All About Arbitration

1973 was quite the year for baseball. The year began with the news that Roberto Clemente, while attempting to deliver aid to Nicaraguan earthquake victims, had died in a plane crash on New Year’s Eve. The Designated Hitter was used for the first time that season. Reggie Jackson and Pete Rose were MVP’s, Seaver and Palmer won the Cy Youngs. Hank Aaron finished the year one home run short of Babe Ruth’s record. Willie Mays retired. George Steinbrenner bought the Yankees from CBS for $10 million. And in the beginning of the year, spring training was almost cancelled.

The early 70’s were the years in which players finally began to gain some of the freedoms they were due. They were the years of Marvin Miller, Curt Flood, Andy Messersmith and Dave McNally, Catfish Hunter and Charlie Finley. The players had gone on strike at the beginning of the 1972 season, and canceling the 1973 spring training was an attempt by the owners to gain an upper hand as the two sides hammered out a new Basic Agreement. The owners did lock the players out of early spring training, but eventually a new agreement rose from the miasma just in time for camps to open March 1st.

It must be said, however, that the owners royally blew whatever upper hand they had gained, because this agreement included something new. They called it Salary Arbitration, and it included many of the characteristics we know so well today:

• Arbitration cases were heard in February.
• Players were eligible for arbitration after two years of major league service.
• Both the player and the club submitted figures to an arbitrator, who picked one or the other. There would be no compromise. This is called “Final Offer Arbitration.”

In one fell swoop, the owners pretty much gave the house away, as arbitration allowed players to consistently receive substantial increases in future years, even during the bleak period of Ueberroth’s collusion. The players knew they had gained something special, as captured by this commentary from the Sporting News’ 1974 Official Baseball Guide:

Of the new gains the Players Association appeared particularly pleased with the unprecedented clause allowing salary arbitration. Previously, a player dissatisfied with his contract offer had no recourse. If he didn’t sign, he had to sit out since the reserve clause rule bound him to one club and he was unable to negotiate with any other team.

Arbitration has had a fundamental impact on the economics of baseball — perhaps as large an impact as free agency itself. And with the arbitration season opening today, it seems like a good time to reflect on the history of the process and its outcomes.

Let’s go over a few graphs covering all thirty-one years of salary arbitration. First up, the number of cases that have gone to arbitration each year:

As you can see, a lot of players went through arbitration in the 1970’s and 1980’s. Reggie Jackson went through arbitration in each of the first two years. He won the first case for $135,000 after his MVP year, but lost in the next year after submitting a salary of $168,500 and losing to the club’s $140,000 submission. After all, the guy only finished fourth in the 1974 MVP race.

Needless to say, the dollar amounts of arbitration settlements have risen dramatically ever since. Here is a graph of the average salary award each year:

In 1997 and 1998, players and clubs managed to resolve most of the high-salary cases outside the arbitration process. From 1979 to 1996, however, average arbitration awards rose from $68,000 to $2,300,000. That’s a Compound Average Growth Rate of 23%. Some of the key increases in arbitration history have been:

• Bruce Sutter’s $700,000 in 1980 (the previous high was $140,000)
• Fernando Valenzuela’s cool million in 1983
• Don Mattingly’s jump to $1,975,000 in 1987
• Doug Drabek skipped the $2 million range altogether and jumped to $3,350,000 in 1991, followed in 1992 by…
• Ruben Sierra’s stunning $5 million award in 1992 (Texas had submitted a bid of $3.8 million.  Rafael Palmeiro and Kevin Brown also took the Rangers to the bank that year).
• Mariano Rivera’s $7,250,000 figure in 2000. This is the only high mark in which the club actually won the hearing — Rivera had submitted a figure of $9,250,000.
• Andruw Jones’ $8,200,000 in 2001 — the highest winning figure among all cases that have gone to arbitration so far.

In Jones’ case, the Braves submitted a figure of $6,400,000, or $1.8 million less than Jones’ bid. That is the third highest difference between players and clubs of all time. The largest differences have been Gagne and the Dodgers last year ($8 million and $5 million) and Rivera and the Yankees in 2000 ($9.25 million vs. $7.25 million). Here is a graph of the average differential between clubs and players each year, expressed as the percent difference between the player’s submission and the club’s submission (you might call it the player’s “markup”).

You can see that the owners really pushed their luck in the early 1980’s as well as much of the 1990’s. Overall, however, clubs have won 59% of their cases. Here is a rundown from year to year. Note how clubs went from big winners in 1978 (winning 7 of 9 cases) to big losers in 1979 (winning just 3 of 12).

There is virtually no correlation between the size of the difference between the parties and whether the eventual settlement goes to the player or club. However, no player has ever won an arbitration case in which his submission was more than twice the club’s submission. The most extreme difference was Jerry Browne’s in 1993, the year after he batted .287/.366/.364 in 324 at bats. The A’s won with a submission of $625,000; Browne’s submission was 212% higher at $1,950,000. Browne was represented by Scott Boras.

By the way, Scott Boras has gone to arbitration for a player 39 times, and clubs have won 59% of his cases. Right on the overall average.

The Really Important Thing to Remember

According to the Basic Agreement, an arbitrator is supposed to consider several things when deciding upon a case. Most importantly, he/she is directed to consider:

• The player’s contribution to his team
• His previous salary
• The salaries of players in a similar class

The last two points are extremely important — in arbitration, players are not all equal. When making a case for a player, the arbitrators are instructed to consider only the salaries of players with the same amount of major league experience, or one year more.

Here is the exact wording from the current Basic Agreement regarding this point:

The arbitration panel shall, except for a Player with five or more years of Major League service, give particular attention, for comparative salary purposes, to the contracts of Players with Major League service not exceeding one annual service group above the Player’s annual service group. This shall not limit the ability of a Player or his representative, because of special accomplishment, to argue the equal relevance of salaries of Players without regard to service, and the arbitration panel shall give whatever weight to such argument as is deemed appropriate.

You may have wondered why players going through arbitration for the first time receive significantly less than players going through it for the third time. It’s because the difference is baked into the system. I was reading a review of the recent $2.5 million Marcus Giles contract in which the author expressed surprise that the Braves got such a good deal. It was a good deal for the Braves, but it made sense, given that Giles was eligible for only his first year of arbitration. That is how the system works.

As a result, there is a “natural” progression of a player’s salary in his career. For his first two or three years, he receives the major league minimum ($316,000 in 2005). He then goes through the arbitration process for three or four years (even if he doesn’t go through the process, his salary will be heavily influenced by arbitration). During those years, his salary rises from the minimum to the level of a free agent in his final arbitration year. After that, his salary is subject to the free agent market.

That is why Ramon Ortiz may make as much as Carlos Zambrano next year, and why low-budget teams sometimes trade players in their sixth year; not just because they are about to become free agents, but also because their salaries will have increased significantly since their first year of arbitration.

So when you’re reviewing player salaries, you not only need to know whether the player is a free agent, arbitration-eligible or not, but you also need to know how many years of major league service he has, if he’s going through arbitration.

As if the system wasn’t complicated enough…

References & Resources
I promised this would be All About Arbitration, but I’ve only covered some of the topics. For more information, I recommend the following:

Marinomics’ Review of this year’s submissions, which includes links to other arbitration studies.

The Sports Econmist has a nice overview of arbitration, as well as a commentary on what can and cannot be considered during arbitration.

And here is MLB’s updated list of all arbitration filings and signed contracts. You can find historical arbitration data at the late Doug Pappas’s website.