Archive for 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.

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Dellin Betances made medium-level news a week ago when he lost his arbitration case. He’d been asking for $5 million — less, for example, than Trevor Rosenthal had made in his first crack at arbitration the season before. The Yankees, meanwhile, submitted a $3 million figure. The case went to arbitration, and the Yankees won. Randy Levine then took the medium-sized news and turned into big news by acting like a fool. While the $2 million difference might not seem like a big deal for Betances when he’s still guaranteed to receive $3 million, the affect on Betances’ finances in the coming years will be significantly greater.

Arbitration isn’t exactly the simplest of systems. Teams submit blind amounts, and if the parties can’t agree on a deal beforehand, they go to hearing. The FanGraphs glossary explains the process in slightly more detail, but if the player and team go to hearing, the arbitration panel decides on either the team’s figure or the player’s figure, with no option to choose a number in between. This makes the arbitration a winner-take-all scenario. If arbitrators could choose a number in the middle, settlements would be even more likely, simplifying the process and lead to far less debate. They can’t, though, and that means that arbitration decisions have a significant impact.

Also relevant is how service time fits into the process. Players’ salaries gradually increase based on service time, rendering the previous season’s salary quite relevant, as it represents the starting point for a raise. A few different researchers have gone through and figured out exactly how much salaries increase during arbitration. (Here’s a good one, for example.) As a general rule, though, it comes to something like a 50% increase in salary every year. Small differences, especially early in the arbitration process, compound to make bigger differences over time.

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Last spring, for the first time in a decade, maybe more, no pre-arbitration pitchers signed a contract extension taking away multiple free-agent seasons. There were a few decent candidates in Jacob deGrom, Sonny Gray, and Carlos Martinez, the last of whom just signed a contract extension of his own earlier this winter. None of those players signed last spring, however, and it’s a possible indicator of a chilling effect on these types of extensions. The lack of deals isn’t due to a lack of candidates, though. In fact, a few of the best pitchers in baseball might be prime for long-term extensions.

When attempting to characterize the recent history of such deals, it’s difficult to say what’s a trend and what’s a random event because only two to five players sign extensions of this sort every year. The recent drought might be a product of players and agents beginning to recognize how much clubs were benefiting from signing extensions with younger players. It’s possible, on the other hand, that teams were less likely to dole out guarantees when the outcome of the CBA was in doubt. When Madison Bumgarner signed his extension right as the 2012 season was starting, he was one of five young pitchers to do so. When Chris Sale signed his ahead of the 2013 season, he was the only one. Sale and Bumgarner’s contracts have proved to be two of the bigger bargains in the majors.

When the White Sox traded Chris Sale to the Red Sox for Yoan Moncada, Michael Kopech, Luis Alexander Basabe, and Victor Diaz, they weren’t just trading Chris Sale. The White Sox were also trading Chris Sale’s contract, which included a $12 million salary for 2017 and options for 2018 and 2019 totaling $26 million. If Sale hadn’t signed that contract, he would have been a free agent this winter and received $200 million. San Francisco has no interest in trading Madison Bumgarner — who would have also been a free agent this winter — while they’re contending, so his value to the Giants is greater as a player on the field than in a trade. His contract is similar to Sale’s and so favorable that it had some discussing whether the team should negotiate a contract extension out of fairness, which does have some precedent.

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Three years ago, seven major-league position players who had yet to reach salary arbitration agreed to contracts with their teams, conceding multiple free-agent seasons in the process. Most of those deals have turned into bargains: Matt Carpenter, Jason Kipnis, Starling Marte, and Mike Trout have all played at a high level since then. This came one year after Paul Goldschmidt and Anthony Rizzo signed contracts that have proved to be incredibly valuable, as well.

In the last two years, however, just four players have signed similar extensions. There are quite a few potential reasons, the most likely being that players are more reluctant to sign deals that give away free agency so easily. It’s also possible that teams haven’t found as many potential candidates who are worthy of a long-term investment.

When I looked at potential extension candidates last year, I noted that there weren’t a great many players who were ideally suited for extensions. Only Gregory Polanco and Kolten Wong ultimately signed extensions, so my hypothesis seems to have been accurate. Teams have made up somewhat for lost time this winter, though, as players like Ender Inciarte, Carlos Martinez, and Wil Myers — all of whom were mentioned as candidates last year — reached extensions this offseason. The guarantees doled out by the teams — in particular, the $83 million to Wil Myers and the $51 million to Carlos Martinez — illustrate why signing players to extensions before they reach free agency is much more advantageous for the teams. While the deals for Myers and Martinez could still prove to be bargains, compare the figures they received to the deals signed by position players in the three previous offseasons.

All of these players signed away two — or, in some cases, three — years of free agency in exchange for a decent guaranteed contract. While a couple years might seem like just a small delay to free agency, teams generally received a 60% surplus on every dollar invested in contracts like these, and the recent extensions seem unlikely to break that pattern.

Most of these guarantees are around $30 million or so, which is significantly less than the deals for Myers and Martinez that were signed one year along in service time. Players take a significant risk by turning down money between their second year and third year in the league, as they have to play that season on a near-minimum salary. Once they hit arbitration and benefit from the security that comes along with a million-dollar contract, there’s less incentive to take a guarantee, especially with free agency just a few years away.

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As has been written before, Royals outfielder David DeJesus is the sort of player who tends to fly under the radar because he does no one thing exceptionally well, but he does a number of things at an average or above-average level. He’s been about a 3 WAR player most of his career, and has accumulated almost that much value already in 2010. DeJesus probably isn’t an average center fielder any more, but runs saved in left or right field count, too. Despite having only average-ish power and being a terrible basestealer, DeJesus has a .344 career wOBA (.290/.361/.429). At 30, DeJesus is having a career year in 2010 offensively, with a .379 wOBA (.329/.397/.466). That probably is not his true talent level, but ZiPS’ rest-of-season projection is bullish nonetheless: .299/.369/.444 (.358 wOBA). One good test to see if a sports journalist has a clue is whether he or she says “David DeJesus is a fourth outfielder on a good team.” By my calculations, those people think that a fourth outfielder is someone whose true talent level over a full season is (conservatively, based on current projections) about 3 WAR. Draw your own conclusions.

Given DeJesus’ subtle combination of skills, it is ironic that the poorly-constructed-but-“official” Elias Rankings might somehow catch on to his value. According to the latest “reverse engineered” Elias Rankings at MLB Trade Rumors, if free agency started today, DeJesus would be Type A, meaning that if the Royals were to offer him arbitration and he turned it down then signed with another team, the Royals would get the signing team’s first round pick in the 2011 draft as well as supplemental pick.

This is particularly interesting because DeJesus is one of the Royals’ best trading chips due both to his value on the field and his team-friendly contract: $4.6 million for all of 2010 with a $6 milllion club option for 2011 (with a $500,000 buyout). Assuming DeJesus is only owed about two million dollars over the rest of the season and (using the conservative 3 WAR full season estimate) is projected to be worth about 1.5 wins at four million dollars per win, that’s four million dollars of surplus value this season. Assuming the team is smart and picks up the option, a half-win decline to 2.5 WAR for 2011 and inflation to about $4.5 million per win, that’s another five million dollars of surplus. Nine million dollars surplus could fetch something like good (if non-elite) prospect and perhaps some filler, and again, that’s based on a conservative estimate of DeJesus’ value.

But if DeJesus ends up a Type A free agent, that potentially adds an interesting wrinkle. In a Kansas City Star article from last month discussing DeJesus, several possible courses of action are mentioned, including trading DeJesus, picking up the 2011 option and keeping him, picking up the 2011 option and trading him in the offseason, and declining the option and then offering him arbitration in hopes he would turn it down and sign with another team, thus netting the Royals draft compensation. This last possibility is what interests me here.

It is an intriging suggestion, but ultimately, it is something the Royals should not do for two reasons. First of all, Victor Wang’s research on Type A compensation (summarized here) values average Type A compensation at about six million dollars. Assuming the Royals could make a fair trade (there is little point in analyzing possible screw-jobs) now at the conservatively-projected above surplus of nine million, the draft pick compensation wouldn’t hold up. Indeed, it is not clear that the draft pick compensation would even be more valuable than picking up DeJesus’ option and trading him in the offseason.

The second reason the arbitration-offer route is a bad idea is that DeJesus would be very likely to accept it. DeJesus is a good player that could help a lot of teams, but he isn’t a top-level talent like Matt Holliday was or Carl Crawford will be. He’s more like Orlando Hudson — a good player, but not good enough that teams are willing to overlook the draft pick they would have to give up to sign him. In each of the last two offseasons, Hudson ended up signing deals below his market value because teams were conscious of giving up the draft pick. DeJesus and his agent have no doubt noticed this, and realize they are likely to get a larger award in arbitration than free agency. If the Royals offer arbitration and DeJesus accepts, they not only don’t get the draft picks, but they would end up paying more in the arbitration award than they would have if they had picked up the option. Moreover, this would further reduce the surplus value (and thus potential return) DeJesus would have on the 2011 trade market.

DeJesus’ Type A status may bring send images of draft picks floating through the heads of Royals fans and officials. But given the likely outcome of that decision combined with the team’s current state, Kansas City should be looking to trade DeJesus now, as his value will never be higher.