MLB Looking For Ways To Improve Competitive Balance

Spring training is all about hope.  It’s a new season and every team is tied for first place.  Anything can happen.  Maybe this is the year that the Cubs (or your favorite team) can win it all.


At least that’s how things are in theory.  In practice, not so much.  The truth is that when MLB opens their 2010 season, about one-third of the teams will have no realistic chance of competing for a spot in the post-season.  These teams have become little more than fodder to fill out baseball’s regular season schedule.


Part of the problem is that too many teams don’t spend enough on player payroll.  The Yankees are an easy target because they annually outspend every other team, but the real outrage is that nearly one-third of the teams in baseball spend less on player payroll and player development than they receive in revenue sharing, that according to ESPN’s Jayson Stark. 


While baseball denies this allegation, this offseason they quietly encouraged the Florida Marlins to spend a bit more on their payroll.  The Marlins routinely low payrolls have been a source of embarrassment for MLB and a source of concern for the Player’s Association. 


The Marlins have been last or next to last in payroll spending every season since 2006, and they have only spent more than $50 million once (2005) since the turn of the century.  Although MLB denies any involvement, the signing of a long-term contract with pitching phenom Josh Johnson only occurred after a great deal of controversy and bad PR over the Marlins frugal ways.


Although the Marlins maintain that they did not violate the basic agreement concerning the use of revenue sharing dollars, the team and the Player’s Association issued a joint statement following Johnson’s contract signing.  The statement indicated that the team and the Player’s Association will work together, along with the commissioner’s office, to make sure that the basic agreement is followed in the future.


Some fans disagree that there is a competitive balance problem in Major League Baseball and they point to these same Marlins as their proof.  Sure, the Marlins are traditionally low spenders, but they have won the World Series twice since 1997.


Despite the two World Series titles, it’s important to keep the Marlins success in perspective.  In 1997, the year the Marlins first won the World Series, they were a high payroll team.  That year, the team payroll was the fifth highest among all teams (Cleveland was third highest).  This was not a case of David beating Goliath so much as it was a case of David becoming Goliath.


Even so, it is true that a lower payroll team occasionally rises up to have an exceptional season.  In addition to the 2003 Marlins, the Twins are a team that have enjoyed a modicum of success.  While they haven’t done well in the playoffs, at least they have made it there a few times.  And we can’t forget about the Tampa Bay Rays who had a great regular season in 2008, and even made it to the World Series.


However, to me, these exceptions prove the rule.  Sure, lower payroll teams occasionally make it to the post-season, but it’s so infrequent that it is an exception to the rule, not the rule itself.


Over the past eight out of ten seasons, at least one team in the bottom third of payroll spending has made the playoffs.  That would seem to indicate that low payroll teams can compete and that competitive balance isn’t an issue.


However, during those same ten seasons, six out of ten times at least five teams in the top third of payroll spending made the playoffs.  In eight out of ten seasons at least four of the top spending teams made the post-season.  In the other two seasons, three of the top ten payroll spending teams made the playoffs.


So in any given year, the top ten payroll teams claim four or five of the eight playoff spots, and the remaining twenty teams are left to fight over the scraps.  Granted, there are occasional exceptions, but as a general rule, the more money a team spends, the more likely they are to make the post-season.


This is not exactly a news flash, but it has taken MLB some time to come to this conclusion.  The MLB Special Committee for On-Field Matters has discussed “floating realignment” which would allow teams to determine their division based on geography, their plans to contend, and payroll.


According to Tom Verducci of Sports illustrated, committee members are interested in pursuing ways to improve competitive balance and believe that floating realignment could be a good non-economic way of accomplishing this goal.  Others, most notably Red Sox owner John Henry, have called for a salary cap.  ESPN’s Jayson Stark has suggested a taxing system that taxes both those teams that spend too much as well as those that spend too little.


The point is, the calls for MLB to do something to improve competitive balance are increasing and getting louder.   Floating realignment may turn out to be a crazy idea and may be completely unworkable, but at least they’re talking about the need for change.  And as with so many things in life, admitting you have a problem is half the battle.


Lou Mindar writes the blog Cubs Notebook.  His book of short stories, Lake of the Falls, is due out in June.

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Comments

Interesting article, Lou.

A couple of things that I think you should also have taken into consideration. The first is statistics. "Statistics can be used to prove anything" is a common phrase you seen thrown around, and to some degree I think you're guilty of doing that here. "well, here is evidence that disproves the theory, but I am going to move the numbers around until it seems like the majority of the evidence favors one side." The top third, and bottom third, numbers are pretty arbitrary. It may be that if you look at it as top half and bottom half the numbers are not so nearly persuasive. I don't know that, but it's a suspicion that pops up when "bottom third" is pulled on of the air.

Well, maybe three things. I'd love to see "non-Yankees-Sox" numbers for the playoffs since the latest round of expansion. I think if you take out those two teams, and to be fair to the bottom spending teams the story may look a lot more balanced. It's a sample size issue.

What really hasn't been proven is that what is most important is that a team is well run. If you develop your own players, and sign them to club friendly contracts you can contend and win pennants, in any market. Just because the Royals and Pirates have been run by idiots for the last 20 years, doesn't mean that system is intrinsically flawed. It means that it has had some bad owners introduced.

A well run team is very important. It's nice though, for teams like the Yankees, Red Sox, Mets, Angels, Dodgers..etc...is that they can throw money at their mistakes. Some of the smaller budgeted teams don't have that luxury. I mean, the Yankees are almost always in the playoffs, but they really hit free agency hard: Teixeira, Damono, A-Rod, Swisher, Matsui, Sabathia, Burnett, even the homegrown Pettitte was brought back as a free agent.
The Red Sox could afford to trade for a Victor Martinez because the budget wasn't a concern. I'm just not sure why, not according to anyone here, but why it's not a good idea to have a salary cap/floor for MLB?

I haven't thought through all the salary floor ramifications, but I think it would tend to make players more money and make overall payrolls rise, assuming the floor is meaningful, maybe $65 million. Guys on bad contracts, who today are treated like lepers, would tend to have some more value. If say the A's needed to grab an extra $6 million in salary to reach the floor, they would find "value" in a guy who doesn't really offer anything to the team. That potential market for bad contracts would make giving out contracts less risky, thus driving up the cost.

Now if it was a hard cap so that a team like the Yankees actually have to re-distribute some of their talent, then that may balance things out. It would really depend on the caps and what the flow of players looks like under the new system.

Instead of instituting a salary floor, which is probably a bad precedent, why not just force teams to pay back the unused portion of the shared revenue? It could be split among the other teams.

TRN -- Thanks for the feed back.

Splitting the teams into thirds based on payroll was not as arbitrary as you might think. The reason I did that is two-fold. First, there is a rather significant difference between what the lowest spending team in the top third of payroll spends and what the top spending team in the bottom third of payroll spends. To make the point I was making, it's important for there to be a sizable difference in payroll spending between the teams.

Secondly, according to Jayson Stark, the bottom third of teams based on payroll are spending less than they are receiving in revenue sharing. Since part of the point I was making is that the competitive playing field in MLB is not level due in large part to some teams not spending enough on payroll, it was important that I highlight the actual portion of the teams that are spending less on payroll (and player development) than they receive in revenue sharing.

You suggested that I split the teams in half based on payroll. By doing this, the numbers are at least equally convincing. Between 2000-2009, 80 teams went to the post-season (8 per year). Of those teams, 21 of 80 had payrolls in the bottom half of all teams. In round numbers, teams in the top half of payroll spending were about three times as likely to go to the playoffs than were their counterparts in the bottom half of payroll spending.

I'm not sure what you're saying about the Yankees and Red Sox. While it may change the numbers somewhat, it wouldn't provide an accurate view of how money impacts success. The Yankees and Red Sox are traditionally two of the higher spending teams. They are also two of the teams that pretty routinely make the playoffs. What are you trying to say by removing them?

Finally, you are correct that well run teams will do better than poorly run teams, all things being equal. However, having a bigger payroll allows a GM to make more mistakes without it showing up in the W-L column. The GMs for teams like Cleveland and Arizona (and to a lesser extent San Diego) looked a lot smarter when their payroll was higher

I really mistrust anything I see about the revenue sharing. I tried to make sense of the numbers based on Boras's lunatic ramblings back in November when he was making them and... well they just didn't add up. Numbers without reliable sources are going to be pretty meaningless. It's possible that those revenue sharing numbers are likely, but it winds up meaning that MLB gets more revenue on national contracts than the NFL does - which is, well, to put it nicely isn't very likely.

What I am saying about the Yankees is that they're an outlier. They've made the playoffs every year, except one for the last what, 14 years? They also out-spend their nearest competitors by 50%. Do a bar graph and look at the salaries for each team. Which team is the biggest outlier? It's not the Marlins or the Pirate, it's the Yankees. They're so far beyond that throwing them into the mix of analysis doesn't lend to a reliable conclusion.

Also, good teams spend more money on players, because they have good players. The Twins and the Indians team of a couple years ago were good teams with medium payrolls, because they had good players. There's implicit cause and effect here, and none of the actual proposed solutions are going to address that.

Which was the last team that had to be blown up because of payroll considerations? How often does that happen?

Well, if youre the Marlins, it's after every WS title..lol.

good point...research anyone?

Just to be clear, I used "revenue sharing" generically as a catch-all phrase for the money that is re-distributed by MLB. However, there are actually three sources (and many more sub-sources) of this money.

According to Jayson Stark:

• Central fund (includes national TV, radio, Internet, licensing, merchandising, marketing, MLB International money): Each team, from the Marlins to the Yankees, gets the same central-fund payout. And that check comes to slightly over $30 million per team if you deduct the $10 million in pension and operations fees, or just over $40 million if you don't.

• Revenue sharing: Only income-challenged teams get a revenue-sharing check. But you should never forget that those checks are a lot larger than your average rebate check from Target. This sport shared $400 million in revenue this year -- more than the gross national product of Western Samoa. Now every club's payout is different. But the five neediest teams -- which we believe to be the Marlins, Pirates, Rays, Blue Jays and Royals -- averaged somewhere in the vicinity of $35 million in revenue-sharing handouts per team. And that still left over $200 million -- more than $20 million a club -- for the rest of the "payees" to divvy up.

• Local TV/radio/cable: Good luck getting these exact figures. But we know that 29 of the 30 teams make at least $15 million a year in local broadcast money, and no team rakes in under $12 million. Obviously, some clubs collect much, much more than that. Or own their networks. Or both.

And remember, this is money the teams receive before they ever sell one ticket.

Bullet 2 - where does that money come from?

And just to point out how stupid this guy is there: 30 teams in MLB, if you take away 5 from 30, you get 25. 25 X $20milion = 500 million, which is somehow is less than $200 million.

According to bullet #2, "Only income-challenged teams get a revenue sharing check." So what Stark is saying is that five teams -- Marlins, Pirates, Rays, Blue Jays and Royals -- get about $35 million each. The remaining $200+ million is split between the remaining ten "income-challenged" teams.

To answer your first question, revenue sharing money is a simple transfer of wealth from high revenue teams to low revenue teams. As I understand it, the 15 highest revenue teams kick in a portion of their revenue that is then transferred in uneven amounts to the 15 lowest revenue teams.

Thanks.

There's some double accruing there, and I'd really like to see the sources of this info.

Anyway, there's another way to figure out how much these clubs make and that's by reverse engineering their sales prices based on NPV of their future earnings. If the Cubs are pulling in $350 million in revenue, $100M of which goes into the owners pockets their NPV would be closer to $2.5B, not $850M where they struggle to arrange financing after having to self-finance half of it.

I think alot of it is how you spend your money also. (see Mets, Cubs)

Forgive me if this gets a little econ-wonky, but here's what I like for a revenue sharing plan and why:

Economic theory says we should pay someone up to their marginal revenue product, and teams bid up player salaries to do just that. Marginal Revenue Product is simply, how much more does player X add to revenues, and is highly connected to how many more wins the player can generate. VORP is an (imperfect) attempt to measure this. If our goal is to get the big-market teams to pay less and the small market teams to pay more, and if we want them to do this of their own accord, then what we need to do is drive down MRP in large markets and drive up MRP in small markets. The payroll tax is effective in driving down salaries in large markets, but then MLB just takes the money and hands it lump-sum to small market teams. That's dumb.

If we want to drive up small-market salaries, small-market MRP, and competitive balance, one solution would be to make teams compete for revenue-sharing dollars and award them based on on-field performance. Essentially, everyone would get revenue-sharing shares equal to their winning percentage. A team that plays .400 ball would get .4 shares, and a team that plays .600 ball would get .6 shares. High-payroll teams would contribute disproportionately into the pool, and contributions would be based on payroll, not winning percentage.

Say, for instance, the luxury tax was 25% of payrolls over $80 million. That would put about $120 million into the revenue-sharing pool and tax 16 teams based on last year's numbers. A .500 team would collect $4 million in revenue, a .400 team would collect about 3.2 million, and a .600 team would collect about 4.8 million. More to the point, one win is worth about $50,000 in additional revenue-sharing money. If everybody played .500 baseball, four teams would recover their tax payment based on 2009 payrolls, and another three would be really really close.

I doubt $50,000 per win would be enough to send the Pirates on a shopping spree, but it might well be enough to get them to think a little bit harder about whether they should send half their team packing at the trade deadline every July. And if you wanted to dial up the incentive a little bit, it wouldn't be that hard to have a two-tiered tax rate, say 20% on payrolls over the league median and 40% on payrolls in the top quartile or something, plus kick in a portion of the national TV contract. If you got to 240 million in the revenue sharing pool, that would make it $100,000 per additional win, or $1.5 million from improving yourself from a .450 club to a .550 club.

It's not a radical redistribution, but at least it will go some distance toward trying to make the post-trading deadline league look something like the pre-trading deadline league, which is all I really hope for.

I like the idea but you're right in that the money is too insignificant. It would have to be applied to a larger section of the pie than just your proposed soft salary cap revenue re-distribution. If the Pirates saved $3 million by trading Freddy Sanchez (as well as get a prospect or two) they're not going to worry about losing $100K in additional losses. You'd need to get it up around $2 million/win.

Which would then lead to a problem of haves and have-nots. If the Marlins throw up a .600 season, they get a bonus of $32 million, which they can re-invest in minors and pocket. But the scuffling pirates continue to scuffle because now a smaller market team like Florida makes 40% more revenue.

Radical redistribution like that is going require a salary cap for the owners and a salary floor for the players.

Remember though that this isn't the whole MRP of the player--the team gets some return from the player's contribution already. Losing Freddy Sanchez costs twice--once in fan attendance/TV contracts/merchandising/etc, and once on the part that I want to add. My part is a premium on the first part. Is it big enough to be meaningful? I'm not sure.

The folks at fangraphs say that the market value of a win is $4.5 million currently, with .300 as the replacement-level winning percentage. With the revenue-sharing part of MRP at $100,000 per win, that's about a 2% premium. I don't know what the right amount is. From the perspective of owners and players, the right amount is whatever it takes to balance the fact that MLB makes more money when the Yankees win than it does when the Royals win, with the fact that MLB makes more money when competitive balance is high. These two things are in some sense exclusive.

the fact detroit has a 100m payroll makes no economic sense.

there's a lot of economic nonsense in baseball.

the owners are playing in a world economy for the most part.

the useless POS owner of the marlins AND the former useless POS owner of the twins could do what detroit does...they just don't want to...no one wants to throw them out for new owners, either.

Great, great posts
You should write econ-wonky stuff more frequently!

The best plan I've seen so far is the one Jayson Stark proposed in the article I linked to in the post. He suggests taxing the biggest spenders and the lowest spenders. Provisions would be made for teams blowing up their roster and starting over, but that would be limited. In other words, a team couldn't saying they were starting over every year.

The Yankees currently spend more than the Marlins, Pirates, Padres, and Nationals combined. It's easy to point the finger at the Yankees for overspending, but I think the bottom payroll teams are at least equally to blame.

Now let's take a look at those five teams, if they never made trades or lost/signed FA's for last year - according to WARP3.

Let's put them all in the same divsion.

1st Place: Yankees 88 Wins
2nd Place: Nationals 80 Wins
3rd Place: Marlins 77 Wins
4th Place: Pirates 76 Wins
5th Place: Padres 55 Wins

The reason those teams have low team salaries is because they're full of bad players, except for the Marlins who are a well-run team, and the Yankees who are a well-run team in a giant market.

Neal -- You indicated that "The reason those teams have low team salaries is because they're full of bad players." True enough, but which comes first, the player or the payroll? I would argue that the payroll drives the talent level of the players the team signs, not the other way around.

Those are the salaries of the contracts the players that the organization originally signed. Who did Washington lose because they couldn't afford him?

TRN -- I’m sorry, but I still don’t think I understand your point. If you are saying that the Yankees have drafted better players or they are better at developing players, I can accept that. If you are saying that the Yankees pay more for their drafted players, I can accept that also.

However, big league teams are not made up of just drafted players. Making trades and signing free agents play a huge part in roster construction. So I’m not sure that what you said has any practical application in the real world.

It’s not unusual for a low revenue team (usually picking early in the draft) to pass on a top prospect due to signability issues. If they do pass and choose a lesser quality prospect, the top prospect is then made available to a high revenue team that can afford them. The current draft system favors the wealthy and just perpetuates the problem (although that is an issue unto itself).

Because in the real world you get to paid for peformance. What is the solution, to make every team spend $90 million a year like the Astros are this year? The Astros are WS contenders because they have a bunch of shitty contracts?

The teams with the lowest payrolls, with the notable exception of the Marlins are full of shitty players. That's why they have the lowest payrolls. When the Pirates are full of good players, their fans will come and they will have a higher salary. See Brewers, Milwaukee or Astros, Houston for examples of this. Spending an extra $20 million the roster doesn't make sense for these teams, they're finally realizing that getting from 72 to 78 wins doesn't provide $20 million in increased profits, so they don't do it. Unless they're in a position to get into at least nominal playoff contention, maybe 85 wins, there's no point in spending money on Freddy Sanchez and Jason Bay.

Has anyone else been having a lot of troubles with the site over the past couple of days? I get a lot of 503 errors. And if this comment goes through, I'll be a little surprised.

Yep. Same problem. I thought it was a local issue.

I've also been having a lot of problems just getting the site to come up in my browser, both Internet Explorer and Firefox.

Same problem for me. Site has been freezing up a lot when I (re)load.

I talked to Rob last night. He said that he has authorized an upgrade of the server, but that probably won't happen until tomorrow at the earliest.

I was going to post this last night, but I couldn't get the site to work. Frustrating...

Congratulations on the book! Nice article.

Thanks, Carlos!

"Piniella said he expects Lilly to get one Cactus League start before spring training ends, and then he'll need three minor-league starts before making his way back to the 25-man roster."

http://sports.espn.go.com/chicago/mlb/news/st...

June-ish?

...they have a 10-pitcher rotation in AAA.

The so-called problems with competitive balance are very recent and tied directly to the willingness of teams like the Yankees and Red Sox to spend massive amounts on free agents and basically create all-star teams. It's uncharted territory and probably just a phase that baseball is going through because prior to free agency the opposite was true and the World Series was dominated by small market teams. From 1971-75 the Pirates, Reds (the Reds also won in the first season of free agency as well) and A's (3 times) won the World Series. All three of these teams are perennially ranked in the bottom third of MLB in franchise valuations. Here's Forbes' bottom 10 for 2009 and the number of World Series they've won since free agency began in 1976:

21. Tigers (1)
22. Twins (2)
23. Jays (2)
24. Brewers
25. Reds (2)
26. Rays
27. A's (1)
28. Royals (1)
29. Pirates (1)
30. Marlins (2)

So, these 10 lowest value franchises have won 12 out of the last 32 World Series. They've actually outperformed the more valuable larger market teams.

Of this group, here are the teams with payrolls in the bottom 10 and the number of World Series they've won since 1976 when free agency began:

Reds (2)
Pirates (1)
A's (1)
Marlins (2)
Twins (2)
Rays

That's 8 out of 32, so these teams which represent 20% of MLB have won 25% of the World Series titles in the era of free agency.

So I take exception when you say,

"However, to me, these exceptions prove the rule. Sure, lower payroll teams occasionally make it to the post-season, but it’s so infrequent that it is an exception to the rule, not the rule itself."

Of course, the Reds won 1 of their world series in 1976, when they were loaded with talent the other in 1990. The Pirates won the World Series in 1979, when they were loaded with talent.

The teams that are loaded with talent win the WS?

The only competitive balance problem is that people think there's a problem with competitive balance.

Salary caps and floors would make trades much more about payroll than performance--not the direction baseball should go. Moreover, NFL and NBA players get a higher percentage of total league revenue because of their salary cap agreements. No way MLB owners want that.

Besides, teams that are well run and wisely invest in talent should win a disproportionate number of games.

Even so, low payroll teams have tremendous opportunity in baseball to get 6 years of relatively cheap, and often peak, performance from home-grown players.

Baseball also gets most of its revenue locally, instead of NFL's tv money. So the real way to provide "competitive balance" (which really means "Yankees win less") is to put another team in New York. Maybe two.

I got my Mariner-Cub tickets ordered for all three games. I expect massive drinking with friends on Tuesday, slightly less drinking with my parents on Wednesday then a huge drop off for the Wednesday day-game with an eldery Thai woman. Good times.

Anyone else going to Seattle interleague games? My pants are tight!

Cubs win today 4-1

Silva went 4 IP, 2 H, 0 BB, 2 Ks

Caridad, Stevens, Mateo, and Russell combined for 5 IP, 1 H, 1 R, 9 Ks

Theriot was 2-3 with a run, Fukudome and Byrd were 1-3, Nady was 2-4 with two doubles and 2 RBI, Baker was 1-1 with solo HR, Soriano 1-3, and Colvin had another hit in his only at-bat

This might sound really ignorant, but I had no idea certain teams were run specifically to lose and make money.

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