early-career extensions that keep them from reaching free agency after six or seven years. With a systematic safety net in place, individual players would not be carrying as much personal risk, and would have more incentive to try to maximize their earnings through arbitration and reaching free agency in the shortest time possible. Beyond just the actual payouts to players who become disabled, a worker’s compensation agreement would push more players into the open market, and theoretically drive an increase in wages by reducing the number of star players playing at wages that don’t reflect their contributions on the field.

The idea is light on specifics, as I’m not claiming to have any kind of magic bullet here, and people I’ve talked to in the industry about this idea have expressed significant skepticism that either side would be all that interested. After all, Gerrit Cole isn’t complaining that the wage scale is withholding his earnings and putting them at risk due to his chances for an arm injury; he’s noting that he simply didn’t get a big raise after performing well last year.

But I do think there’s merit to the idea of creating a safety net for players who are intentionally underpaid early in their careers, especially pitchers. If MLB had a system in place that allowed young players to be guaranteed some kind of significant compensation in case of a serious injury, then they could offload some of the risk that comes with being underpaid during your productive years, and could essentially raise the level of compensation for young players relative to older players without changing the wage scale itself.

It wouldn’t help Gerrit Cole feel better about his 2016 salary, necessarily, but if highly productive young players knew that they had guaranteed income in the future as long as they remained productive — either because they’d stayed healthy enough to reach free agency, or because the safety net paid them a percentage of loss potential wages if they suffered a significant injury before reaching free agency — then the inequity of paying guys like Cole a fraction of their market value would be reduced to some degree.

The logistics of implementing the system are not simple, but I’d at least like to put it forward as a point of consideration as both sides attempt to determine how to compensate the game’s best players for their production without making it more difficult for low-revenue teams to remain competitive.