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Is Boras Right That Payrolls Are Lagging Behind Revenue?

Posted By Wendy Thurm On January 15, 2013 @ 11:00 am In Daily Graphings | 50 Comments

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. ┬áIf 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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