Salaries for arbitration eligible players eclipsed $1 billion in 2015, making the arbitration process more important to team building than ever. At MLB Trade Rumors, we are entering our fifth year of modeling arbitration salaries and have improved the model again for the 2015-16 offseason.
Being able to accurately predict salaries is crucial for teams, and it’s important for MLBTR readers who want to understand the rationale behind teams’ decision-making processes. Teams typically sign free agents before reaching agreements with arbitration eligible players, so budgeting effectively requires a reasonable estimate of how much they will spend on the complete roster once arbitration raises are determined.
Forecasting arbitration salaries is also important for signing young players to long-term deals. Teams have increasingly used such deals to achieve payroll certainty and to avoid the risk of crippling free agent contracts. As a result, teams have used arbitration forecasts many years into the future to determine appropriate spending levels on extensions. Understanding the arbitration process in general is also important for teams seeking to find inefficiencies. Teams succeed by finding bargains on the free agent market, but finding players who will be bargains in the arbitration process is helpful as well.
The basic structure of the arbitration model to be used for this year is the same as in past years. Players are compared to recent players who went through the arbitration process, who played similar positions and who had similar MLB service time. Typically, players qualify for arbitration upon reaching three full years of Major League service time. The top 22 percent of players from the group that has between two and three years of service time also becomes eligible. These players are designated as “Super Two” players and can be arbitration eligible four times before reaching free agency.
A player’s first arbitration salary is based primarily on his most recent season, but on overall career statistics are considered as well. Beyond the first year, players receive raises based more heavily on the most recent season’s performance. Historical performance is only factored in to the extent that it affected a player’s most recent salary. While that may seem counter-intuitive, those familiar with the process have confirmed that this is usually the case in actual arbitration hearings.
Another quirk to the arbitration process is that it usually only factors in “baseball card statistics” rather than more sophisticated metrics. While teams signing free agents are typically up to speed on sabermetrics, the arbitration process does not account for them. Counting stats are important, as is playing time in general. Since labor lawyers typically sit on arbitration panels, the concept of “making it to work every day” is something that holds value.
Hitters are typically evaluated using batting average, home runs, runs batted in, stolen bases and plate appearances. There are some positional adjustments, but typically the added defensive value of a shortstop relative to a first baseman is not as important in arbitration hearings as it is on the free agent market. Hitters also can receive larger arbitration awards if they have unique accomplishments, such as winning an MVP award. Pitchers typically are evaluated using innings pitched and earned run average. Starting pitchers are rewarded for wins, and relievers are rewarded for saves and holds. Unique accomplishments, such as Cy Young Awards, matter for pitchers as well.
In addition to factoring these statistics into the process, the arbitration model also accounts for salary inflation—players are expected to receive more money in 2016 for the same performance than they would have in 2015. Precedents are also important, as we learned when we developed the “Kimbrel Rule.” The Kimbrel Rule limits the maximum margin for a player to exceed the previous record for his player type to $1MM (and similarly, the maximum raise for a non-first time eligible player is $1MM greater than the previous record raise as well). This was developed because Craig Kimbrel’s eye-popping save and ERA numbers entering his first year of arbitration would have led to a projected salary that was unrealistically high. Historically speaking, players do not typically break arbitration records by much greater magnitudes than $1MM.
The arbitration model we use at MLB Trade Rumors has improved over the years. The typical average error is generally around $300K or slightly below, but it does vary significantly based on how many big misses there were in a given year. The more useful metric that we track is the number of players who ultimately earned a salary within 10% of our salary projection. This has steadily increased from 55% in 2012 to 65% in 2015 and hopefully will continue increasing going forward. We have added some other adjustments for this year’s model. Such bells and whistles usually increase predictive efficiency of the model but can hurt in some cases. As a result, our adjustments typically mimic the way that the arbitration process works.
An additional feature of our model at MLB Trade Rumors is that I also pen roughly ten articles each year on unique arbitration cases in a series we’ve previously titled Arbitration Breakdown. Within that series, I look at historical comps for the players in question to determine whether the model is likely to be accurate in a particular case. I personally look forward to not having to write about the challenges of predicting David Price’s salaries anymore, now that he is a free agent. This Price-less set of articles will be released in the coming months, while the actual forecasted salaries for every arbitration eligible player will appear on MLB Trade Rumors during the middle of this week.