Is Boras Right That Payrolls Are Lagging Behind Revenue?

Scott Boras has several clients who are yet to be signed for the 2013 season. Three of those clients — Kyle Lohse, Rafael Soriano, and Michael Bourn — received qualifying offers from their former teams, and rejected those offers. As a result, whatever teams sign those players will give up a sandwich round draft pick in June’s Rule 4 draft and a percentage of its draft bonus pool. Much has been written here and elsewhere about this new compensation system, which replaced the Type A/Type B free-agent system used in the old collective bargaining agreement. Not surprisingly, Boras isn’t too fond of the new rules, not only for their effect on his current free-agent clients, but for the effect on future clients who may be skipped over by teams that have lost a significant percentage of their bonus pool.

But Boras doesn’t look solely to the new rules as the reason his three big free-agent clients are still unsigned. No, he says teams are just being stingy with their payroll. Too stingy, he says, in light of booming MLB revenues. According to Boras, most teams have lower payrolls heading into the 2013 season than the highest payroll those teams had from 2000-2012. “Only five teams have higher payrolls,” Boras told Murray Chass over the weekend. “Everybody else is below even though revenue is up 200 percent and franchise values are up 300, 400 percent. What we’re seeing is not many teams are spending on payrolls despite the fact that their profits are extraordinary. You’d expect teams to have their highest payrolls, but they don’t.”

Is Boras right? Are payrolls lagging behind the growth in MLB revenues?

Let’s look first at the overall picture by comparing league-wide payroll expenditures to league-wide revenues for the years 2000 through 2012. The payroll numbers are year-end figures used by MLB to calculate the luxury tax. Both data sets are from Maury Brown’s Biz of Baseball site (payroll numbers here; revenue numbers here).

PayrollRevenue

These overall numbers seem to confirm Boras’s view. When MLB saw total revenues climb from $3.9 billion to $4.5 billion between 2003 and 2004, payrolls declined from $2.195 billion to $2.123 billion. Similarly, the growth in revenues from $6.6 billion in 2009 to $7.5 billion in 2012 far outpaced the growth in payrolls over the same time period.

We get a similar result when we compare year-to-year percentage change in MLB payrolls compared with year-to-year percentage change in MLB revenues.

 

PayrollRevenuePercent

Again, after 2003, the numbers are not in sync.

On a club-by-club basis, Boras singled out twelve teams that he claims have significantly reduced payroll over the last five years: Astros, Marlins, Mets, Cubs, Mariners, Indians, Braves, Athletics, Padres, Rays, Diamondbacks, and Orioles. Boras suggests that team owners are pocketing the additional revenue as profit or using it to pay down debt, instead of reinvesting in the team in the form of payroll.

A few thoughts on this point. Overall MLB revenue growth doesn’t necessarily translate into revenue growth for all teams, or at an even pace. Revenue generated through the Central Fund (national TV contracts, MLB-licensed merchandise, the All-Star Game, etc) is shared equally among the 30 teams, and revenue-sharing shifts some money from the wealthiest teams to the least wealthy. But the big-market, high-revenue teams still have a sizable advantage over other teams when it comes to spending.

As for these specific teams, we know the Mets are in financial distress as a result of the Wilpon’s investments with Bernie Madoff. The Astros and Padres have new owners. The Cubs have a new President of Baseball Operations and new GM who are revamping the franchise from top to bottom. The Rays and A’s are locked in bad stadium and local TV deals. The Diamondbacks payroll is climbing toward 2003 levels, when it hovered around $90 million. Same with the Orioles payroll. That leaves the Braves, Indians and Mariners with significantly lower payrolls that in the early-to-mid 2000’s. Oh, and the Marlins. Well, they’re the Marlins.

What Boras doesn’t mention are all the teams likely to reach new payroll highs at the start of the 2013 season. Yesterday, Jeff Passan of Yahoo! posted an analysis of expected Opening Day payrolls for each MLB team. Passan analyzed information from Cot’s Contracts on Baseball Prospectus and MLB Trade Rumors’ arbitration projections (by our own Matt Swartz), and made assumptions about where the remaining free agents would sign, and for how much.  If you compare Passan’s anticipated 2013 Opening Day payrolls to Maury Brown’s payroll data from 2000-2012, you find eight teams that will reach new highs this season: Angels, Blue Jays, Cardinals, Dodgers, Giants, Nationals, Reds, and Tigers. Another three teams will be close to their franchise payrolls highs: Rangers, White Sox, and Yankees.

Have some teams cut back? Yes. Are those teams pocketing profits or using the additional revenue to pay down debt? Possibly. But other teams have stepped up, and are flexing their newly-strengthened payroll muscles. And as Passan noted yesterday, Opening Day payrolls will top $3 billion for the first time this season.

In the big picture, Boras is right to say that payroll growth has lagged revenue growth. And some teams have downsized significantly over the last several years. But other teams have taken on considerable new payroll obligations recently. Indeed, the Nationals and Tigers will reach new payroll highs, in part, based on previous deals for Boras clients — Jayson Werth and the Nationals; and Prince Fielder and the Tigers.

And dare I say that wagging your finger at the Indians and Mariners for cutting payroll isn’t the most effective way to entice them to sign Michael Bourn to a $100 million deal. Yes, I dare say it. Go ahead, Scott Boras. Prove me wrong.



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Wendy writes about sports and the business of sports. She's been published most recently by Vice Sports, Deadspin and NewYorker.com. You can find her work at wendythurm.pressfolios.com and follow her on Twitter @hangingsliders.


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Dan Rozenson
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Dan Rozenson
3 years 6 months ago

I’d also like to see a comparison with average ticket price, but that’s a great view of Boras’s contention.

MG
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MG
3 years 6 months ago

Boras is right about his overall point and the fact that MLB changed the FA compensation rules with one of the major intentions to suppress the FA market. Let’s not forget too that the owners have been proven to be proven liars time and time again regarding their finances. Often quite dramatically. They were a few years ago when financial statements were leaked to Deadspin, they were after the books were opened & audited during the ’94 strike, and during the collusion investigations in the early 80s.

Boras did misjudge the market though and his clients are going to suffer as a result. I personally don’t like how Boras handles himself. Just never understand why so many fans are seemingly supportive of the owners over the players/agents.

Crumpled Stiltskin
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Crumpled Stiltskin
3 years 6 months ago

Perhaps largely because media outlets (often directly owned and if not, most certainlt in partnerships with the leagues and this the owners) side with the owners. The best most media members have done, even with the NHL, is to say its both sides are at fault.

(The NFL refs which eventually engendered support was perhaps an exception. And even then it took months for this to happen, and only when ESPN made it a big issue. I don’t think it was the reason why it was made an issue, but it should at least be pointed out that in this case the NFL as a business partner was acting against ESPN’s best interest in providing a watchable product, which is perhaps why news organization shouldn’t have such partnerships. Since, at thr very least, it suggests impropriety.)

The fact that enough high profile players are delinquent in their personal lives doesn’t help either, as it makes it hard to empathize with them. Most owners stay out of the news besides labor disputes.

Jadevion
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Jadevion
3 years 6 months ago

Don’t worry most people side with the players, you are so contrarian that you can’t see it.

rustydude
Member
rustydude
3 years 6 months ago

What I’d like to see is a comparison chart of the divergence of revenue stream vs. employee salaries across other industries. I suspect that this phenomenon is not unique to baseball. Salaries of people in just about every industry seem to be flat over the last couple of decades.

Dave S
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Dave S
3 years 6 months ago

THIS!!!

BJsWorld
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BJsWorld
3 years 6 months ago

Exactly.

I highly doubt that this gap is unique to baseball. I bet if you plotted out payroll to profit on Apple the gap would be even wider.

Baseball is a business. Something we often forget.

Carlton Clark
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Carlton Clark
3 years 6 months ago
MikeS
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MikeS
3 years 6 months ago

You mean Scott Boras – a sports agent – would lie to people? Why? Whatever could his motivation be?

Johnhavok
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Johnhavok
3 years 6 months ago

Ya weird !

It’s like he epxects a completely perfect correlation between revenues and salaries. Newsflash, just because revenues are up, doesn’t necessarlity mean profits are. Expenses other than player salaries also go up. While probably not as much, there are other things to consider for these teams other than just player salaries as an expense.

Not only that, but what part of the CBA states that players are allowed X% of MLB revenue? I honestly don’t know the answer to this question or if anything like this is even in place like there is in the NHL so if anyone knows… please advise.

If revenues go down do you think Boras would be out there willing to have his clients take a pay cut to keep in line with declining revenues?

Jim
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Jim
3 years 6 months ago

Just because revenues are rising at a higher rate than salaries doesn’t mean owners are pocketing all that money. In case you haven’t noticed the price of things like gas, shipping, and food has gone up significantly in the past few years and, probably eat a larger chunk of revenue than they did a few years ago. The company I used to work for laid off nearly 10k workers in 2012 despite posting 6 straight quarters of record revenue, and supposedly plan to lay 6k more off this year.

Besides all industries are going through a period like this, why should Baseball be any different?

Ben
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Ben
3 years 6 months ago

Just to add for the nth time, pure revenue has little to do with profits or available money for payroll other than being the starting point for a budget. You have to factor every expense into a business’ position to pay its employees. This isn’t to say the owners aren’t trying to maximize their share, because I’m sure they are, but the above graph doesn’t show a complete picture of a business’ ledger.

Jason B
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Jason B
3 years 6 months ago

Too, I think there are different supply and demand curves for different tiers of players (haven’t crunched the numbers, just seems like a reasonable conjecture to me). The top-end players seem well compensated because their skill sets aren’t quitea as easy to duplicate or replace. But for more fungible assets (middle relievers, utility men, etc) I would think the fact that six other guys can do exactly what you can do would tamp down demand and by extension, their salaries.

pg
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pg
3 years 6 months ago

Looking at those revenue’s really puts things in perspective for me as a Blue Jays Fan. Rogers (which owns the Jays) reports quarterly revenue of over $3b, the entire MLB reports revenue of about $8B. The average MLB franchise has about $266m in revenues, Rogers does that amount in 8 days.

The team payroll is financially immaterial to Rogers Communications.

Big Jgke
Member
Big Jgke
3 years 6 months ago

You don’t really have any idea how a publicly traded company works, do you?

olethros
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olethros
3 years 6 months ago

So basically, baseball is exactly like all other major industries, in that the vast majority of the revenue is used to compensate a very few executives while the actual workforce is left to starve. Or, in the case of the players (as opposed to the myriad other members of the team’s workforce), settle for six or seven instead of eight digits left of the decimal.

Anon
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Anon
3 years 6 months ago

New stadiums create higher revenues but usually create more expenses (stadium debt) as well.

It would be interesting to see the private financing costs for stadiums on the same graph as revenues and payroll.

Andrew
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Andrew
3 years 6 months ago

The Braves are also locked into a bad, long-term TV deal.

gnomez
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gnomez
3 years 6 months ago

I’d also like to see a graph on payroll breakdown. I wonder how % of payroll devoted to, say, the five highest-paid players on each team has changed over the same period, and how inflation adjusted $/WAR has changed. Perhaps teams are spending more wisely, squeezing out the mid-range free agents and getting their production from pre-arb players and stars extended before they hit free agency.

Billy C
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Billy C
3 years 6 months ago

These blogs aren’t doing that gap any favors either. All this prospect talk has finally caught on and teams are valuing prospects more than ever. Teams are giving up on seasons before they start. Teams pay a bunch of prospects the minimum and claim they are “building for the future”. Worked out well in Seattle so far, right?

These rebuilding efforts last 5 years and then if the prospects turn out to be nothing more than prospects the team is back at square one and finds itself trying to buy a Josh Hamilton.

Seems like for every Washington National type success there are 5 Pittsburgh Pirate type failures.

But then again you can still profit quite a bit by losing in baseball…..

byron
Member
byron
3 years 6 months ago

Wendy, I’m usually a big fan, but I think your logic at the end doesn’t hold up. If revenues are rising and salaries should be tied to revenue (which we’ll take as given, though some good points in opposition are in the above comments), pointing out that revenue isn’t rising for some teams is irrelevant. Maybe it’s the teams “stepping up” that aren’t stepping up enough, but if you accept that higher revenue should translate to higher salaries, the plight of individual teams doesn’t matter.

Synovia
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Synovia
3 years 6 months ago

“pointing out that revenue isn’t rising for some teams is irrelevant”

Yes, it is.

Because of the way the CBA is structured, the top revenue teams can’t increase their salaries. The Red Sox, Yankees, Mets, etc, can spend $175M a year, whether they’re making 200M, or 2B a year in revenue.

Because of the cap, all of the salary growth must come from the smaller market teams, and they’re the ones who aren’t seeing revenue growth.

B
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B
3 years 6 months ago

It’s normal to expect payrolls to lag increases in profitability. The majority of compensation (dollars not contracts) is in the form of multi-year guaranteed contracts. Signing a player is more like buying a factory or a server rack than it is paying your employees, because of the high cost and long commitment. It might hurt players but teams need to control long term payroll while the economy struggles. MLB is a luxury/discretionary product that will suffer in recessions.

Peter
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Peter
3 years 6 months ago

“MLB is a luxury/discretionary product that will suffer in recessions.”

Maybe. Depends on what other complementary goods are out there. For instance, bus ridership might be considered a luxury compared to walking, yet probably not when compared to owning a car. Do you think bus revenue falls or rises during a recession?

In any case, you’re missing the point entirely of Boras’ comments. Demand for baseball is up – output prices have increased – it’s only natural for factor prices of “scarce resources” to rise with them. It always does and always will. Also, it’s entirely possible for factor price increases to lead output prices if entrepreneurs correctly anticipate future shifts in demand, although I’d be hard pressed to think of an example of that ever happening.

Peter
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Peter
3 years 6 months ago

ugh! *Substitute Goods

back to econ 101 for me.

Dave in GB
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Dave in GB
3 years 6 months ago

To single out the Orioles, their player development system, overseas scouting, and training complexes (including a new Domincan complex) has improved hugely over the past 5 years. To say the extra revenue isn’t Hong anywhere is shortsighted in some respects, and it shows an improved farm system. If teams like the Orioles kept filling major holes thru free agency, they’d be worse off than they ever were 5 years ago. Unless the team is going all in that particular year, free agency isn’t a good investment

Peter
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Peter
3 years 6 months ago

Good points.

payroll
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payroll
3 years 6 months ago

Shouldn’t Boras take his complaint to Bud Selig to get the luxury tax rates chanaged? Isn’t that really the ceiling holding down payrolls for most of his clients’ would-be buyers?

brian
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brian
3 years 6 months ago

Boras is mad because he significantly misevaluated the market, I remember the majority of fans believed Soriano would struggle to land as good of a commitment as his 1 yr/14m deal with the Yankees with the caveat it only takes one crazy GM. The players collectively bargained for this system, they could’ve made a hard line against compensation but they decided to allocate their demands to other things, you can’t win everything, Boras just sounds childish…this is the rare case where you don’t hate the game, hate the players.

Johnhavok
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Johnhavok
3 years 6 months ago

And there is is, Soriano signs with Washington for 2 years, 28 million with a vesting option for another 14 million for 2015.

Same AAV, just 1 more guaranteed year than he would have had with the Yankees.

Peter
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Peter
3 years 6 months ago

Boras knows this market better than any other person around, I’d suspect. His overall point is almost certainly not wrong, but that doesn’t mean he didn’t also “misevaluate” the current market for his unsigned free-agents.

tdillon
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tdillon
3 years 6 months ago

While its great to see the overall trend, these numbers are highly skewed by the enormous tv deals that have occured recently, along with YES network. Having outliers of the Rangers, Angles, and Yankees removed will bring the overall numbers closer. It won’t eliminate the disparity (which is completely valid), but these extremely large deals will skew the data. I’d be very interested to see this broken down by teams.

With plenty of teams with some money to use, and some quality Boras players left, the brinksmanship will be interesting to see play out.

Also, the Mariner’s haven’t really cut payroll, they are trying to increase it. They just can’t sign or trade for the people they want.

Carlton Clark
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Carlton Clark
3 years 6 months ago

Wendy, as usual you present data in a way I find useful and insightful. Judging by some of the comments, not all readers agree. Maybe a chart showing total MLB payroll as a % of MLB revenue over time might inform the other readers.

Total US wages as a percentage of the economy [GDP] have been falling for decades while US corporate profits as a percentage of the economy [GDP] are at record highs. Basically, corporations have been able to boost profits by paying employees less and less.

Why should we expect MLB, no matter how much we Fangraphs readers love it, to be any different?

Peter
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Peter
3 years 6 months ago

“Total US wages as a percentage of the economy [GDP] have been falling for decades while US corporate profits as a percentage of the economy [GDP] are at record highs.”

Yet the Employee Cost Index continues on it’s linear rising slope. Of course, when they began to deviate significantly ABOVE TREND, the Federal Reserve engineered what they hoped would be a small recession in 2008.

Be careful that you do an apples to apples comparison when analyzing GDP share. Varying compensation trends can trip up even seasoned economists/researches.

Eric R
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Eric R
3 years 6 months ago

Forbes has their revenue and player expenses data going back to 1998;I have 1998-2010 handy, here are the percentages:

1998 53%
1999 54%
2000 59%
2001 63%
2002 65%
2003 66%
2004 59%
2005 57%
2006 55%
2007 56%
2008 57%
2009 55%
2010 54%

To me– 2000-2004 looks more like, ‘what the hell was going on’ than the more recent years…

Eric R
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Eric R
3 years 6 months ago

I grabbed the 2011 Forbes data;

2011 54%

Eric R
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Eric R
3 years 6 months ago

Splitting the data in half, I grabbed each years’ average revenue and pooled the teams that were above or below that line:

YEAR TTL ABV BLW
1998 53% 50% 57%
1999 54% 54% 54%
2000 59% 59% 60%
2001 63% 65% 60%
2002 65% 67% 64%
2003 66% 70% 63%
2004 59% 63% 54%
2005 57% 63% 51%
2006 55% 60% 50%
2007 56% 61% 51%
2008 57% 60% 54%
2009 55% 56% 55%
2010 54% 56% 51%
2011 54% 60% 49%

Eric R
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Eric R
3 years 6 months ago

Forbes estimates also include Operating Income. If we split the data based on that instead [ie the teams with above average profits vs those with below average profits]:

YEAR TTL ABV BLW
1998 53% 44% 62%
1999 54% 47% 62%
2000 59% 54% 66%
2001 63% 58% 71%
2002 65% 60% 72%
2003 66% 59% 74%
2004 59% 52% 67%
2005 57% 50% 68%
2006 55% 51% 59%
2007 56% 51% 65%
2008 57% 52% 62%
2009 55% 52% 59%
2010 54% 49% 59%
2011 54% 51% 60%

Eric R
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Eric R
3 years 6 months ago

it is ‘Employee Expenses’ as a percentage of revenue. I’m guessing that Forbes is adding in benefits and the like into the pot…

Mr Punch
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Mr Punch
3 years 6 months ago

“[F]ront offices are now populated with people who are more interested in projecting a player’s future than they are with paying for an established track record,” writes Dave Cameron (today). And there you have it. We’re seeing big contracts to buy out arb years of young established stars; but otherwise it’s not so easy to pay really big bucks for projections.

Seems to me, too, that part of the change in funding streams is that the “star power” of big names is less important than it used to be (except of course in LA).

Returns in this business are shifting towards capital and away from labor. The most recent CBA was not a win for the players; my take is that the MLBPA, for obvious reasons, was too ready (under the circumstances) to sacrifice the interests of young players in favor of those of veterans.

Tim
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Tim
3 years 6 months ago

It’s interesting to me that in a year when the other three major leagues have all had contentious labor negotiations trying to limit the players to around 50% of revenue, baseball, where the players are generally considered the best off of any sport, has fallen well below that.

maqman
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maqman
3 years 6 months ago

Boras had Soriano opt out on $14MM for this year. He signed with D.C. for $14MM per year for two years and a likely unreachable vesting option for one more season. However, Soriano is only being paid $7MM this year and next, the balance will not be paid for several years later. So the constant dollar value of his income is less than $14MM per season played. Boras cost him money but is trying to paper over the fact.

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