The Associated Press’ annual report on Opening Day payrolls set off another round of alarm bells in baseball circles. Despite the recent spate of long-term extensions and mega contracts paid to high profile young stars and elite free agents, the average salary was down…again! This revived concern about pending labor strife, and led some to extrapolate an even larger decline for the entire year, essentially heralding the destruction of baseball’s middle class. Framed in that context, it’s easy to understand why so many are predicting a work stoppage when the current collective bargaining agreement expires.
In the AP report itself, however, was an important explanation. Because of all the long-term deals that were signed recently, the average salary was artificially deflated by signing bonuses. Players often prefer these lump sums for a variety of reasons, including their preferred tax treatment and higher present value. However, baseball allocates signing bonuses on a prorated basis, meaning year one of each contract is assigned a value much lower than the actual payout. According to AP, that turned a $46,000 per player increase into the $36,000 decline that triggered so much concern.
How Signing Bonuses Deflate Year-One Contract Values
Note: Accounting basis = Base Salary + (Bonus/Contract Length)
Source: Spotrac and proprietary calculations
Allowing for the full accounting of signing bonuses in year one would have yielded a 1% increase in Opening Day salaries, which, admittedly, is still meager, especially coming off a decline year. However, the impact of long-term free agent contracts on the average salary is more pervasive. These lengthy deals essentially involve a player accepting lower average annual compensation for a higher guaranteed total over a longer term. So, by definition, the more long-term deals signed, the lower the average annual salary should be for all players. Think of it this way. Some reports had teams offering Bryce Harper as much as $40 million per year for a shorter term deal. Had the former MVP been interested in maxing out his yearly compensation, he could have signed one of those deals and contributed a much higher annual salary than the current $27 million he’ll earn over the next 13 years.
Harper is just one example, but he isn’t alone. This season has seen an increase in not only the number of long-term deals, but also the average length and total value of the contracts involved.
Multi-Year Deals, 2018 v. 2019
Note: Total value and years are for guaranteed portions of each contract. The average age is not weighted based on the years of each contract.
Source: Spotrac data supplemented by proprietary research and calculations
In 2018, 63 multi-year contracts were signed, totaling $1.62 billion and covering 169 contract years. Of that total, 11 deals covered five years or longer and represented $978 million in aggregate. In 2019, there were 64 multi-year deals, but at $3.8 billion and 247 contract years, the value and length increased exponentially. This increase was largely the result of a doubling of five-year deals. Since the offseason, 20 players have signed at terms at least that long, resulting in a total value of $2.6 billion over 132 contract years.
Another important thing to note about this year’s spate of long-term deals is that most have been contract extensions. To date, there have been 23 extensions of four or more years, compared to five free agent deals of that length. That’s important because such deals are signed without maximum leverage. For established stars, that means leaving money on the table. For younger stars, a short-term increase in annual earnings comes at the expense of eschewing arbitration and delaying free agency, two processes that typically result in higher long-term earnings. As a result, extensions not only depress the potential future earnings of the players involved, but they also lower the baseline for all others. And that’s not all. By increasing the short-term compensation for players under control, teams end up shifting budget dollars away from established veterans…the “middle class” of the MLBPA.
The MLBPA used to overwhelm management when it came time to negotiate a new CBA. That was partly a result of extraordinarily strong leadership, beginning with Marvin Miller and continuing with Donald Fehr and Michael Weiner. However, the players had another built-in advantage. Individual owners could be counted on to act in their own best interest to the detriment of the group as a whole. In the current environment, however, the script has been flipped. As the increasing popularity of contract extensions shows, it is now individual players whose actions are contrary to the collective good, and owners who are taking advantage of the discord. So, what should the MLBPA do?
There’s nothing wrong with players signing long-term extensions. The risk of injury is significant; so too is the stress and inconvenience of relocation. If a player is happy in his current environment, and prefers long-term security to maximizing potential future earnings, the MLBPA would be doing a disservice if it pressured him to hold out for free agency. By the same token, however, the union, media, fans, etc. need to better appreciate the value of long-term security when assessing how fairly players are treated under baseball’s current financial system. It’s not enough to simply cite the average salary for all players. The number of years and guaranteed value of all contracts also need to be weighed. That’s exactly what each player does when considering an extension.
Just because the financial trends in the game aren’t as dire as some suggest, the MLBPA would still be wise to refine the system to better align with the new priorities of its members. Instead of discouraging young players from signing extensions, the union should seek to increase their leverage. Whether by reducing the number of years until arbitration or free agency, or increasing the minimum significantly, the MLBPA could give its young stars a stronger negotiating position when considering a long-term extension.
What about the middle class? Must they be the victim of baseball’s new focus on youth? To address their concerns, the MLBPA could push for a win-based financial reward system in which teams would compete for an allocated portion of revenue. Instead of seeking a direct transfer, this approach would create an incentive for teams to pursue marginal wins in the regular season, removing the “all or nothing” financial rewards that currently encourage tanking and discourage building a super team. In this environment, the stability and predictability of veterans would become more valuable commodities as the marginal return on each additional win increases.
Those calling for revolution are misguided. Sure, ownership behaviors, such as tanking and service time manipulation, that contradict the spirit of the CBA should be confronted. However, the MLPBA must also acknowledge the changing attitudes of individual players and recognize the things they value most. If the MLBPA can re-establish its priorities based on the changing needs of its membership, and prudently address the different concerns of each constituency, it should be able to maintain a strong position at the bargaining table, and baseball should continue to enjoy more years of labor peace.
Leave a Reply