Inside Salary Arbitration

NOTE: There was an error in the salary arbitration details around Sean Marshall and Carlos Villanueva as it pertains to settlement contracts in advance of salary arbitration (some of the figures were flipped). That has now been corrected. — Maury Brown

Before Curt Flood’s landmark case, and before Messersmith and McNally held out in a contract year, thus allowing for the reserve clause to be challenged and overturned, Marvin Miller and the MLBPA got the players salary arbitration. What was initially seen as a win by the owners – the thwarting of free agency – was a huge win for players.

Since 1973 the process has been in place, and since that time it’s been largely misunderstood. The process is based largely on three factors:

  • Major League Service Time;
  • Comparable statistics with like players by position, and;
  • Comparable salaries with like players by position;

Along the way, MLB’s calendar ticks away with deadlines for certain milestones to be met – when players and clubs exchange figures; when all players in the process have settled on contracts or had hearings, etc.

So, a player’s Major League Service Time (MLST) is driven by the amount of time that a player is under. A player of between 3 and 6 years of service time (the CBA defines one full year as a total of 172 days of Major League credited service) becomes automatically eligible salary arbitration.

There’s also a select group of players – Super Twos – which fall under salary arbitration. The current CBA defines these players below the “3 to 6 MLST” range as:

A Player with at least two but less than three years of Major League service shall be eligible for salary arbitration if: (a) he has accumulated at least 86 days of service during the immediately preceding season; and (b) he ranks in the top seventeen percent (17%) (rounded to the nearest whole number) in total service in the class of Players who have at least two but less than three years of Major League service, however accumulated, but with at least 86 days of service accumulated during the immediately preceding season. If two or more Players are tied in ranking, ties shall be broken consecutively based on the number of days of service accumulated in each of the immediately preceding seasons. If the Players remain tied, the final tiebreaker will be by lot.

This “tweener” of sorts is a key clause that is already being discussed by the owners and GMs during their quarterly meetings in Florida as it is being discussed as part of collective bargaining for the next CBA. Players such as Stephen Strasburg have been held back in the minors (although the Nationals said it was for other reasons), while Tim Lincecum was able to leverage his Super Two status into a mullti-year contract last season.

At a given date on the calendar (this year it was January 19), if the parties have not yet reached a deal, the club and player exchange salary figures for what they wish to pay, or be paid, for the following year (see a detailed report on each player and club in the last salary arbitration class). If a deal is not reached by the club and player, then both sides present their case at a hearing before a panel of three arbitrators, which then rules whether the player figure or the club figure will be paid to the player over the next season. There is no in-between. It is either one, or the other.

While management may have had fits when the process was initially put in place, and still argues that players leverage the system dramatically, the truth is it works. There were 210 players eligible for salary arbitration in late November of 2009 (see the complete listing), and by the time the deadline for hearings was reached on Feb 20 of this year, all but 8 cases were resolved before hearings (see the panels, and arb scorecard). Of those eight hearings, clubs won 5 cases (B.J. Upton, Brian Bruney, Wandy Rodriguez, Sean Burnett, and Ryan Theriot) while players won 3 (Cory Hart, Cody Ross, and Jeff Mathis).

Key to the process is how players, their agents and the clubs look at “comps”. The majority of rank and file players can be fairly easily measured between each other. As example, let’s use Rangers reliever Darren O’Day.

As a first-time salary arbitration eligible player, O’Day can be compared to last year’s class of relief pitchers, or players in years past that had the same amount of MLST at the time. You don’t compare pitchers to position players, and rarely do SPs get used.

Last class, 6 relievers with between 3 and 4 years of MLST exchanged salary figures with their respective clubs. Here is a breakdown of the salary figure the players was asking, the figure the club was offering, the difference between the two, the mid-point between the figures, what the settlement figure was, and where it was – plus or minus mid-point – for the club or player:

Ramon Ramirez

  • Asked – $1,250,000
  • Red Sox offered – $1,060,000
  • Difference – $190,000
  • Mid-point- $1,155,000
  • Salary reached – $1,155,000
  • +/- for club – $0 (deal lands on the mid-point)

Carlos Marmol

  • Asked – $2,500,000
  • Cubs offered – $1,750,000
  • Difference – $750,000
  • Mid-point – $2,125,000
  • Salary reached – $2,125,000
  • +/- for club – $0 (deal lands on the mid-point)

Sean Marshall

  • Asked – $1,175,000
  • Cubs offered – $800,000
  • Difference – $375,000
  • Mid-point – $987,500
  • Salary reached – $950,000
  • +/- for club – $37,500 below mid-point

Carlos Villanueva

  • Asked – $1,075,000
  • Brewers offered – $800,000
  • Difference – $275,000
  • Mid-point – $937,500
  • Salary reached – $950,000
  • +/- for club – $12,500 above mid-point

Mike Adams

  • Asked – $1,200,000
  • Padres offered – $875,000
  • Difference – $325,000
  • Mid-point – $1.037,500
  • Salary reached – $1,000,000
  • +/- for club – $37,500 below mid-point

Brandon League

  • Asked – $1,325,000
  • Mariners offered – $900,000
  • Difference – $425,000
  • Mid-point – $1.112,500
  • Salary reached – $1,087,500
  • +/- for club – $25,000 below mid-point

Looking at the figures, you’ll notice that differences between asking and offering figures march to a nearly the same beat for player and clubs with salary reached being at or close to the mid-point between the figures.

Where those that follow analytics may get a twitch is when you then tie salary to stats. Because the arbitration process ultimately could be determined by a panel of arbitrators, not of a baseball background but from the American Arbitration Association, no advanced stats are used to compare players. So, no WAR. No wOBA. What you get are the traditional stats, with the likes of OPS and WHIP just now making its way into the arbitration panel vernacular.

So, for O’Day, an argument by management or agent will center on whether he is better or worse than players he is compared to on the list, and possibly others with the like MLST and salary from years past. Clearly though, he will likely land between $1-$2 million for 2011.

Finally, we’ve talked rank-and-file players. The system does account for “special accomplishments”. Going back to the Rangers, Josh Hamilton will be in his second year of salary arbitration eligibility. He won ALCS MVP honors, just earned his second Silver Slugger Award, led the league in Batting Average (.359), Slugging % (.633) and OPS (1.044), ranked 5th in the AL in Home Runs (32), and 6th in the league in Total Bases (328), making Hamilton not only ALCS MVP but a solid candidate for AL MVP when the BBWAA compiles their votes. With the awards and solid stats for the 2010 season, Hamilton is in line for another big paycheck in 2011. The question is how much?

Hamilton will have 4 years of Major League Service Time this year.  Ryan Ludwick, as a position player last year earned $5.45 million in salary arbitration within the second-year eligible players. Hamilton will ask for more, and surely get it. Based upon his strong showing in 2010, plus the awards, Hamilton could land $10 million or more if he and the Rangers don’t reach a multi-year deal. Matt Holliday might be a comp that is used by Hamilton’s agent Michael Moye. Moye could cite Holliday as having 4 years of MLST in January of 2008 when Holliday landed a 2-year $23 million deal that earned him $9.5 million in 2008 and $13.5 million in 2009.

Based upon the detailed salary arbitration report for last year’s class (PDF), here’s some key notes:

  • Number of players that filed: 128 on 1/14/10
  • Number of players exchanged figures with their clubs: 44 on the 1/19/09 deadline
  • Amount in salaries for all 128 players for ’10: $353,637,502
  • Amount in salaries for all 128 players (includes multi-year contracts) who signed in 2010: $660,077,502
  • % of ’09 salary for the 46 players that exchanged figures against total: $151,522,502 or 46% of the total
  • Total 2009 salaries for the 128 players that filed in 2010: $175,311,432
  • Increase in salary from 2009 to 2010 for the 128 players that filed: 102%
  • Total salaries for 46 players that exchanged figures in 2009: $136,275,000
  • Avg. salary for the 46 players that exchanged figures in ’09: $3,011,638
  • Avg. salary for the 44 that exchanged figures in ’10: $3,443,693
  • Difference between avg. salary for exchange players from ’09-’10: $432,055 (an increase of 14 percent from the year prior)
  • Of the 44 that exchanged figures, # of those reached mid-point deals: 8
  • Number of mid-point contracts in 2009: 12
  • Of the 128 in ’10, number of multi-year contracts: 24
  • Biggest contract in this year’s class: Justin Verlander of the Tigers (5-years, $80 million)
  • Still the best: Though many thought two-time Cy Young Award winner Tim Lincecum was a lock to top Ryan Howard’s first year arbitration eligible record award of $10 million in 2008. Despite a mid-point north of $10 million (The Giants offered $8 million, to Lincecum’s asking point of $13 million when the two exchanged figures), the deal brokered between the parties only paid Lincecum $8 million in 2010, with Lincecum getting $13 million in 2011. The deal included a $2 million signing bonus, which merely means that the Giants can say they didn’t pay Lincecum a record deal in his first year of eligibility and Lincecum’s agent Rick Thurman can counter that he got his client $10 million in compensation for 2010 (salary plus bonus) with incentives that could still make the deal more lucrative. Lincecum does however shatter Jonathan Papelbon’s record set in 2009 for the biggest ever by any first-time eligible pitcher – starter or reliever – when he got a $6.25 million deal from the Red Sox.
  • Arbitration hearings (1): Of the 44 players that exchanged salary figures, eight cases were ruled on by arbitration panels, more than double the three cases from 2009 when Shawn Hill, Dan Uggla, and Dioner Navarro had decisions rendered. In 2010, the owners topped the players 5 to 3 in hearing, with SS Ryan Teriot of the Cubs, SP Wandy Rodriguez of the Astros, CF B.J. Upton of the Rays and both RPs Brian Bruney and Sean Burnett of the Nationals losing their cases. OF Cody Ross of the Marlins, C Jeff Mathis of the Angels and OF Corey Hart of the Brewers prevailed in hearings.
  • Arbitration hearings (2): 2010 was significantly better for the owners than 2009, when they had a losing record in the three cases that went all the way to the arbitration panel.
  • Historical Hearing Record: Of the 495 salary arbitration cases that have been heard since the process was collectively bargained into MLB in 1974, owners have won 285 (57.6%) to the players’ 210 (42.4%) cases heard.

Follow Maury Brown on Twitter @BizballMaury




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Maury Brown is the Founder and President of the Business of Sports Network, which includes The Biz of Baseball, The Biz of Football, The Biz of Basketball and The Biz of Hockey, as well as a contributor to FanGraphs and Forbes SportsMoney. He is available for freelance and looks forward to your comments.

14 Responses to “Inside Salary Arbitration”

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  1. JH says:

    Maury,

    I was under the impression (actually from a conversation with two MLB arbitrators I had last week) that the arbitrators don’t have leeway to select a midpoint, but rather have to choose either the team’s number or the player’s number. You seem to suggest a lot of the arbitration awards settle at the midpoint. Is my understanding of the system incorrect?

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    • John says:

      Those were cases that settled BEFORE getting to arbitration. He states in the beginning that arbitrators must select either the player or the team’s number, no in between.

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    • AK707 says:

      They can’t choose in the middle – they have to pick a side. However, the midpoint salaries come from when clubs settle with cases before they see an arbiter for some salary midway between what the player wants and what the club thinks they are worth.

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    • nateg26 says:

      If you read the article more carefully, you’ll see that the examples he provides are not arbitration cases, but cases of players arbitration eligible being signed to 1 year deals in order to avoid arbitration.

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    • JH says:

      Got it. Missed that. Thanks.

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    • Steve says:

      He states in the article that if it goes to arbitration either the teams value or players value must be picked. The other examples were of players that settled outside of arbitration.

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  2. J-Doug says:

    Might want to review and edit/spell check this post.

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  3. Uncle Bingers says:

    JH, I believe that if the arbitrator decides they must simply choose one of the two figures. But prior to that the team and the arbitration-eligible player may reach an agreement on their own, which is what those figures are.

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  4. That Guy says:

    Not a bad overall summary. Just a minor correction though – Major League Service is commonly abbreviated MLS, not MLST.

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  5. Paul Thomas says:

    The NLRB does not arbitrate these hearings (or, indeed, any hearing; the NLRB enforces labor law by finding (or not finding) “unfair labor practices” in situations where arbitration is NOT the chosen method of resolution, such as during strikes when the two sides are not talking to each other– one key case actually came out of the 1987 NFL players’ strike).

    As I understand it, the arbitrators in these cases are American Arbitration Association arbitrators mutually approved by the union and the owners. Their powers are very limited, as they are allowed only to choose one side’s figure or the other. Normally, labor arbitrators have much broader powers. This situation is sufficiently unusual that the “pick one side or the other, no discretion” style of arbitration is actually referred to as “baseball-style arbitration” in the literature.

    However, the point (that these guys are neither baseball professionals, statisticians, nor analysts, but rather generalist lawyers) is important.

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  6. Tigerdog says:

    Question: Has there been a case where a player’s salary is REDUCED from the previous year in arbitration? Even the case of a potential free agent that is offered and accepts?

    I’m wondering how to guesstimate players such as Ordonez, Pavano, Manny, and some of the other Type A free agents that have a salary history of expensive contracts, but performance recently has diminished due to injuries, or just decline. It’s my impression that a club would never offer arby to an Ordonez or a Manny because two of the main criteria are salary history and years of experience, and those are two factors that no GM would care about if they were to be signed as a free agent. Just wondering.

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  7. cs3 says:

    why do the arbiters have no baseball background?
    i always wondered about this because it seems pretty dumb, but maybe im missing something

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