How Clubs Determine Pre-Arbitration Salaries

Earlier this month, MLBTR's Tim Dierkes learned that the Rockies have employed an unusual pre-arbitration pay scale.  As you might expect, agents are less than thrilled with the system in which Colorado pays a league-minimum $500K for players with between zero and one year of service, then bumps that up by just $1K for each additional service year before arbitration.  The pay scale is unique in that it offers only a minute bump over the minimum and doesn't factor in performance.  However, after speaking with a number of agents and baseball officials around the league, it's clear that the Rockies are far from alone when it comes to having a rigid pay scale for players with three or less years of experience, even if theirs is less generous than others.

"I'd say about two-thirds of baseball is using some kind of formula for that," one experienced agent told MLBTR. "Every system is different.  The Indians, for example, take a very sabermetric approach to it to be a little more scientific.  Others will be more about service time.  On one hand, those systems allow you to say to your client, 'This is why arbitration is so valuable, because you can let a third party sort it out objectively.'  Of course, you can't really compare an average player with a couple years of experience to a guy with less that made the All-Star team, so I have mixed feelings about it."

Many agents mentioned the Rays as a club with a similar "sabermetric" approach to calculating pre-arbitration salaries and it's believed both teams have been using that formula for several years now.  The Brewers use something similar to Tampa Bay and Cleveland, a "dumbed down" version of the sabermetric formula, as one agent put it.  Other teams, like the aforementioned Rockies, have a simpler method.  MLBTR's own Steve Adams learned that as recently as 2013, the Astros used the same basic formula as Colorado – players with 0-1 years experience would get the minimum salary ($490K at the time) with a $1K bump for each year.  Players could earn more by making the All-Star team (+$5K), being named organizational player/pitcher of the year (+$1K), and playing time in the previous year, calculated with the following formula:

Position Players: (PA/650)*$10K

Pitchers: The greater of: 1. (GS/33)*$10K 2. (G/75)*$10K 3. (IP/200)*$10,000

Houston's system came with two interesting wrinkles.  Agents were told that no player will be offered a pay cut from the salary they earned on a major league deal signed with the Astros in the previous year, an obvious plus for players and agents.  On the flipside, any player who would reject the offer and opt instead for renewal would get $5K less than the calculated scale amount (or the minimum, if the $5K penalty dipped below that point).  One player, Justin Maxwell, wound up getting his contract renewed by Houston at $492,500, just above the major league minimum of $490K.  The Astros, citing club policy, declined to comment on their pay scale.

One baseball source told MLBTR that even though the Rockies' pay scale has gotten a great deal of attention this offseason, they've been using it for the last three winters.  Even prior to that, they were using a system that was rather similar and also based on service time.  Any extra money given beyond the minimum was dictated by the raise in the league minimum from the previous year.  In the case of this offsesaon, the $1K increase reflected the healthy $10K boost in the minimum.

While agents may not be doing cartwheels over a $1K raise from year to year, there are instances in which nearly all of a club's pre-arb players will earn the league minimum, as was the case with the Marlins in 2012.  That year year saw a drastic spike in the league minimum salary from $414K to $480K, however, so the players received a notable bump nonetheless (and in some cases more, as evidenced by Chris Coghlan's $500K salary).  An executive with one club who uses a modest pay scale told MLBTR that their reasoning is rather simple.

"The thought process from our perspective always been to try and be consistent as possible," the exec said.  "The [Collective Bargaining Agreement] dictates a minimum, now $500K, for these guys.  The philosophical question is, what benefit do you get from paying them significantly above that, or even a dollar above that?  

"It's the one time in the process that the club has the edge, if you will.  We always tried to be consistent and objective and we don't want to have to try and figure out which player is more valuable than another or whether a first baseman is worth more than a relief pitcher…arbitration is all about comps, free agency is just market value, if we didn't have a pay scale, we'd effectively be choosing one of our players over another and we don't want to do that.

The exec went on to say that virtually every agent has complained about his club's pay scale and he understands their frustrations since it's the one time in the process they don't get to negotiate their client's salary.  However, even though agents don't like the system, he says there have yet to be any negative consequences for it.  He believes that it's partially because the scale promotes consistency.  One American League executive whose club uses an "objective and subjective" method for coming up with salaries and is "in the middle of the pack" in terms of pre-arb player compensation supported that notion, saying that agents will typically protest more over how their client is paid compared to his teammates rather than the actual dollar amount.  

The other reason that the official from the modest pay scale doesn't fear any sort of retribution is because agents will approach arbitration and free agency the same way regardless of how their client is paid within the first three years.  The official used an example that came up numerous times in conversations with other executives and agents – Ryan Howard's $900K deal with the Phillies in his final year before arbitration.  The Phillies gave their star slugger more than double their obligation, but it obviously didn't buy them a loyalty discount through the arbitration process.  General Manager Pat Gillick & Co. offered $7MM, Howard's camp countered at $10MM, and the first baseman walked away with the the largest first-time arbitration salary ever.  That could be of some comfort to the Angels, who took a good deal of heat from fans and the agent for Mike Trout after they opted to pay their star outfielder just $20K over minimum last year.  In short, you'd be hard-pressed to find someone in baseball to bet on Craig Landis taking it easy on the Halos in their current contract talks if his client had received another $50-$100K a year ago.

It's worth noting there is at least one documented instance of a player taking his hard feelings into the arbitration process.  Outfielder Cody Ross told Ken Rosenthal and Jon Paul Morosi of FOX Sports in 2012 that his previous low pay was "one of the main reasons" why he went to a hearing with the Fish in 2010.  Ross won his case, coming home with $4.45MM instead of the $4.2MM he was offered.  However, that doesn't appear to be the norm.  In conversations with MLBTR, agents admitted that even in instances where they feel their client is underpaid in the pre-arb years, it doesn't affect how they approach arbitration or free agency since they're always pushing for top dollar no matter what.  Baseball people also say that while they have seen pre-arb pay come up in hearings, there is no evidence that it factors into the arbitrator's decision.

That could help explain why most clubs have opted to use rigid formulas rather than dole out significantly more money than required.  One high-ranking executive with a club that negotiates pre-arb pay with agents acknowledges that players won't take it easy on teams in arb hearings over the extra money, but he believes that it makes for a stronger relationship with the players.  

"Players will pass judgment on how a club treats them relative to anything and everything," said the National League executive.  "They'll think about how a club treats them when it comes to their family, travel, their contract, tickets…clubs are constantly being evaluated by players, justifiably, and every club can choose where they want to be evaluated well and where they're prepared to take a hit."

While that exec didn't like the notion of clubs giving their pre-arb players a near-minimum salary, he admitted that he understood the allure.  The up-front savings, even if they're not significant, are a nice perk.  On top of that, it's also less time-consuming to send an agent a dollar figure and say, "take it or leave it."   "I couldn't imagine how much longer it would all take if we were negotiating with every player," said one executive with a pay scale club.   

The player-friendly notion of negotiating appears to be going out of style throughout baseball.  "Most clubs, if they don't have a strict formula where you input the service time and certain numbers based on performance, they at last have some basic parameters in place versus 'Hey, this is what we feel like paying you,'" one exec said.  While negotiating pre-arb pay might make a player happier in the short-term, it seems that many clubs would rather expedite the process, and perhaps save a few dollars, with a pay scale.

This article was originally published on February 26th.


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