How Fair is MLB’s Salary Scale?

Over the weekend, the Angels renewed Mike Trout’s contract, opting to pay him $510,000 — $20,000 over the league minimum — for the 2013 season. Because of how great Trout was last year, this has caused some backlash, including these comments from Trout’s agent:

“I asked only that the Angels compensate Mike fairly for his historic 2012 season, given his service time,” Landis said in an email to the Times. “In my opinion, this contract falls well short of a ‘fair’ contract, and I have voiced this to the Angels throughout the process.

While Trout’s renewal has gotten some attention, the reality is that the Angels are just following standard operating procedures for MLB teams. Giancarlo Stanton just had his contract renewed for the third time, and he’s going to make just $537,000 this year, the first year he’s cracked $500K in salary. The Dodgers renewed Clayton Kershaw’s contract three times as well, paying him $404,000 in 2009, $440,000 in 2010, and $500,000 in 2011. Jason Heyward was paid just $496,000 for his second big league season and $565,000 for his third year. This isn’t just the Angels being cheap. This is the pay scale that MLB teams operate on. This is the pay scale that the player’s association has collectively bargained.

Like in many unions, the system is setup to ensure that those with seniority get larger paychecks than those who are just starting out. By establishing a scale where players with less than three years of service time have essentially no leverage, the union has simply shifted money from younger players to older players. The system was designed so that the money would be unequally distributed, with aging players drawing the majority of the benefit.

Trout’s agent is correct that this system isn’t “fair” to young stars who are creating a lot of value for their teams and are not being paid for that performance until much later in their careers. However, this is essentially the system that every professional sports union in the U.S. has accepted. The NFL’s league minimum salary is just over $400,000 for a rookie, and a player with one year of service time has a minimum base salary of $480,000. The rookie minimum in the NBA is $475,000, though their pay scale escalates a little quicker, with a second year player making $762,000. The league minimum in the NHL is $525,000, and is set to rise to a grand total of $750,000 by the expiration of their brand new CBA, which covers the next 10 seasons.

Half a million seems to be something like the magic number for early career players in American pro sports. Major League Baseball isn’t out on an island here, as everyone has essentially agreed that the youngsters should give up money that they earn with their play so that veteran free agents can get larger paychecks than they deserve. And, while this system isn’t equitable, it likely has some positive effects on competitive balance that we should be careful to not remove in the interest of fairness.

As Jeff Passan notes, MLB teams are going to crack $3 billion in spending on total payrolls this season. Last year, the MLBPA estimated that the average salary for a Major League player $3.2 million, as 944 players were either on active rosters or the disabled list as of August 31st. Even though there are only 750 roster spots available in MLB, dead money players who are rehabbing or forcibly retired still collect paychecks, so there are usually between 900 and 1,000 players receiving big league paychecks.

And a lot of those players make the league minimum or something very close to it. The Lahman Database has the salaries for 848 Major League players in 2012, and 335 of those 848 made $550,000 or less last year. That’s basically 40% of the population earning a salary that was within $70,000 of the league minimum. That’s why the average salary of those 848 players was recorded at $3.4 million while the median salary was $1.1 million. The high-earning tail of MLB players represents a lot of money going to just a few players. For reference, here’s those salaries broken down into quartiles of 212 players each.

Quartile	Average Salary
Low	$482,886
Middle-Low	$639,714
Middle-High	$2,580,448
High	$10,130,637

What would happen to MLB’s pay scale if the league minimum doubled to $1,000,000 per year, in order to more fairly play pre-arb players for their contributions? Well, last year, there were 401 players with a salary below $1 million according to the Lahman database, and those 401 players were paid a total of $215 million. If we raised the floor to $1 million and assumed that every player would just accept the minimum — not a true assumption, but let’s just go with it for now — that would transfer $187 million to the lower and lower-middle class players. That money has to come from somewhere, and a raise in the league minimum would almost certainly result in a similarly sized reduction in salaries for veteran players.

And that would likely present some problems for the lowest revenue teams in MLB. Shifting money from the highest paid players to the lowest paid would essentially act as a regressive tax on teams that run lower payrolls. The 0-3 service time players are the life blood of competitive teams with low-to-moderate budgets, and increasing the price of those players would limit their ability to add veteran free agents to round out their rosters. An offsetting decrease in the price of free agents would make it easier for higher revenue teams to add even more veteran talent, since the prices of middle-tier and higher end players would come down in response to the higher minimum.

Raising the minimum would essentially be like enacting an extra tax on people who shop at Walmart while paying for it with a tax break for items purchased at Pottery Barn. And that’s probably not something that MLB should be too eager to enact, given the revenue disparities that already exist. The luxury tax and revenue sharing have done some good work in helping lower revenue clubs to be more competitive, but a raise in the league minimum would be a step backwards from a competitive balance standpoint.

There’s essentially a fairness trade-off here. If you make the system more fair to the individual players, you make it less fair at the team level. A wide range of player salaries shifts a larger burden of the spending towards higher revenue teams, and forcing high revenue teams to spend their financial advantage on aging, declining players mitigates some of those advantages. If MLB established a pay scale that was based more on player performance and less on service time, the financial disparity among MLB clubs would become a larger factor in determining wins and losses. By making things more fair for young players, the sport would likely become less fair in terms of distributing wins and losses between franchises.

On the one hand, I sympathize with players in Trout’s situation. If his career goes the way of Grady Sizemore, he may never land the massive paycheck that his talent is worth, and it seems silly for Giancarlo Stanton to be paid less by the Marlins than guys like Jeff Mathis, Jon Rauch, and Juan Pierre. However, Trout’s not exactly struggling to pay his bills, and high quality pre-arb players can get large guaranteed contracts early in their careers by selling some of their free agent seasons at reduced prices. By creating a class of players that are both excellent and cheap, MLB’s pay scale gives low revenue teams a chance to build winning rosters even on a shoestring budget. Taking that path to success away isn’t worth the increased fairness of flattening the pay between rookies and veterans.