Service Time, Salaries, and the Reliance on Free Agents

It would likely surprise no one to learn that players who reach free agency are the ones who make the most money. The owners and players together have devised a system wherein players at the beginning of their careers make the league minimum, players in their next few years earn a little bit more, and players who possess six-plus years of service time… they make a ton of money. That system has made it so that clubs with greater payrolls typically employ more of this last type of player, while teams on the lower end of the spectrum rely on more minimum-salary players. Let’s examine that gap and which teams are the most reliant on free-agent veterans to fill their rosters.

To illustrate the effects of the system, let’s begin by looking at all MLB player salaries along with service time. The graph below (courtesy of Sean Dolinar) includes 750 data points, each one representing a player likely to appear on a major-league Opening Day roster. While service time is often presented as in years and days, I’ve used a slightly different format here. For the purposes of a better-looking graph, days were divided by 172 (a season’s worth of service time) to get a more accurate picture of how close each player is to having recorded another full season in the majors.

We see a great number of points clustered near the bottom left of the table. Those represent the players who’ve recorded the least service time and are (mostly as a result) also earning the least money. The few outliers on the left of the graph are composed mostly of Asian and Cuban free agents whose situations more closely resemble players with at least six years of service time. Next, there’s another cluster at Year Three. That’s when players become eligible for arbitration. Salaries rise at that point, but only a little. After that, it’s all over the place.

There are still a lot of players who’ve recorded six or more years of service time making lower salaries, but a vast majority of the salaries over $10 million come after Year Six, when players are eligible for free agency. While there’s certainly a shrinking middle class and a certain class of veteran free agents are finding more difficulty finding jobs, that is still where the money is, and is shown in their average salaries.

Even with some veterans struggling to find work, that free-agent average is still highest by some margin. The median salary for those players is a solid $10 million. The players in arbitration have an average that’s roughly equivalent to the MLB average, with their median at $3.4 million. So the veterans are making a lot more money, but just how much money are they getting, and does their performance make up for it?

In terms of player distribution, each group has around the same amount of players. Nevertheless, free agents make twice as much as the other groups combined. The rightmost column is merely an estimate, taken from using Baseball-Reference’s Play-Index for three types of players: those yet to complete their third year, those in years four through seven, and those who’ve completed seven or more years. The players in the midst of their arbitration years are generally going to be in their mid- to late 20s, and thus at the height of their peak, so it isn’t surprising that those in that group would produce the most value. Those veterans are just as good overall as the league-minimum players, but the problem for all teams is how to find and develop those players. It isn’t easy.

Once a player gets to the free-agent market, teams have a pretty good idea about what he will produce, and the only thing they have to give them is money. Younger players take time to develop, the market to acquire them has league-imposed limits, and even when they receive opportunities, performance is far from given. Every team might prefer a bunch of young stars, but that is basically impossible. Every team has a mix of players young and old, though some have more than others. The graph below shows the mix of the projected 25-man roster for every team.

This chart is sorted by teams with the most players who’ve recorded six-plus of service time. As we might expect, we see some higher payroll teams on the left side of the graph due to the higher cost of free agents. On the far right, we see a bunch of rebuilding teams and the Tampa Bay Rays, who are perpetually in a if things go right state of contention. They also have the highest number of players in arbitration. This affords them great flexibility when it comes to payroll, but rarely provides continuity. It prevents them from getting tied up in bad long-term deals, but it makes it so players are always close to leaving. The Philadelphia Phillies have the most minimum-salaried, having cut their payroll in half as they rebuild.

The New York Yankees, once a free-agent-or-bust playground, has the most evenly distributed group of players, with roughly the same number in every category. The pay, of course, is not evenly distributed. The graph below shows the different categories of players, except this time, by salary.

The above payrolls are ordered by money committed to the free-agent class of players. The amounts include only players expected to be on the active roster and doesn’t include all payroll, such as money given to other teams or players no longer on the roster (e.g. Alex Rodriguez). Every team is going to pay a small amount to minimum-salaried players with players in arbitration varying somewhat. The relationship between free-agent spending and total spending is strong (r^2=.58), so payroll is highly dependent on free agency. Given that nearly three-quarters of performance comes from players outside that group, payroll isn’t everything. Carrying a high payroll will certainly make winning a lot easier, but drafting, signings players internationally, and then developing those players once they’re in an organization is probably more important when it comes to success. That’s just harder to do.