The following is a guest article by Adam Holzman.
Since the introduction of free agency in the mid-1970s, the salaries of Major League Baseball players have risen without limit. The abolishment of the reserve clause, which bound a player to his original team for the duration of his career (barring a trade), forced MLB owners to compete with each other in attracting premier players to play for their teams, driving up player salaries. As a result, many small market teams find it difficult to compete in a market where large market teams can offer substantially larger sums of money to free agents. While the reserve clause unfairly restricted the salaries of MLB players, free agency has threatened the competitive balance of the game. However, is a salary cap an appropriate solution to create balance in the playing field?
Certainly, small market teams are disadvantaged in the free agency market. In Moneyball: The Art of Winning an Unfair Game, author Michael Lewis explains how Doug Pappas, the late, great sabermatrician, measures the quality of a team’s front office by determining the team’s “marginal wins” (all wins above the 49th) and “marginal salary” (all payroll dollars spent above $7 million). Dividing marginal wins by marginal salary gives the team’s financial efficiency for a given year. From 2005 through 2007, the median financial efficiency for MLB teams was $2,265,414.99 per marginal win. In 2007, the minimum number of wins needed to make the playoffs in the American League in 2007 was 94, or 45 marginal wins. (see a detailed breakdown of the 2007 Marginal Wins/Marginal Payroll here on The Biz of Baseball). Therefore, a team operating at the average efficiency level would have had to commit to a marginal payroll of $101,943,674.60, or a total payroll of $108,943,674.60. Since most small market teams cannot afford to spend this much on payroll, the general managers of these teams are forced to find ways to operate at higher levels of efficiency in order to compete with large market teams. Clearly, small market teams have an inherent disadvantage in free agency.
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However, before we declare that a salary cap is a viable measure to fix the problem of competitive balance, we must consider its feasibility and its consequences. Firstly, the hope that a salary cap will be implemented in the near future is unreasonable. Not only would large market teams be reluctant to concede their financial advantage in the free agency market, but the Major League Baseball Players’ Association (MLBPA), the most powerful union in America, would not accept any measure that would decrease the amount of money being spent on player salaries. If the commissioner’s office were to attempt to install a salary cap, the decision would almost certainly be followed by the most prolonged strike in the history of major league sports.
In addition, the question must be asked: would a salary cap actually provide us with a more entertaining league? In the NFL (which has a salary cap), team quality fluctuates drastically from year to year, and the final standings of each season are almost impossible to predict. I may be in the minority, but I find a league with a greater degree of continuity to be much more entertaining. To me, one of the most appealing aspects of being a fan of a certain team is being able to watch the front office construct a contender or a dynasty from a previously hopeless club. I worry that a strict salary cap, while fixing the problem of competitive balance, would create too much parity throughout the league.
A stronger luxury tax system is most likely the best possible available method for leveling the playing field among large market and small market teams. While large market teams will still have the option to spend higher amounts of revenue on payroll, they will be taxed a certain percentage of their total payroll. This tax revenue will then be distributed amongst teams that do not surpass a predetermined payroll threshold.
However, out of this system of revenue redistribution arises another question: how can MLB administration prevent the owners of small market teams from pocketing the redistributed funds and refusing to spend it on payroll? Contrary to conventional wisdom, an owner’s ultimate goal is not necessarily to construct a winning team, but to make a profit. Because these two goals often go hand in hand (winning teams should increase team popularity and, therefore, team revenues), the distinction is sometimes overlooked.
One must consider the incentives presented to small market team owners in producing winning teams. When a small market team competes with a large market team for a high profile free agent, the small market team would inevitably have to spend a higher percentage of its total revenue in order to win the players’ services. Even if the small market owner decides to make this financial commitment, the financial returns on his investment will be less than what they would have been for the large market team. For argument’s sake, let’s assume that whichever team signs a certain high profile free agent will receive attention from an additional 2% of the team’s metropolitan area. In other words, 2% of the area’s population who previously could’ve cared less about the team now begins to spend money on tickets, jerseys, etc, because of the attraction of the newly-signed player. For a team in New York, this would signal an increase of about 376,370 local fans (2% of 18,818,536 total people in the metropolitan area), while, in Milwaukee, the team would receive increased revenues from only 30,200 additional fans (2% of 1,509,981 total people). If I am the owner of a small market team, why would I invest a greater percentage of my revenues in a player that will produce less increased revenue for my team than he would for a large market team? Small market owners, such as those of the Florida Marlins, are often criticized for a lack of commitment to producing a winning team, but, in reality, there is a lesser amount of financial incentive for the Marlins’ ownership to construct a winner than there is for large market teams.
The solution to the problem produced by the incentive disparity is twofold. Firstly, in addition to the luxury tax threshold described above, a salary “floor” should be implemented. Teams with payrolls below this floor would not be eligible to receive the redistributed luxury tax revenues, creating an incentive for stingy owners to spend more money on payroll. Secondly, the redistributed revenue should act less like a donation and more like an interest free loan. If the owners do not spend the added funds on team payroll by the end of the season, the money will be returned to the commissioner’s office. In other words, if a team receives $8 million in redistributed funds but only spends $5 million on payroll, the owner of the team will not be allowed to retain the extra $3 million. This removes any incentives that small market owners have to restrict team payroll. As a result of this plan, small market teams should become more financially competitive in the free agency market relative to large market teams.
Most importantly, the MLBPA would not be opposed to this plan. While an NFL-style salary cap would reduce the total amount of money spent on player salaries, the luxury tax plan may, in fact, promote increased spending on payroll. Although the ability of large market teams to agree to astronomical contracts would be restricted, small market teams would simultaneously begin to commit more money to team payroll. Because more teams would have a legitimate chance to sign high priced free agents, the competition among owners to sign such free agents would increase. Such competition would increase the negotiating leverage of the players, naturally driving up player salaries. All things considered, this luxury tax system appears to fix the problem of competitive balance between large market and small market teams, preserve the ability of a team to produce a consistent contender, and satisfy the MLBPA’s demands. I doubt that a salary cap would have the same level of success.
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Adam Holzman is a senior at Amity Regional High School in Woodbridge, CT., and is a guest contributor to the Business of Sports Network. He will be attending Yale University in the fall.