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January 17, 2011

Contractual Matters

Playing the Arbitration Spread

by Jeff Euston

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Pitcher David Palmer is remembered primarily for throwing five perfect innings for Montreal on a rainy April night in St. Louis in 1984, then having Major League Baseball strike his rain-shortened claim on perfection from baseball’s official record book seven years later because the game did not go nine innings.

But Palmer is also something of an historical footnote for another reason: his unique 1987 arbitration case. That winter, he was locked in contract negotiations with Atlanta after posting an 11-10 record in 35 starts with a 72-win Braves team in 1986. The right-hander wanted a raise from his $390,000 salary, and he felt he deserved more than the $500,000 offer that Atlanta had floated before the deadline to submit salary figures. Palmer surveyed the market, consulted with his advisors, and submitted a salary request of $725,000. Then he braced for a hearing and waited for word of the Braves’ figure.

Meanwhile, in Atlanta, Braves general manager Bobby Cox surveyed the market, consulted with his advisors, and submitted a salary offer of… $725,000.

Happily for every other player who has gone through the arbitration process—and unhappily for front offices—this never happened again. Players and clubs exchange salary figures for 2011 on Tuesday, the next step in the process as teams set rosters and payrolls before spring training. One high-profile case came off the board this weekend as Cincinnati reached an agreement for a three-year extension with first baseman Joey Votto. Several high-dollar cases remain, including those of sluggers Jose Bautista, Prince Fielder, and Josh Hamilton. If settlements are not reached, hearings before panels of three arbitrators will be held in February.

For front offices, the risks in arbitration have increased apace with player salaries. In 1979, the average spread for cases going to a hearing was $19,000. Six short years later, in 1985, it was $163,000. Fast forward to 2004, and the average gap was a cool $1 million. The average spread topped out at $1.6 million in 2008 before falling off to $637,500 last offseason.

A general manager facing multiple arbitration cases can find himself rolling the dice on his budget plans before his roster is set for spring training. Toronto’s Alex Anthopoulos has an MLB-high eight arbitration-eligible players at the moment, to take this winter’s most prominent example.

Some clubs use Tuesday’s exchange of salary proposals as a deadline to spur agreements, telling players and agents that if the two sides go so far as to submit numbers, the club will cut off negotiations and go to a hearing. That “file and trial” threat explains what will likely be a flurry of settlements Monday and Tuesday before agents and front offices begin polishing their arguments in preparation for a hearing. Anthopoulos is one GM who takes this approach, which helped produce a settlement this weekend with a ninth arbitration-eligible Blue Jay, recently-acquired reliever Carlos Villanueva, formerly of the Brewers.

The predictable result of the increasing financial risk has been a gradual reduction in the number of cases that go all the way to hearing. Clubs are more risk-averse than ever, with the average number of hearings per team falling to six for the five-year period from 2006 to 2010. That’s down from an average of seven hearings a year for 2001-05, nearly nine for 1996-2000, nearly 16 for 1991-95, and 23 for 1986-1990. Players and agents have little to lose by filing a high number and taking their chances, but most players would rather not sit through a three-hour hearing guaranteed to include 90 minutes devoted to exposing their shortcomings as professionals—and yes, the player’s attendance at the hearing is required.

Two cases from last winter illustrate the incentive to settle. Faced with a $5 million spread with Tim Lincecum, the Giants signed their ace to an extension paying $23 million over two seasons, thereby eliminating the specter of arbitration until after the 2012 season. The Mariners were deep into negotiations for a long-term deal with Felix Hernandez last winter when the two sides exchanged arbitration figures and found themselves $4.3 million apart. They soon reached an agreement on a five-year, $78 million extension.

A likely candidate for the biggest disparity this winter is Fielder, who is entering his final season before free agency after earning $10.5 million in 2010. The Milwaukee slugger could file for a salary in the range of $15-19 million range, matching the salaries for Ryan Howard’s fourth and fifth full seasons. Even an increase in line with the 38-percent raise Mark Teixeira received in his final year of arbitration would push Fielder to about $14.6 million. Fielder’s father, Cecil, established what was then a record with a salary request of $5.4 million in 1992. Detroit’s offer of $3.2 million created a gap of $2.2 million, also a record for the time. Prince Fielder’s request won’t set a new benchmark this winter; that distinction belongs to Roger Clemens, who filed for $22 million as a returning free agent with Houston in 2005. The resulting $8.5 million spread in the Rocket’s 2005 case also remains a record.

The record for the largest gap also once was held by Derek Jeter, whose arbitration experience serves as one more reminder of the procedure’s high-stakes implications, even for a franchise with the financial clout of the Yankees. Renewed at the club’s chosen salaries in 1997 and 1998, Jeter reached arbitration for the first time in the winter of 1999, just months after the Yanks had won 114 games and swept to their second championship in three years. Jeter and agent Casey Close submitted a request of $5 million, which, if awarded, would have been the highest salary increase ever for a player between three and four years of service time. New York offered $3.2 million, resulting in a $1.8 million spread, a new record at the time. Just before the hearing began, Close made a last-minute offer to settle at the $4.1 million mid-point, but the Yankees refused.

At the hearing—the first of Close’s career—the agent drew upon the Yankees’ record-setting ‘98 season and swept away the club’s comparisons to shortstops Mark Grudzielanek and John Valentin with one simple observation. Jeter “is the best player on the best team in history,” he told the panel. Close—and Jeter—won the case. A year later, the Yankees had no appetite for a second hearing and agreed to settle, doubling the shortstop’s salary to $10 million. Two years later, Jeter submitted a request for $18.5 million—then the highest number ever filed—before signing the second-largest contract in baseball history.

Jeff Euston is an author of Baseball Prospectus. 
Click here to see Jeff's other articles. You can contact Jeff by clicking here

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