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Redesigning Compensation

Beyond the commonly assumed battle between labor and ownership, there are several intraparty issues that drive the broken compensation system in MLB. Specifically, the current MLB demonstrates two unacceptable realities in terms of compensation: (1) MLB players are undperpaid by at least $1 billion; (2) Minor League Players face criminal poverty wages.

Related Reading:
OFP and Minor League Pay
Revising Replacement Theory
Player’s Perspective: Minor League Pay

These compensation inefficiencies (if you’re a free marketeer) or injustices (if you’re a leftist) are arguably driven by significant intraparty battles that laid dormant throughout recent MLB and MLB Players Association negotiations for the latest Collective Bargaining Agreement:

  • Owners fail to justly distribute television and media revenue equally throughout the league. This leaves a constant structural deficiency where clubs like Milwaukee or Tampa are systematically unable to spend like the Dodgers or Cubs.
  • The MLBPA (and by extension, MLB players) refuse to negotiate on behalf of minor league players, leaving those minor leaguers an easy target for poor wages by both players and owners. Without bargaining power, top prospects are unable to cash out their surplus produced to the parent club, and depth minor leaguers are unable to earn a living wage while serving a player development system that allows MLB clubs to produce top prospects.

This is an all-together disgusting state of affairs for an elite profession such as the MLB and Minor League Baseball. Yet, in order to demonstrate the necessity for relatively easy structural fixes to systemwide compensation, it is helpful to dive into the distribution networks of MLB talent that serve as sites for allowing inefficient or unjust compensation schemes. The fixes are easy:

  • Systemwide arbitration on an annual basis, from year one following draft (or international signing) through the close of an MLB career.
  • Minor League Free Agency after two professional, affiliated seasons (or injury rehabs, or foreign academy years).

These fixes are straightforward due to the existing administrative framework to handle arbitration. While fans might protest that such a system would be chaotic, in effect such a system would cause teams to sign minor league players to multiyear contracts, as well as early MLB talent. This system would be as helpful to prospects like Demi Orimoloye (who could secure full-term development contracts and therefore developmental security) as it would be to players like Jonathan Villar, who is absurdly underpaid for the 2017 MLB campaign. Minor league free agency after two seasons would force clubs’ hands in the same way; the best counterargument to this system comes from former Disciples of Uecker editor, Ryan Topp, who emphasized that clubs would forego “project players” if they were threatened with free agency after two minor league seasons. This is a valid concern, but it seems to me that this type of concern could underscore the interest an MLB club has in protecting the financial stability of a longterm project. Such a prospect would be better served by providing that player with a four- or five-year contract than paying that player their current deflated minor league wage.


There are several distributional structures that ensure that minor league players will be criminally underpaid, and emerging-potential-stars like Jonathan Villar are not paid according to their productive surplus. Alongside the intraparty labor and ownership battles noted above, the current MLB system rewards service time instead of production, and the MLB draft also deflates salaries (via bonuses) to a significant degree. Guaranteed money for multiyear contracts also makes it less plausible to sign flexible arrangements that offer a range of pay grades for a player. For the purposes of this analysis, I will focus on demonstrating the historic value of MLB draft picks, along with the risk faced by organizations to develop those players, in an effort to showcase a robust repricing system. In fact, an extremely easy fix to MLB compensation issues would be to offer players their historical value, depreciated by MLB development risk, on draft day; indeed, the vast majority of professional baseball players are significantly underpaid from the day they enter affiliated baseball. But I am also hopeful that this argument is a better conduit to more feasible alternatives, such as earlier minor league free agency and systemwide, annual salary arbitration.


 

The MLB draft is an anticompetitive mechanism that ostensibly serves underperforming clubs by offering a chance to secure the best future prospects, but actually serves all MLB owners by decreasing the contract negotiating powers of potential players. To demonstrate this point, let’s first look at the top of the draft, where the most egregious payment errors occur.

Assembled from Baseball Reference, the following table tracks the risk of developing an MLB player for each pick, the WAR produced per pick, the median WAR produced by that group of picks, and the value of that WAR depreciated by the risk of missing the MLB:

Pick MLB Players / Picks WAR / Pick Median WAR Depreciated Risk Payment
1 47 / 52 19.0 12.3 $120.4M
2 45 / 52 12.3 7.1 $74.3M
3 42 / 52 10.4 2.3 $58.8M
4 41 / 52 10.8 1.4 $59.6M
5 29 / 52 7.5 -1.1 $29.3M
6 38 / 52 10.3 -0.1 $52.4M
7 37 / 52 6.5 0.0 $32.4M
8 33 / 52 4.9 -0.6 $21.7M
9 32 / 52 5.0 -0.6 $21.6M
10 43 / 52 9.0 1.1 $52.3M

The very top of the draft is indeed the best area of the draft because it returns the best players and the best odds that a prospect will reach the MLB. Moreover, even if a prospect “misses,” they are likely to become an MLB replacement player rather than a “did not reach the MLB” player. While the implication that “Replacement Level” is an easily-attainable baseline of talent suggests that replacement players are not very good MLB players, replacement players are very good professional baseball players. The inability to see a replacement player as one of the very best in their chosen profession stems from a system that does not afford labor representation to minor leaguers. So, one way or the other, the top of the MLB draft is indeed the best area of the draft, both for the ability to return strong MLB talent and replacement depth for an organization.

Outside of the top ten picks, the value of each draft pick depreciates relatively quickly. However, fans will notice that in many cases, even the depreciated value of later picks is significantly higher than actual bonuses paid to professionals:

Pick MLB Players / Pick WAR / Pick Median WAR Depreciated Risk Payment
20 30 / 52 7.5 -0.6 $30.4M
30 28 / 52 6.7 -1.0 $25.3M
40 18 / 52 1.8 NO MLB $4.2M
50 23 / 52 3.6 NO MLB $11.1M
60 20 / 52 1.2 NO MLB $2.8M
70 16 / 51 1.4 NO MLB $3.1M
80 23 / 53 1.9 NO MLB $5.7M
90 14 / 52 2.2 NO MLB $4.2M
100 16 / 52 1.3 NO MLB $2.7M
110 15 / 52 2.0 NO MLB $4.0M
120 13 / 52 0.3 NO MLB $0.4M
130 15 / 52 1.5 NO MLB $3.0M
140 14 / 52 1.7 NO MLB $3.2M
150 13 / 52 0.3 NO MLB $0.4M

To estimate lower round value, I designed a structured sample in which I investigated alternating sets of 50 picks (250 to 299, 400 to 449, 550 to 599, 700 to 749, 850 to 899, 1000 to 1049, and 1150 to 1199). Piecing together these picks produces total draft value estimates of $2.4 billion, which constitutes approximately 23 percent of MLB revenue.

Pick Range Total Spending Average ($M or $K)
1 $120.4M -
2 $74.3M -
3 to 10 $328.3M $41.0M
11 to 34 $422.9M $17.6M
35 to 63 $239.3M $8.3M
64 to 78 $83.9M $5.6M
79 to 100 $81.7M $3.7M
101 to 126 $54.9M $2.1M
127 to 150 $47.9M $2.0M
250 to 299 $43.9M $0.9M
400 to 449 $19.1M $0.4M
550 to 599 $17.0M $0.3M
700 to 749 $5.7M $0.1M
850 to 899 $4.8M $0.1M
1000 to 1049 $3.8M $80K
1150 to 1199 $2.9M $60K

Reaching through each range of draft picks, one can find that low round picks receive a relatively modest bonus that nevertheless would significantly expand current pay ranges in many cases. Bonuses would also be expanded to such a degree that even fifth- or sixth-round picks could sign multiyear development contracts with their parent organization.


 

Within the confines of the MLB’s capped draft system, the Brewers signed Corey Ray for $4.1M on draft day. While it’s easy to say that Ray received a huge chunk of cash that should allow him material comfort for his lifetime, the Brewers underpaid Ray by at least $25 million when one considers that Milwaukee was drafting better-than-50 percent odds that they would return 7.5 WARP to the MLB (or, at worst, receive a replacement player. Which in fact stands below Ray’s current 50 OFP-to-60 OFP projection). History says that the Brewers should have offered Ray $29 million on draft day, perhaps paid over the course of a five-year (or potentially longer) development contract.

Compensation Type Salary ($M) Percentage of MLB Revenue Per Team
Draft Bonus $2400M 22.9% $80M
MLB Contracts $2400M 22.9% $80M
Minimum Salary $400M 3.8% $13M

Cashing out historically depreciated player value on draft day would allow an MLB compensation system to accomplish three aims:

  • No minor league player would be underpaid.
  • The MLB league minimum could be set significantly lower than its current half-a-million-or-so rank (since teams would be able to value and price production in a different way). A minor league minimum salary of $35,000, and MLB minimum salary of $100,000 could be paid to players regardless of bonus (and on top of bonus).
  • MLB clubs could divide contract pools into “development contracts” and “MLB guaranteed contracts.”

The benefit of enacting a full draft-day contract is that players would gather the bulk of their professional value from their bonuses, thereby necessitating less pay later in their respective careers in some cases, and more evenly controlled contract levels in other cases (both of these aims would be bolstered by annual arbitration). Teams would also be able to creatively navigate years of bonuses and years of guaranteed contracts by using separate pay pools for both types of contracts. One argument opposing this type bonus system is that teams would be reluctant to trade players, but this is not the case because even a player’s draft day bonus will not exhaust their Overall Future Potential (OFP) in many cases. The value of producing a potentially above average MLB player is simply so high as to create strong surplus for organizations. As an example, 29th pick Lewis Brinson was worth an $18 million draft day bonus, but his 55 OFP-to-70 OFP scouting range is easily worth $50 million, and probably worth closer to $100 million. Even if Brinson was playing on the final years of an $18 million draft day development contract in 2017 and 2018, his surplus value created by his potential MLB role would be significantly greater than the amount of salary owed.


 

Of course, this type of system is obviously impossible because MLB teams do not equally share revenue, and the MLBPA refuses to represent minor league players. As a result, MLB teams can comfortably expect that inefficient and unjust compensation schemes will remain the norm, and MLB players can consider themselves the major claimants of MLB revenues. These interests must be challenged at some point in time, either by underpaid MLB players (like Jonathan Villar), or small market owners (like Mark Attanasio). Given the tools available to price WAR at different levels (or with different assumptions), to estimate OFP, and to price risk associated with both OFP development and draft pick development, it is time for the MLB to redesign their compensation system.

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2 comments on “Redesigning Compensation”

Robin's Home Town

A lot of good ideas here. How do we get this discussed at a more elevated level? It is crazy to me that the Players Association would not want to represent all of the minor leaguers. Typically, unions want to increase their base.

I think your ideas would lead to a ‘pay for performance’ structure, which would reduce the number of Jeff Suppan/Matt Garza deals for the fans to complain about.

Mike Trout would have been PAID in his second MLB season, all of the minor leaguers could survive on their own and the lower performing veterans would have their salaries reduced earlier.

Nicholas Zettel

Thank you, I appreciate the feedback! I am hopeful MLB gets closer to a “pay for performance” structure, and that MLBPA gets it together (and the owners too, for that matter).

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