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trying to put salary inflation in perspective


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#1 philly sox fan


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Posted 12 November 2007 - 08:28 PM

I know I've had a hard time wrapping my own mind around the massive surge in player costs the last couple of years and judging from the abject horror some people seem to have at the thought of Lowell making 14M or ARod making 30M I think many other people have that same problem. I thought maybe this look at where the average team salary has gone from 1996 through 2007 might help put some of these "shocking" individual salaries in perspective.

I also included a projection of where the average team salary may go through 2012. I don't have a link off the top of my head, but I'm pretty sure payroll has increased by 11% per year since (blank). I'm not sure if that blank is supposed to be the start of free agency in 1976 or something else, but over a long period of time there has been a study increase at about that rate. I used a slightly more convervative and much rounder 10% average increase over that future interval.

For a long time the idea of a 100M payroll seemed completely fantastic. Three teams (Yankees, Red Sox and Dodgers) crossed that threshold in 2001. Last year it looks like 8 teams - more than 25% of the league - spent more than 100M on payroll. So the third column looks at how a flat 100M payroll compares to the league average payroll from 2001 on.

The last three columns look at the percentage of an average payroll that would be taken up by a 10, 15 and 25M player.

Table
Year Ave Payroll 100M as %ave 10M as %ave 15M as % ave 25M as % ave
1996 32.0 31 47 78
1997 38.0 26 39 66
1998 40.0 25 37 62
1999 48.2 21 31 52
2000 55.9 18 27 45
2001 65.4 153 15 23 38
2002 67.5 148 15 22 37
2003 70.9 141 14 21 35
2004 69.0 145 14 22 36
2005 73.1 137 14 21 34
2006 77.6 129 13 19 32
2007 82.6 121 12 18 30
2008 90.9 110 11 17 28
2009 100.0 100 10 15 25
2010 110.0 91 9 14 23
2011 121.0 83 8 12 21
2012 133.1 75 8 11 19


The average team payroll in 1996 was 32M. It took just five years for the average payroll to double to 65M. Now it's possible that that pace was too quick for the growth in overall MLB revenues. Certainly owners cried poverty again leading up to the CBA negotiations in 2002. That CBA instituted enhanced revenue sharing and helped to usher in a period of stagnant payroll growth. Over the next four years the average payroll just barely nudged up. With another CBA agreement in place and numerous stories of MLB revenues spiking up we've now seen the rate of increase pick back up to the point that the average payroll in 2007 was up over 80M and roughly 3-fold higher than it was during the 1994/95 strike when MLB claimed that the industry was in danger of going under.

On the team level our mental framework of about what a reasonable payroll figure is has shifted dramatically higher. It was only 5, 6 years ago that the Twins and A's were competing for playoff spots at ~30M in total payroll. Last year both teams missed the playoffs with payrolls over 70M. Nothing has changed about their individual markets or revenue potential, but the rising tide was really lifted their boats, if not their on field performances.

When the first teams crossed the 100M team payroll level they were over 50% higher than the average team payroll. Thatís a huge financial advantage. The stagnant period that followed meant that the percentage slowly drifted down for a few years, but it picked up to the point that last year a 100M payroll was only 20% above average. In a couple of years it will be average a few more years after that we may see the financial weak sisters of baseball crying poverty with payrolls of 100M.

And in that same way we have to change our mental framework about team payrolls, we have to shift our framework about individual players. It wasn't that long ago that Julio Lugo's 9M or Mike Lowell's possible 14M salary meant that they were expected to be stars or at least near stars. Now, 9M is the going rate for a decent regular and while it's, of course, disappointing when a 14M player like the future Lowell or the present JD Drew doesn't perform that well, it's hardly crippling or a future albatross contract. And the reason that's the case is because those contracts become an increasingly smaller percentage of payroll as payroll at the team level continues to increase.

Or at least that's what I'm trying to show in those last three columns.

In 1999 a 10M player took up 21% of an average payroll. By 2003 a player needed to make 15M to take up 21% of an average payroll. By 2011 it may be that a 25M players takes up that same payroll percentage. In this sense Ė and I do think itís a relevant one Ė the 25M player of 2011 is no more risky than the 10M player of 1999.

Look at ARodís last deal. In 2001 his 25M AAV was 38% of an average payroll. By 2007 that had dropped to 30% and by 2012 it may be cut in half all the way down to 19%.

Does that help put things in perspective a bit? It does for me.

Oh, and how does this relate to the Sox specifically? Since Epstein took over the Sox have had a payroll that has been 64% greater than the average team (with a low of 41% and a high of 84%). As a result these types of players take up a much smaller percentage of their very large payroll. If they sign Lowell he will probably be 10% of their payroll at ~14M AAV. If the average 2008 payroll does end up at 91M, then obviously a team that commits 10% of their payroll to one player would be paying that player 9.1M.

And actually I think thatís a nice way to look at the Sox payroll advantage. They can spend 5M more on a player Ė and theoretically get a much better player Ė and yet have the same basic risk profile.

#2 bowiac


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Posted 12 November 2007 - 09:12 PM

One interesting factor here is how salary inflation plays in nicely with ageing. Players lose on average after their peak at almost the same rate at which salaries expand in MLB. (Both at around 10% per year).

So lets say Mike Lowell profiles to be worth $14M next year, and he doesn't project worse than most 34 year olds going forward. The fact that he's going to be 37 at some point making $14M shouldn't terrify us, because of the decreasing value of $14M. Because a player's value is nonlinear (a player worth four wins above average should, and will get paid more than twice as much as a player worth two wins above average), this isn't actually perfect, but it does do a pretty good job at keeping albatross contracts in check.

We keep hearing about albatross contracts, and it seems like they never actually pan out to be the millstones that many people project. Sure players decline - but so their salaries, at least in baseball terms.

Edited by bowiac, 12 November 2007 - 09:13 PM.


#3 singaporesoxfan

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Posted 12 November 2007 - 09:18 PM

One piece of data that would be nice to know is the proportion of players' salaries compared to revenues. Are rising salaries the natural result of roughly the same number of people (presumably the overall number of players any team is carrying hasn't changed that much) getting to share in a fast-growing pie?

#4 Clears Cleaver


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Posted 12 November 2007 - 09:30 PM

It would be interesting to see how much THE average payroll is inflated by the Red sox and yankees and then see the median or average payroolls of the rest of the league. Becasue there is a belief that the $25M player is really only viable for a couple teams

I guess it would aslo be interesting to see how much the Red Sox gave up in revenue sharing and how that (if completely reivested) would have inflated average payrolls the last couple years

#5 TomRicardo


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Posted 12 November 2007 - 09:33 PM

I really doubt the average payroll will jump this year. The only major free agent is ARod and I doubt he will get a huge jump up from 27 million AAV. I suppose Lowell would add a bit but there is just not enough major free agents to rise MLB payroll 250 million per a year (thats what is necessary for MLB avg team payroll to jump up 8 million).

#6 philly sox fan


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Posted 12 November 2007 - 09:45 PM

I really doubt the average payroll will jump this year. The only major free agent is ARod and I doubt he will get a huge jump up from 27 million AAV. I suppose Lowell would add a bit but there is just not enough major free agents to rise MLB payroll 250 million per a year (thats what is necessary for MLB avg team payroll to jump up 8 million).


It's not just FAs though, it's all players. Miguel Cabrera is going to jump from 7M in arbitration to maybe 11/12M. Chase Utley is going to jump from 4.5M to 7.5 as part of his longterm contract. Brett Myers is jumping 3.5M.

Holy crap, Beltran is jumping from 12M to 18.5M. David Wright is picking up 4M. Josh Beckett will make an extra 3.5M and a few other Sox will make an extra million here or there.

The normal progression of players from pre-arb to arb and players already signed to big deals and getting raises always eats up more payroll than people expect.

I bet most teams have players already under contract (or arb eligible) who will add an extra 5-10M to their payroll. Toss in a few big FAs and a bunch of JC Romeros, who just just tripled his salary, and it adds up.

#7 philly sox fan


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Posted 12 November 2007 - 09:50 PM

One piece of data that would be nice to know is the proportion of players' salaries compared to revenues. Are rising salaries the natural result of roughly the same number of people (presumably the overall number of players any team is carrying hasn't changed that much) getting to share in a fast-growing pie?


Well revenues are supposedly around 6B. It looks like total payroll was around 2.5B or 42%.

I really need to find some old revenue numbers because my recollection is that that is very, very low historically. I think that number used to be around 60% (and may be codified by CBAs in the NFL and NBA at that level).

If it did use to be 60%, then that's about 1B that used to be going to the players that now stays with the owners. That's so ridiculously large, that I have a hard time beleiving it, but a) the players have gotten thier butts kicked in the last 2 CBAs and b) revenues are exploding.

It is very likely that baseball owners can spend like drunken sailors on JC Romeros and still make a ton of money.

#8 bowiac


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Posted 12 November 2007 - 10:07 PM

Well revenues are supposedly around 6B. It looks like total payroll was around 2.5B or 42%.

I really need to find some old revenue numbers because my recollection is that that is very, very low historically. I think that number used to be around 60% (and may be codified by CBAs in the NFL and NBA at that level).

If it did use to be 60%, then that's about 1B that used to be going to the players that now stays with the owners. That's so ridiculously large, that I have a hard time beleiving it, but a) the players have gotten thier butts kicked in the last 2 CBAs and b) revenues are exploding.

It is very likely that baseball owners can spend like drunken sailors on JC Romeros and still make a ton of money.


While it's not definitive, I found this article which comfirms your recollection:

The league says that is a higher share of revenues than go to players in the NBA (55 percent), MLB (63 percent) and NFL (64 percent). And it's much higher than a decade ago, when 57 percent of NHL revenues went to player costs.


I also found an article which cites the figure as being 69% in 2002, and as being 52% in what I think is 2005 (the article doesn't have a date, absurdly enough).

So it seems like since 2002, the percentage spent on payroll has shifted pretty rapidly towards the current figure. As I'm skeptical the owners were even really losing money in 2002, I suspect this means we're going to continue seeing massive salary inflation, as owners have a great deal of "give".

#9 Rudy Pemberton


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Posted 12 November 2007 - 10:09 PM

It seems like the high end of the market has been limited to AAV of around $18-19M, though, for whatever reason. All the talk about how A-Rod is going to get $30 or $35M per year forgets that he is still the highest paid player in the league by a good 20%, and he signed that deal 7+ years ago. Are owners hesitant to give players $20M+ per year, even though it makes up a smaller percentage of their payroll than it would have in the past? If so, why? Is it the Mike Hampton syndrome? It seems like the highest paid player of each FA class is getting that amount; whether it's Carlos Beltran, Barry Zito, Alfonso Soriano, or whoever.

Payroll's have certainly expanded- but where is it happening? I think you hit on it and it's largely teams locking up their own guys before they hit FA? For FA, it seems to be the middle class- the guys making $9-$10M now who would have made $5M a few years ago? Guess you'd really have to look at it on a team by team basis to see where the growth is coming from, it's likely a lot different for the A's, Indians, and Twins than it is for Dodgers, Sox, Yankees, and Mets.

Interesting stuff.

#10 philly sox fan


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Posted 12 November 2007 - 10:13 PM

So it seems like since 2002, the percentage spent on payroll has shifted pretty rapidly towards the current figure. As I'm skeptical the owners were even really losing money in 2002, I suspect this means we're going to continue seeing massive salary inflation, as owners have a great deal of "give".


Good finds on the articles.

And people think Selig has been a bad representative of the owners? Those guys are going to erect a 100M statue made out of gold to the guy.

#11 TomRicardo


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Posted 12 November 2007 - 10:21 PM

It's not just FAs though, it's all players. Miguel Cabrera is going to jump from 7M in arbitration to maybe 11/12M. Chase Utley is going to jump from 4.5M to 7.5 as part of his longterm contract. Brett Myers is jumping 3.5M.

Holy crap, Beltran is jumping from 12M to 18.5M. David Wright is picking up 4M. Josh Beckett will make an extra 3.5M and a few other Sox will make an extra million here or there.

The normal progression of players from pre-arb to arb and players already signed to big deals and getting raises always eats up more payroll than people expect.

I bet most teams have players already under contract (or arb eligible) who will add an extra 5-10M to their payroll. Toss in a few big FAs and a bunch of JC Romeros, who just just tripled his salary, and it adds up.


There are also the people who are getting less money/leaving baseball. Bonds, Clemens, Clement, Possibly Pettitte. I just don't see baseball's total payroll going up 250 million.

#12 Saints Rest

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Posted 12 November 2007 - 11:45 PM

Payroll's have certainly expanded- but where is it happening? I think you hit on it and it's largely teams locking up their own guys before they hit FA? For FA, it seems to be the middle class- the guys making $9-$10M now who would have made $5M a few years ago? Guess you'd really have to look at it on a team by team basis to see where the growth is coming from, it's likely a lot different for the A's, Indians, and Twins than it is for Dodgers, Sox, Yankees, and Mets.

Interesting stuff.

The way to track this would be, if possible, to compare the mean salary to the median. If Rudy's point is accurate, the median would be rising more quickly than the mean.

As for salaries as a percentage of revenues, one has to be carfeul about comparing apples to oranges, to wit:
Is the calculation of revenues always being emasured in the same way?
Likewise, sit he calculation of salaries always being measured the same?
If one includes benefits and luxury tax (or not) it would drastically change the percentage.
Likewise if one includes non-baseball revenues (or wahtever the term is that does not apply to revenue sharing), it will change the percentage.

#13 Paul M


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Posted 13 November 2007 - 12:01 AM

Tom, unless payrolls as a % of revenues buck the trend and shrink, the $250 million seems easily attainable. Sure, there's always attrition and players exit the system, but existing players more than off-set it. Take arbitration and FA and voila you get baseball's version of inflation which is something I would not want to bet against. The Posada deal is an early sign of what will happen, and in 3 years that deal won't seem out of line like Varitek's deal today looks pretty reasonable for an above average catcher. For the industry as a whole, a rising tide lifts all boats. I guess this is why the cost-controlled player will always be extremely valuable.

#14 singaporesoxfan

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Posted 13 November 2007 - 02:11 AM

If the payrolls really are down to 42% of revenue, then really, the Posada deal is not an overpay - it's merely an example of a player who's less underpaid. The true scarcity then is the roster spot, rather than funds. And any team that anticipates this inflation (maybe the Sox did, with the Drew and Lugo contracts) can lock up players for prices that in 4 years may seem like bargains - assuming they're willing to commit that future roster spot.

#15 Tangotiger

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Posted 13 November 2007 - 09:46 AM

Up until 2004 or 2005, the following all increased by 10% over the last 10 to 30 years:
- payrolls
- revenue
- market value of teams

Interestingly, MLB revenues have shot up over the last couple of years, as payrolls are now below the 50% revenue level. The key play will be MLBAM, and how much of that money teams will be giving to the players.

#16 Worst Trade Evah


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Posted 13 November 2007 - 10:09 AM

Are teams pricing risk more effectively now? Back in the 1999-2000 era of super-contracts, the stock market was bubbling, and people just seemed to have little conception of pricing risk. Didn't contracts like those of Dreifort, Hampton, Neagle, and Park affect the ability of those teams to do other things on the market? Didn't Manny's contract affect the Sox for a while? They seemed to act like it did.

#17 Maalox


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Posted 13 November 2007 - 11:23 AM

Are teams pricing risk more effectively now? Back in the 1999-2000 era of super-contracts, the stock market was bubbling, and people just seemed to have little conception of pricing risk. Didn't contracts like those of Dreifort, Hampton, Neagle, and Park affect the ability of those teams to do other things on the market? Didn't Manny's contract affect the Sox for a while? They seemed to act like it did.

And yet they chased ARod and assumed Mike Lowell's contract. I don't think the Sox ever genuinely felt hampered by Manny's contract. I think they were afraid they would be someday but have revised that viewpoint.

I think that in general the Sox F.O. and other F.O. recognize that consistent, top-flight talent is worth the huge contract, whereas guys who have one or a couple good years are not. Related to this, I think they recognize that big contracts to elite players are less likely to be drivers for the whole market, precisely because Manny Ramirezes, Derek Jeters and Alex Rodriguezes don't grow on trees. By contrast, if you pay Denny Neagle a market-beating contract you end up almost hoping he gets hurt, so that at least he'll serve as a warning to GM's about the damage overpaying does to the market. This could be the stance the Sox are taking with Lowell: that it's the bad contracts to merely good players that driver salaries up, not the huge contracts to the best players.

#18 Worst Trade Evah


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Posted 13 November 2007 - 12:14 PM

The Sox chased ARod -- and walked away over what amounted to about $15 million, as I recall it anyway.

Anyway, I'm just wondering if teams are 1. re-evaluating the cost of risk, and 2. more effectively pricing the value of stars.

Consistent, top-flight talent carries risks as much as that Neagle-type contract, with the likelihood of greater performance balanced by the increased level of commitment. I'm sure teams like the Red Sox do a lot more looking at injury profiles, types of injuries, etc, then they used to. Juan Gonzalez was consistent, top-flight talent who was offered 7/140 from the Tigers, and turned it down. He immediately got hurt and basically was finished. If he'd accepted that contract, that contract might have been the biggest bust ever, and it's hard not to think that would have seriously damaged the Tigers. I'm sure the Tigers thought Gonzalez seemed like a sure bet -- Hall of Fame class slugger who kept himself in tip-top shape (probably via steroids, which was not much of a concern then).

Another problem baseball players have relative to sports like football and basketball is that even huge stars are a lot closer to replacement level. There may be money in the system to pay them, but the cost of their marginal wins gets prohibitive pretty fast. A big NFL star quarterback may well be worth 25%-33% of team budget; it's hard to see that for a baseball player. They're intrinsically more fungible, even a star like ARod.

Edited by Worst Trade Evah, 13 November 2007 - 01:00 PM.


#19 Chuck Schilling

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Posted 13 November 2007 - 02:13 PM

Another problem baseball players have relative to sports like football and basketball is that even huge stars are a lot closer to replacement level. There may be money in the system to pay them, but the cost of their marginal wins gets prohibitive pretty fast. A big NFL star quarterback may well be worth 25%-33% of team budget; it's hard to see that for a baseball player. They're intrinsically more fungible, even a star like ARod.

Tom Brady had the largest cap number of any NFL QB in 2006, at 13.828MM, with the Patriots having a total payroll of 105MM per USA Today. While it's true that the rarest commodity in the game, dominant starting pitchers, can each contribute only once every 5 days or so, the MLB market values them about the same as the premier NFL talent, which plays every game. Part of it may be due to the relative lack of predictability of individual games in baseball - the worst teams still win about 3 of every 8 games, while the worst in the NFL win about 1 in 8.

#20 Worst Trade Evah


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Posted 13 November 2007 - 02:19 PM

Tom Brady had the largest cap number of any NFL QB in 2006, at 13.828MM, with the Patriots having a total payroll of 105MM per USA Today. While it's true that the rarest commodity in the game, dominant starting pitchers, can each contribute only once every 5 days or so, the MLB market values them about the same as the premier NFL talent, which plays every game. Part of it may be due to the relative lack of predictability of individual games in baseball - the worst teams still win about 3 of every 8 games, while the worst in the NFL win about 1 in 8.


I'm not sure why you choose cap number. That's just a league mechanic -- total compensation on an AAV basis should be the relevant comparison. Football is weird -- Manning's "salary" was $35,000,000 in 2004, and has since gone to the 9-11 million range.

#21 Maalox


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Posted 13 November 2007 - 02:44 PM

The Sox chased ARod -- and walked away over what amounted to about $15 million, as I recall it anyway.

Anyway, I'm just wondering if teams are 1. re-evaluating the cost of risk, and 2. more effectively pricing the value of stars.

Consistent, top-flight talent carries risks as much as that Neagle-type contract, with the likelihood of greater performance balanced by the increased level of commitment. I'm sure teams like the Red Sox do a lot more looking at injury profiles, types of injuries, etc, then they used to. Juan Gonzalez was consistent, top-flight talent who was offered 7/140 from the Tigers, and turned it down. He immediately got hurt and basically was finished. If he'd accepted that contract, that contract might have been the biggest bust ever, and it's hard not to think that would have seriously damaged the Tigers. I'm sure the Tigers thought Gonzalez seemed like a sure bet -- Hall of Fame class slugger who kept himself in tip-top shape (probably via steroids, which was not much of a concern then).

In general I think it's #2. More than that I cannot venture, as I'd be getting into somewhat dangerous territory here with regard to anecdotal proof of a principle, as opposed to anecdotal illustration of a point of thought. I don't know enough about Juan Gonzalez to know if his injury and failure to recover was foreseeable or not. So I cannot guess whether he represents some larger argument about big contract risks.

#22 Chuck Schilling

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Posted 13 November 2007 - 02:57 PM

I'm not sure why you choose cap number.

What a dumb question - because it fit my argument best. -insert smilie here-
Football salaries are weird, but with the non-bonus money not guaranteed by the club, cap number may be closer than AAV which might include heavily backloaded deals. Not to digress too much, but I don't see where the NFL market is valuing top talent at 25-33% of their payroll - it seems to be more in line with how MLB values it's top stars. FWIW, Brady's official 2006 salary inclusive of bonuses was $16MM, still a far cry from 25-33%. Manning's $35MM in 2004 was followed up by $668K in 2005 and $10MM in 2006.

#23 Worst Trade Evah


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Posted 13 November 2007 - 03:07 PM

What a dumb question - because it fit my argument best. -insert smilie here-
Football salaries are weird, but with the non-bonus money not guaranteed by the club, cap number may be closer than AAV which might include heavily backloaded deals. Not to digress too much, but I don't see where the NFL market is valuing top talent at 25-33% of their payroll - it seems to be more in line with how MLB values it's top stars. FWIW, Brady's official 2006 salary inclusive of bonuses was $16MM, still a far cry from 25-33%. Manning's $35MM in 2004 was followed up by $668K in 2005 and $10MM in 2006.


Okay, I accept the correction that football quarterbacks don't make 25-30% of team salary, which to me makes it even less likely that a rational pricing scheme for a baseball star would ever approach that. Boras appears to think some team will give ARod 25-30% of team salary, when ARod has less impact on team wins for a league that makes less money than Manning or Brady. He will never matter to a team even close to a way those players do.

edit: I feel like I'm flailing around a little bit. I'm just wondering if there aren't changes in the way teams do business -- sort of a macro-Moneyball. There's more money to pay stars, so stars may get more, but there may also be adjustments in the way teams value stars, in both estimating contract risk and the value of their production. These trends may cut against each other, with the result that player salaries may tick up, but not in the same proportions as other eras.

Edited by Worst Trade Evah, 13 November 2007 - 03:27 PM.


#24 Rudy Pemberton


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Posted 13 November 2007 - 04:01 PM

Boras appears to think some team will give ARod 25-30% of team salary, when ARod has less impact on team wins for a league that makes less money than Manning or Brady. He will never matter to a team even close to a way those players do.


Well, there's major differences in TV contracts and ticket sales with MLB as compared to NFL. Nearly every NFL team sells out every game and the TV money is all national. A superstar in MLB has the ability to add to a teams revenue far more than he does in the NFL. I don't think the Giants really benefit from being in a bigger market than the Packers, at least not to the extent in MLB.

#25 Tangotiger

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Posted 13 November 2007 - 04:09 PM

ARod will get 30MM / yr, if you believe he's a 7 wins above replacement player (don't bring up WARP please). Free agents are getting paid at 4.4MM per win. It's really that simple.

#26 bowiac


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Posted 13 November 2007 - 05:09 PM

ARod will get 30MM / yr, if you believe he's a 7 wins above replacement player (don't bring up WARP please). Free agents are getting paid at 4.4MM per win. It's really that simple.


Isn't the scale nonlinear? It certainly should be...

#27 Tangotiger

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Posted 13 November 2007 - 05:25 PM

Isn't the scale nonlinear? It certainly should be...


It is not non-linear (i.e., it IS linear), and I have a challenge out there for anyone who wants to prove otherwise:
http://www.insidethe...top_end_talent/

It's quite simple: create me a model and show me it's not linear.

#28 bowiac


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Posted 13 November 2007 - 05:33 PM

It is not non-linear (i.e., it IS linear), and I have a challenge out there for anyone who wants to prove otherwise:
http://www.insidethe...top_end_talent/

It's quite simple: create me a model and show me it's not linear.


By "should be" - I meant that shouldn't be teams be paying a nonlinear amount, not are they actually doing so.

Interesting to see that they aren't.

#29 ManhattanSoxMan

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Posted 13 November 2007 - 05:36 PM

Not to hijack, but had a thought.

The long term compounded rate of return for the stock market (Dow as proxy) is around 9.5% (based on Ibbotsen's data). If franchises are looked at like other capital assets (at least for the very wealthy and taking into effect tax benefits of capital appreciation vs current income), and baseball franchise values were assumed to follow a similar rate of return (not sure if this is a valid assumption), can it be said that payroll as a whole following the stock market (in the long run) is not irrational? Maybe the efficient markets theory works for franchises and athlete payrolls over the long run? If that is the case, then arguably its only the collection of a team contracts (an investment portfolio of sorts) that over their life exceed the anticipated rate of return on franchise value, taking into account risk, that are truly "bad contracts/investments". It would appear that owners looking for current income (Jacobsen and the Bruins for example) are shortchanging the fans (because fans do not participate in those returns), and those looking for long term capital appreciation (Henry, and Steinbrenner for that matter) are naturally inclined to be the most "fan friendly", even while doling out individual contracts that seem excessive?


Or maybe its slow at work and its hot stove season.

Edited by ManhattanSoxMan, 13 November 2007 - 05:48 PM.


#30 philly sox fan


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Posted 13 November 2007 - 08:39 PM

If I had a nickel for every time the Wall Street Journal ripped me off... let's just say Murdoch would have had to have met my price. Or not.

Here's a link to a BTF discussion of a brief WSJ story that goes over a lot of this ground and pretty much confirms that player payroll as a percentage of overall revenues is way, way down.

link

#31 Chuck Schilling

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Posted 13 November 2007 - 09:18 PM

It is not non-linear (i.e., it IS linear), and I have a challenge out there for anyone who wants to prove otherwise:

Not a proof, just a question - is the WAR component calculated based upon performance after the contract is signed, or before? The bias may be that you're assuming that the GMs are collectively good at predicting future effectiveness vs. paying for past accomplishments.

#32 wade boggs chicken dinner


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Posted 13 November 2007 - 10:32 PM

I think that in general the Sox F.O. and other F.O. recognize that consistent, top-flight talent is worth the huge contract, whereas guys who have one or a couple good years are not.

Isn't this kind of looking at the issue in hindsight? Yes, it's a good thing that Manny turned out to be a consistent, top-flight talent and Albert Belle didn't, but isn't the problem that things very easily could have turned out the other way.

But if you put the word "young" in front of "consistent, top-flight," I would have to guess that your statement would prove much more true.

I really need to find some old revenue numbers because my recollection is that that is very, very low historically. I think that number used to be around 60% (and may be codified by CBAs in the NFL and NBA at that level).

No idea how accurate this is, but this website seems to haveteam-by-team revenues going back aways.

Edited by wade boggs chicken dinner, 13 November 2007 - 10:44 PM.


#33 singaporesoxfan

  • 3204 posts

Posted 13 November 2007 - 11:08 PM

It is not non-linear (i.e., it IS linear), and I have a challenge out there for anyone who wants to prove otherwise:
http://www.insidethe...top_end_talent/

It's quite simple: create me a model and show me it's not linear.


I agree with bowiac - it seems it should be non-linear, even if currently people do pay at a linear level, because of the limited number of roster spots.

tango - your link seems to focus on starting pitching. I wonder whether it might be non-linear for position players.

#34 LondonSox

  • 4325 posts

Posted 14 November 2007 - 05:42 AM

It strikes me how underpaid this makes the young cost controlled rookie contract kids are right now. It just makes pouring money into the farm even more of a no brainer, as salaries increase but the rookie contracts don't (frankly even if they do) if you can have 2-3 of these guys on a team at a time you free up an increasing amount of money vs a veteran.

#35 Tangotiger

  • 445 posts

Posted 14 November 2007 - 09:52 AM

Not a proof, just a question - is the WAR component calculated based upon performance after the contract is signed, or before? The bias may be that you're assuming that the GMs are collectively good at predicting future effectiveness vs. paying for past accomplishments.


WAR is his expected performance from this day forward. You pay for future performance, just like you would for anything you buy.

#36 Tangotiger

  • 445 posts

Posted 14 November 2007 - 09:53 AM

I agree with bowiac - it seems it should be non-linear, even if currently people do pay at a linear level, because of the limited number of roster spots.

tango - your link seems to focus on starting pitching. I wonder whether it might be non-linear for position players.


I tracked almost all free agent signings in 2007 pre-season, and am doing so again for the 2008 pre-season on my blog. Everything I've seen suggests that teams are paying linearly based on wins above replacement.

#37 Tangotiger

  • 445 posts

Posted 14 November 2007 - 09:58 AM

It strikes me how underpaid this makes the young cost controlled rookie contract kids are right now. It just makes pouring money into the farm even more of a no brainer, as salaries increase but the rookie contracts don't (frankly even if they do) if you can have 2-3 of these guys on a team at a time you free up an increasing amount of money vs a veteran.


MLB owners are about as stupid as they get. How can I say that? We can show how the impact of one win generates around 2.0 to 2.5MM more profit. That's how much you should give a player, per win.

And yet, teams are paying double that for free agents. Why? Because teams set their budget, and then spend to that budget! Teams save an enormous amount on the pre-arb players, and save some on the under 4 year guys. When it comes time to free agents, teams, rather than paying the intrinsic value of the asset, instead have all this extra money that they just throw down the toilet.

I estimate that teams, collectively, throw about 800 million$ extra down the toilet to free agents... every year. What should cost 800 million$ based on their intrinsic value, teams are actually paying 1.6 billion$.

This is the Picasso-syndrome.

#38 PedroKsBambino


  • SoSH Member


  • 13997 posts

Posted 14 November 2007 - 10:08 AM

MLB owners are about as stupid as they get. How can I say that? We can show how the impact of one win generates around 2.0 to 2.5MM more profit. That's how much you should give a player, per win.

And yet, teams are paying double that for free agents. Why? Because teams set their budget, and then spend to that budget! Teams save an enormous amount on the pre-arb players, and save some on the under 4 year guys. When it comes time to free agents, teams, rather than paying the intrinsic value of the asset, instead have all this extra money that they just throw down the toilet.

I estimate that teams, collectively, throw about 800 million$ extra down the toilet to free agents... every year. What should cost 800 million$ based on their intrinsic value, teams are actually paying 1.6 billion$.

This is the Picasso-syndrome.


I agree with that at the macro level, e.g. across the industry. But I don't think that's quite true for an individual team, either.

The Red Sox incremental revenue per win is very low---they are close to maxed out I'd suspect. But they still spend.

The (say) Rockies incremental revenue this past year was far, far greater than that for a win--it's the difference between selling likely thousands of extra season tickets this year and not.

I'd suggest that for most teams, they pay such high incremental costs for two reasons: first, because they envision the potential windfall of a playoff run (which is, of course, not a windfall in year one since playoff money is largely paid back to the leagues, but is a windfall in increased ticket sales the following year and increased ad revenue and partnership dollars); and second, because they don't really get the economics of it as Tango lays it out.

Ultimately, gambling is not that rational and thus, the first of those isn't really that rational either, but I don't think it's wholly ignorance driving the decisionmaking either---it's a mix of irrational optimism and ignorance.

#39 singaporesoxfan

  • 3204 posts

Posted 14 November 2007 - 11:57 AM

MLB owners are about as stupid as they get. How can I say that? We can show how the impact of one win generates around 2.0 to 2.5MM more profit. That's how much you should give a player, per win.

And yet, teams are paying double that for free agents. Why? Because teams set their budget, and then spend to that budget! Teams save an enormous amount on the pre-arb players, and save some on the under 4 year guys. When it comes time to free agents, teams, rather than paying the intrinsic value of the asset, instead have all this extra money that they just throw down the toilet.

I estimate that teams, collectively, throw about 800 million$ extra down the toilet to free agents... every year. What should cost 800 million$ based on their intrinsic value, teams are actually paying 1.6 billion$.

This is the Picasso-syndrome.


I'd argue that it isn't necessarily that all owners are stupid. As with many auctions, there's probably a winner's curse thing going on with the bidding for free agents. So if you bid exactly what each player is worth in terms of the value of the extra wins he will bring in and you knew exactly how many wins he would bring in every auction for the services of a free agent, you'd have your principles and your perfect calculations, but you have zero free agents. In most situations (unless players take a hometown discount, or join a team for non-monetary benefits such as being on a winning team or being with a manager they like), the team that wins the free agent contract is going to be the team that most overvalues the player's services. Which means free agents will as a whole be overvalued relative to the profits that their additional wins bring in.

#40 Tangotiger

  • 445 posts

Posted 14 November 2007 - 11:57 AM

Ultimately, gambling is not that rational and thus, the first of those isn't really that rational either, but I don't think it's wholly ignorance driving the decisionmaking either---it's a mix of irrational optimism and ignorance.


Irrational optimism, Ignorance. Tomayto, tomahto.

I'm not really concerned about the pysche that drives the decision. I just know that it's not a smart way to run a business, but it is a great way to spend your money on things like art.

The real long-term effect here is that everyone wants to own this piece of asset, not for business reasons, but for Picasso reasons.