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How Much Does Payroll Matter?

Posted By Lewie Pollis On April 23, 2011 @ 9:00 am In Outside the Box,Research | 15 Comments

This article was originally published on WahooBlues.com.

Everyone knows that money matters in baseball. I’m a Cleveland fan, so you don’t need to convince me that my small-market Indians are at an unfair disadvantage when competing against teams like the Yankees and the Bank of Steinbrenner (in the immortal words of Ken Tremendous, “It’s like Scrooge McDuck’s gold coin-filled pool”). There’s no question that franchises with the financial flexibility to retain their stars, import new ones, and remain contenders even when their well-paid players bust have a leg-up from the get-go.

But we all know that money isn’t everything. Omar Minaya and the New York Mets gave us a years-long crash course in what happens large payrolls are spent poorly. Meanwhile, plenty of underfunded teams have had success, including last year’s Rangers and the Rays of both 2008 and 2010. Check my facts on this, but I’m pretty sure one or two low-budget Oakland A’s teams have had some mild success in the past too.

Of course, citing these extreme examples isn’t enough for an honest analysis of the impact of financial inequity. There are 30 teams who take the field each year, and to discuss only the extreme, memorable examples is to ignore how the vast majority of other teams operate.

And so, when I found myself wondering how much money matters in the major leagues relative to the recent past, I decided to find an answer more methodically. Using USA Today‘s salary database for payroll info, I found the correlations between how much money teams spent and how many games they won for every season since 1988. The results were quite interesting:

Or, for those of you who prefer the aesthetic simplicity of graphs to sifting through large amounts of repetitive numbers: (click to zoom in)

In general, the data point to a clear, if inconsistent upward trend (the correlation of the years and correlations is 0.417). The impact of money was inconsistent before the strike of 1994, skyrockets to its peak in 1999, then plummets immediately after. The added bonus of a dollar has remained relatively stable for most of the last decade at a level higher than 22 years ago but lower than it was 12 years ago.

The biggest surprise to me was the complete irrelevance of money in 1990 and 1992. I had assumed that the correlation would be lower in the first years I tested, but the idea that the relationship between payroll and success could ever be as low as it was in ’92—until I inputted the numbers for the last team, the correlation was actually negative—is mind-boggling.

The flaws with this simplistic analysis are highlighted by the major year-to-year fluctuations—I don’t think the differences in correlations between 1991 and 1992 and 1999 and 2000 necessarily represent the massive shifts in the financial role of the game that they imply. So I smoothed the curve by factoring the two previous and subsequent seasons’ correlations into each year’s score using a 1-2-3-2-1 weighting system. Here’s how it came out with my adjustments: (again, click the image for a better view)

This looks like a much more plausible description of how the role of money in the game has changed over the years. We’ve still got the relative unimportance of money around 20 years ago; the rapid rise in the 90’s; the peaks in 1998-9 and 2004-5; and the slow decline since.

Obviously this analysis is somewhat crude. I make no claim that the payroll-to-wins correlation described here fully captures the impact of cash on teams’ successes, especially considering some of the large yearly fluctuations. My weighting system for the smoothed curve was admittedly fairly arbitrary. And, for simplicity’s sake, I used only Opening Day payrolls in this study, thus discounting midseason signings and trades. Still, I don’t think there’s any reason to doubt the basic pattern we see here.

The initial increase in the mid-90’s can probably be explained simply by the rapid increase in payroll league-wide. In 1992, the Toronto Blue Jays’ $45.7 million Opening Day payroll was more than twice the Los Angeles Dodgers’ league-leading $21.6 million budget from just three years earlier. By 2000, both the Yankees and Dodgers more than doubled what the spendthrift Blue Jays spent eight years earlier, and half of all MLB teams shelled out at least $59 million in payroll.

As for the rebound circa 2004, I would posit that the increased acceptance of sabermetric thought—or at least, the basic principles of properly valuing plate discipline and power—helped teams spend their money more effectively. I’m not sure what would have caused the dips around 1989 and 2000 or the slow but steady decline in the payroll/wins correlation that has persisted for the last six years, though.

With this adjusted model, it is even more apparent that the impact of money in baseball has been significantly diminished in recent years—the weighted correlation for 2010 was just .397, the lowest since 1994. Money still matters much more in today’s game than it did in the pre-strike era, but low-payroll teams can take solace in knowing that the financial advantage enjoyed by richer teams is at least getting smaller.

Finally, as a bonus, here’s what the year-to-year correlations look like if we exclude two teams who had major influences on the curve: one line represents the year-to-year correlations without the World Series-buying Yankees, and the another takes out the A’s. Check out the difference in the early 2000’s:

Lewie Pollis is a freshman at Brown University. For more of his work, go toWahooBlues.com. He can be reached at LewsOnFirst@gmail.com. Follow him on Twitter: @LewsOnFirst or @WahooBlues.

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