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February 19, 2003

Prospectus Feature

Where Does the Money Go?: Taking a Look at Major League Payrolls

by Doug Pappas

Whenever "competitive balance" is debated, the debaters inevitably turn to published information about team payrolls to support their positions. This sounds straightforward... but unfortunately, "team payroll" is a fluid concept. The four most widely reported measures each use different methods and can lead to different conclusions.

The four measures are (1) the Opening Day payrolls reported by the AP and USA Today a week or so into the season; (2) the August 31 payrolls reported by MLB after the season; (3) the August 31 average team salaries reported by the MLBPA after the season; and (4) the luxury tax payrolls reported by MLB after the season.

The first three have a lot in common. Each begins with the salary of every player on a club's 25-man roster, or its major league disabled list, as of the stated date. Each computes each player's base salary in the same way: the actual amount he is paid during the season, plus a pro-rated share of his signing bonus and the discounted present value of any part of his salary which is deferred to a future year. Each has a common flaw: by taking a snapshot of the roster as of a specific date, it ignores the effect of midseason player moves.

The MLBPA's formula has a more serious flaw which renders it essentially useless for meaningful team-to-team comparison. Its averaging method involves dividing the club's total payroll by the number of players on its roster-plus-DL. However, the size of the disabled list varies widely from team to team. In 2002 just 26 players were used to compute the Kansas City and Oakland averages, while San Diego's average was based on a 36-man roster. Thus while the August 31 payrolls for Oakland and San Diego were virtually identical, Oakland's reported average was $450,000 higher. Given the other information available, that's an unacceptable variance.

Here are each club's 2002 payrolls as computed by the three other methods:

                         Opening Day        Aug. 31    Luxury Tax
Team                         Payroll        Payroll    Difference      Payroll   Difference

Anaheim Angels          $ 61,721,667   $ 62,757,041   $ 1,035,374  $ 69,449,444  $ 7,727,777
Arizona Diamondbacks    $102,820,000   $103,528,877   $   708,877  $106,590,086  $ 3,770,086
Atlanta Braves          $ 93,470,367   $ 93,786,065   $   315,698  $103,035,498  $ 9,565,131
Baltimore Orioles       $ 60,493,487   $ 56,504,685  ($ 3,988,802) $ 64,351,025  $ 3,857,538
Boston Red Sox          $108,366,060   $110,249,535   $ 1,883,475  $106,060,766 ($ 2,305,294)

Chicago Cubs            $ 75,690,833   $ 74,950,543  ($   740,290) $ 81,104,031  $ 5,413,198
Chicago White Sox       $ 57,052,833   $ 54,534,084  ($ 2,518,749) $ 57,800,783  $   747,950
Cincinnati Reds         $ 45,050,390   $ 46,310,698   $ 1,260,308  $ 54,663,420  $ 9,613,030
Cleveland Indians       $ 78,909,448   $ 74,888,365  ($ 4,021,083) $ 82,693,915  $ 3,784,467
Colorado Rockies        $ 56,851,043   $ 56,509,185  ($   341,858) $ 72,300,867  $15,449,824

Detroit Tigers          $ 55,048,000   $ 54,390,870  ($   657,130) $ 67,589,693  $12,541,693
Florida Marlins         $ 41,979,917   $ 40,822,536  ($ 1,157,381) $ 45,369,104  $ 3,389,187
Houston Astros          $ 63,448,417   $ 65,412,960   $ 1,964,543  $ 74,384,060  $10,935,643
Kansas City Royals      $ 47,257,000   $ 49,362,709   $ 2,105,709  $ 50,973,807  $ 3,716,807
Los Angeles Dodgers     $ 94,850,952   $101,504,889   $ 6,653,937  $112,274,884  $17,423,932

Milwaukee Brewers       $ 50,287,333   $ 49,259,130  ($ 1,028,203) $ 50,455,737  $   168,404
Minnesota Twins         $ 40,225,000   $ 41,309,031   $ 1,084,031  $ 45,931,954  $ 5,706,954
Montreal Expos          $ 38,670,500   $ 37,901,032  ($   769,468) $ 35,814,751 ($ 2,855,749)
New York Mets           $ 94,633,593   $ 94,395,575  ($   238,018) $102,182,193  $ 7,548,600
New York Yankees        $125,928,583   $133,429,757   $ 7,500,992  $167,592,745  $41,664,162

Oakland Athletics       $ 39,679,746   $ 41,942,665   $ 2,262,919  $ 58,143,776  $18,464,030
Philadelphia Phillies   $ 57,955,000   $ 59,593,741   $ 1,638,741  $ 64,505,697  $ 6,550,697
Pittsburgh Pirates      $ 42,323,598   $ 46,059,984   $ 3,736,386  $ 55,967,080  $13,643,482
St. Louis Cardinals     $ 74,098,267   $ 76,227,801   $ 2,129,534  $ 88,378,549  $14,280,282
San Diego Padres        $ 41,425,000   $ 41,791,170   $   366,170  $ 57,943,130  $16,518,130

San Francisco Giants    $ 78,299,835   $ 78,426,572   $   126,737  $ 88,488,058  $10,188,223
Seattle Mariners        $ 80,282,668   $ 86,084,710   $ 5,802,432  $ 92,310,287  $12,027,619
Tampa Bay Devil Rays    $ 34,380,000   $ 34,728,540   $   348,540  $ 36,249,505  $ 1,869,505
Texas Rangers           $105,302,124   $106,915,180   $ 1,613,056  $122,887,987  $17,585,863
Toronto Blue Jays       $ 76,864,333   $ 66,814,971  ($10,049,762) $ 58,963,374 ($17,900,959)

Sources: 

Although the AP's Opening Day payroll information is unofficial, it's quite accurate. When I've been able to verify published salary figures against the official data, 99% of the salaries matched and the differences were usually just a few thousand dollars.

Opening Day payrolls, not MLB's official figures as of August 31, are the best measurement of which, if any, clubs truly "can't afford to compete." They reflect each club's offseason budgeting and roster management, the process through which the club decides whom to trade, whom to non-tender and whom to pursue in the free agent market. Once the season begins, payrolls tend to vary with the club's fortunes. Contenders acquire high-earning veterans for the stretch drive--an intelligent strategy, since MLB's 2001 financial disclosures show that making the playoffs was worth a collective $45.5 million to the eight qualifiers--while teams that have fallen out of the race dump salaries. (Can you spot the Raul Mondesi trade in Columns 1 and 2?) A spectacular example of the latter phenomenon occurred in 1995, when the New York Mets slashed salaries by 46% in midseason to finish with the lowest payroll in the majors.

Thus when MLB's Blue Ribbon Economic Panel Report used August 31 payrolls to contend that "small market teams" (in fact, low payroll teams) "couldn't compete," it improperly relied upon tainted data. Any claimed causal connection between a low payroll and a poor record is inherently suspect where, as here, the payrolls were measured after each club had already adjusted its payroll to reflect its midseason record.

In the context of payrolls and competitive balance, note that three of the four clubs with the lowest Opening Day payrolls finished with winning records. Two, Oakland and Minnesota, won their divisions. Meanwhile, Milwaukee lost 106 games while outspending the Twins and Athletics by $10 million, and Detroit lost 106 while spending $5 million more than the Brewers. These clubs can afford to compete--they just don't know how.

However, one problem with the use of Opening Day payrolls is that many players' salaries can't be fully calculated as of Opening Day. Incentive clauses can boost the earnings of players selected to the All-Star team or awarded Gold Gloves. In addition, players viewed as injury risks often receive incentive-laden contracts accompanying relatively low base salaries. David Wells was last season's incentive-bonus champion, earning $4 million beyond his base salary of $2,250,000. Even for the Yankees, that's not chump change. A better way of computing team payroll would be to attribute each player's total compensation to the club with which he started the season.

For predicting each club's future, though, the luxury tax payroll is the tool to use. The luxury tax payroll differs from the regular payroll in two major ways. First, it includes the cost of player benefits--$7,734,310 per club in 2002, which was subtracted from the figures above. More importantly, for luxury tax purposes each year of a multi-year contract is valued at the average annual value of the contract, regardless of how the salaries are actually distributed. For example, the contract of a player earning $3 million in 2003, $4 million in 2004 and $5 million in 2005 will be valued at $4 million for each of these seasons.

A club's luxury tax payroll is, therefore, a good indicator of how much free money it is likely to have in upcoming seasons. Where the luxury tax payroll far exceeds the actual payroll, the club has a large number of players in the early years of back-loaded contracts. In an extreme case like the Yankees, such contracts will absorb an ever-larger share of George Steinbrenner's resources even as their principal rivals--the Red Sox and Blue Jays--shed bloated contracts and reload. For Oakland, which has the second highest differential because the they bought out the arbitration-eligible seasons of their best young talent, the exodus of players when they become eligible for free agency is likely to continue.

For those interested in performing their own analyses, a spreadsheet with team-by-team payroll information can be downloaded from my Web site.

Related Content:  MLBPA,  Payroll,  Salaries,  Luxury Tax

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