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From Monopsony to Arbitration: Time to get Paid

2013 January 20
by Phil Miller

♪♫I just got paid today, got me a pocket full of change♫♪

Last week saw the day by when arbitration-eligible players and their teams had to exchange final offers in Major League Baseball.  Baseball uses a variant of what is known as final offer arbitration, a type of arbitration (suggested by economist Carl Stevens in 1966) where the arbitrator renders a decision restricted to being one party’s offer or the other’s.   The word “final” is a misnomer in MLB since players and their teams may continue bargaining until a decision is rendered, so those offers really aren’t final.

One of the many interesting facets of baseball arbitration is what happens to players up for arbitration for the first time.  Mr. Buster Posey: your present experience may take the stand.

• Buster Posey: one-year, $8 million with San Francisco Giants

In his first year of arbitration, reigning National League MVP and two-time World Series champion Buster Posey received a hefty pay raise, going from $615,000 to $8 million. Despite his accolades, that’s a higher figure than most were expecting, but it’s likely this is just a precursor to an extension as the two sides are expected to begin negotiations soon. He’s under Giants control through 2016 regardless of that outcome.

If Posey is under Giants’ control for the next few years (meaning he is subject to the reserve clause), then why did he get nearly a $7.4M raise?  Part of it is that apparently the two sides are looking at a multi year deal according to the article, and part of it is that Posey is just that good of a player.  But a big part also depends on how baseball arbitration per-se is structured.

Players with less than 6 years of major league service are subject to the reserve clause, meaning that they are bound to their teams by the terms of the collective bargaining agreement (CBA).  Reserved players with at least 3 years of service are reserved, but they have option to go through baseball’s arbitration system.  So-called “super two” players, players with two years  but less than three years of service, can also go through the system.  To be a super two, a two year player must be in the top 22% of service time of all two year players with at least 86 days of service.  Players not eligible for arbitration are simply bound by the reserve clause.

The threat of arbitration, and its expected outcome in any particular case, drives the bargaining for arbitration eligibles.  According to baseball’s CBA, arbitrators can examine particular-defined criteria when rendering a decision (the quality of the player, his compensation record, disabilities of the player, the non-financial performance of the team, the length and consistency of the player’s career, and comparable baseball salaries).  It is that last one that is the biggie.

Arbitrators are given a list of comparable players (as defined by the CBA) and their salaries.  In any given case, “comparable” players may not have any more than one more year of experience than the player in question.  But for players in their first year of eligibility, there is a chain linking the free agent market to arbitration-e;igible players’ salaries.  Players comparable to 5 year players include first-year free agents, 5 year players are comparable to 4 year players, and and 4 (3) year players are comparable to 3 (2) year players.

When players just become eligible for free agency, the typical salary jumps.  According to data from 2001  gathered by Dan Marburger, the average salary jumped by approximately 150% while the average salary of 3 and 4 year players nearly doubles.  Since arbitrators may consider comparable salaries, the effects of the free agent market get passed down to arbitration eligibles.  an showed that just becoming eligible for arbitration drove the average salary of that class of players from just under $500,000 to nearly $1,200,000, about a 240% jump.

Posey is but one example.  He was set to get a big payday anyway had his case gone through the formal arbitration process.  Rather than go through the headaches of the process, Posey got his nice payday and now he has a pocketful of change.

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