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Salary Arbitration
Written by Joe Tetreault   
Tuesday, 16 March 2010 21:53

Writing for the Biz of Baseball has given me a fascinating crash course in the salary arbitration process. With so many personnel decisions influenced by the service time of the players involved, the arbitration process has truly become central to understanding why teams elect to leave useful players toiling in the minors (yes, we're looking at you Evan Longoria and Matt Wieters). And despite the unending utitility of salary data gained through the process, one stark fact remains above all others: comparisons across service time are useless.

Evan Hoschild, writing at the Crawfish Boxes, stumbled into such an inapt comparison recently.

Of course when a player of similar age and position signs a new contract, I get interested in what the Astros are going to do with Pence. Does Ed Wade wait and see how Hunter does to start the season in 2010 and begin to think beyond the one year increments that has been the approach with not only him but Michael Bourn? At this juncture, with potentially so much payroll coming off the books after this season, I think this is the prudent approach to take.

A multi-year deal for Hunter Pence is absolutely the prudent course of action. But Hochschild will be disappointed with the cost of the contract Astros GM Ed Wade could negotiate with the Astros right fielder. Pence's starting point is significantly higher than that of either Denard Span or Arizona's Mark Reynolds who just signed a long term contract as well.

Because neither would be arbitration eligible until after the season Span and Reynolds are more comparable. Their teams could have set salaries however they wanted as long as it did not dip below the league minimum or represent more than a 20% pay cut from the previous year's total compensation. In short, the teams held almost all the leverage. With that in mind, let's tackle the key mistake in Hochschild's piece:

The details of the contract...are ridiculous in their reasonableness. The per year salaries increase conservatively, buying out five arbitration eligible years for the certainty that goes with a long term contract.

First off, Span does not have five years of arbitration eligibility. Players are guaranteed three years of arbitration eligibility. Some players receive four years, by qualifying as a Super Two player after their second full year of major league service time.

With Minnesota buying out three arbitration eligible years and two years of team contract control, they could set a low initial salary and conservative raises. Reynolds provides another example. His salary for 2010 is just $500,000. Arizona had renewed Reynolds on the 11th, before working out this deal which can (if the Diamondbacks exercise the team option) buy out the entirety of Reynolds' arbitration eligibility.

Comparing Pence to Span is category error because Pence was arbitration eligible this past season. The increased leverage helped him win a significant raise from the Astros for 2010. Had he not qualified as a Super Two, he would have been subject to contract renewal this spring, just like Span and Reynolds were. That difference is immense.

Pence and the Astros agreed on a deal that pays him $3.5 million in 2010 establishing his baseline for 2011. Pence’s 2011 will be far above that baseline, because arbitration is designed to inflate salaries. This isn't some voodoo from Scott Boras. It's the nature of the system.

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Proof is found yeat again in Arizona. Their first baseman, Conor Jackson who took home $3.05 million in 2009, suffered through a horrendous season, as he battled valley fever. Despite his illness and poor performance, the Diamonbacks agreed with him on a contract that gave him a raise of $50,000. Though modest, his raise was a certainty, because the arbitration process precludes pay cuts.

Constructing a reasonable contract for Pence needs to be based on his service time, his performance and comparable players. Luckily, we can project Pence’s progression with a similar player who is one year ahead of Pence in the arbitration process. The Dodgers Andre Ethier provides a near ideal roadmap for what lies ahead.

Both players qualified for arbitration as Super Twos following their seasonal age 26 years. Players can qualify for arbitration after they complete their second year of MLB service time.  The must accumulate at least 86 days of service during the immediately preceding season and rank in the top 17 percent in total service among players with more than two, but less than three years of service time.  Maury Brown discussed Super Two players in the arbitration process last year.

Through his first three seasons, Pence posted a .289/.340/.488 slash line in 1,773 plate appearances. Ethier's first three seasons were statistically similar, though with marginally less playing time. His batting line was .299/.364/.482 in 1,542 plate appearances. Ethier’s first arbitration influenced salary was $3.1 million, which is also comparable to the $3.5 million Pence will get in 2010.

Ethier’s playing time increased in 2009 which boosted his counting stats helping him hit 30 homeruns, a plateau he had not approached previously. His perceived breakout season prompted the Dodgers to work out a long term extension that will pay him $15.25 million over two seasons. For perspective, his two-year guarantee is $1.25 million less than Span will get over five years.

Using Ethier as a guide, if Pence maintains his current rate of production, he should expect no less than $6.5 million in 2011 (Ethier is getting $6 million next season and Pence has a higher starting point) and better than $10 million in 2012 (Ethier is getting $9.25 million). To buy out the balance of his arbitration eligibility will likely cost Houston close to $30 million over three seasons on top of the $3.5 Pence will earn this year.

Hochschild's premise is sound. Signing young talent to team friendly, cost-controlling deals is almost without question a reasonable decision. But once a player reaches the arbitration process, suppressing salary escalation becomes nearly impossible. Had Houston negotiated a long term deal with Pence prior to the date the players and teams exchanged salary arbitration figures, they may have been able to lock him up for the duration of his arbitration eligibility for less than $24 million over the four seasons. Having demurred, they now face a bill that will likely be 40% higher. That's the difference arbitration makes on salary increases.


Joe Tetreault is a member of the Business of Sports Network, which includes The Biz of Baseball, The Biz of Football, The Biz of Basketball and The Biz of Hockey.

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