The Looming Arbitration Battle

The pandemic has had a massive effect on MLB team revenues, which most expect to translate to a frigid free agent market.  More quietly, a related battle looms: salary arbitration.

The first marker will be Wednesday, December 2nd.  That’s when teams must decide whether to tender a contract to their arbitration-eligible players, often known as the non-tender deadline.  Players with at least three years of MLB service but less than six – as well as a group of Super Two players – are eligible for arbitration, which is the established system in which teams and agents use comparable players to determine salaries.  Every year, certain players meeting the criteria for arbitration eligibility are simply cut loose, or non-tendered, by teams that feel they’re not worth the salary that would come out of the system.  Last winter, non-tenders included Kevin Gausman, C.J. Cron, Cesar Hernandez, Maikel Franco, Yimi Garcia, Taijuan Walker, and Kevin Pillar.

This winter those within the game expect a record number of non-tenders, as teams seek opportunities to slash payroll.  The result is that the free agent market will be flooded with players, driving salaries down for everyone.  Players, agents, and clubs expect this, creating pressure to consider “pre-tender” deals.  Pre-tenders are contracts signed prior to the December 2nd deadline, often at a discounted rate due to the threat of a non-tender.  Pre-tender deals exist somewhat outside of the arbitration grid, meaning they are not used for salary comparisons in the event of a hearing.

It’s also worth considering that players that are tendered contracts on December 2nd and will be the best and most valuable ones.  Teams generally don’t relish the idea of forcing their franchise players into hearings, so the balance of power may swing back toward the players to a degree.

Arbitration eligible players who do not sign contracts prior to December 2nd but are tendered a contract will enter uncharted waters.  That is, how should a 60-game season be treated?  The team side could argue that Cody Bellinger’s raw numbers –  12 home runs and 30 RBI – should determine his salary.  Bellinger’s agent could choose to extrapolate: his numbers should be treated as 32 home runs and 81 RBI, which he projected to do over a full season.  Or, a simpler pitch to an arbitration panel would be the idea that “a full season is a full season,” and the exact number of games is irrelevant in the face of more prominent themes of role, health, and performance.  In an arbitration hearing, the narrative each side presents is an important element.

It’s possible a solution lies somewhere in the middle, though I’d argue not exactly at the midpoint – it’s not as if Albert Almora hitting 12 home runs in all of 2019 is comparable to Bellinger doing so in 56 games.  In our forthcoming arbitration projections, we plan to present multiple numbers, including a calculation that determines the player’s full raise and takes 37% of that, since 37% of a season was played.  For players eligible for arbitration for the first time, their entire body of work is considered.  For everyone else, there’s a philosophical divide in which teams focus on an appropriate “raise” amount while agents tend to hone in on their favored specific salary.

It could be argued that second, third, and fourth time arbitration eligible players already fell well short of earning the salaries warranted by their 2019 production.  Bellinger was slated to earn $11.5MM in 2020 in large part due to his 2019 MVP season, but instead received about $4.26MM.  Arbitration, after all, is a backward-looking system where you get paid for past production.

No one actually knows where arbitration salaries will fall on the spectrum from raw to extrapolated 2020 numbers.  Considering the philosophical differences at hand, both sides carry significant risk of getting entrenched in their positions and pushing the entire market into hearings. For players, the risk is obvious – millions of dollars.  Teams with large arbitration classes could have quite a bit of money hanging in the balance, impacting their approach toward free agency.  In a hearing, a three-person panel hears from both sides and picks a winner – they don’t meet in the middle.  There’s a good chance we’ll see a record number of hearings, so teams and agencies will be taxed in trying to prepare.  While there’s always pressure on both sides to hold the line, it’s generally easier on the team side, since there’s only 30 clubs and they can work together.  The players’ union naturally has a harder time getting agents to act as a cohesive unit.

The March agreement set forth that these arbitration salaries won’t be considered precedent.  But while salaries this year will not directly impact future classes, the deals may have a compounding effect on this particular class as they move through the arbitration system.  It’s unlikely MLB would agree to disregard 2021 salaries when considering what a player should earn in 2022, 2023, and 2024.  That calls back to my point about the philosophical divide between raises and salary.

There’s also a larger backdrop to consider: how will the 2021 season shake out?  When President Trump declared a national emergency in March, that gave MLB commissioner Rob Manfred the authority to suspend contracts in 2020, creating a scenario for a broad negotiation on the 2020 season.  It seems plausible that with gate revenue far from certain for 2021, teams would seek to do something less than a full-salary 162-game regular season. As Jared Diamond of the Wall Street Journal wrote in September after interviewing the commissioner, “Manfred described the idea of playing 162 games next year without fans as ’economically devastating,’ adding that the losses ’would be a multiple’ of the $3 billion from this season.”  It is unclear if MLB will have standing to negotiate a shorter season without a similar declaration of national emergency leading up to the 2021 season.

2020 brought months of fighting and a season like no other, and we’re set up for more of the same this offseason.