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January 18, 2007

Prospectus Today

Exchanging Numbers

by Joe Sheehan

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Since the arbitration/free agency system evolved in 1976, teams have complained that arbitration is a salary escalator. It is, of course, but only as compared to the system that existed before then, when players had no leverage at all. In arbitration, teams are forced to consider more than "what would we like to pay this player" in making an offer, a process that forces them to negotiate in a more reasonable manner.

Those of us under 40 have little memory of how big a deal holdouts were before arbitration. There was a time when a player's only leverage in salary negotiations-which happened every year in a time before multi-year contracts became standard-was to withhold his services. So every spring, players would either not show up for spring training or go down to Florida and not participate, trying to use their absence to force their teams to come to the table with more than a number and a stern glare. Sometimes it was successful, but it was always wildly confrontational and often a media circus.

Arbitration stopped that. Arbitration meant that both sides would have to come up with a number they could defend. It gave players an option beyond holding out and essentially ended that process. The presence of a system that forces compromise eliminates the need for high-pressure tactics such as holdouts and fines and negotiating through the media. Arbitration may raise the salaries of players with three to six years of service time over a system without it, but that's not a bad thing for the game as a whole, and not nearly as bad as high-profile holdouts each March.

Arbitration also created a path to compromise, as once each side has a number on the table, there's obvious middle ground, and there's just as obvious risk. Just look at the last few days. Tuesday's deadline for exchanging arbitration figures inspired a host of signings, nearly 40 over two days. Of the 56 players who actually exchanged figures, three have already reached agreements with their teams, and probably another 40 will before hearings begin next month. The rules of the arbitration process-one of the two numbers must be chosen-is a strong incentive to submit a reasonable number that leads to compromise. Of the 53 players still officially in arbitration, 19, or more than a third, submitted figures within a half-million dollars of their team's number. That's a lot of money, but it's trivial in the context of most payrolls. Small gaps like that can and should be closed quickly. We should see players such as Felipe Lopez, Chad Cordero, Corey Patterson and even Miguel Cabrera come to terms well in advance of the hearing date.

Of course, not all cases will be settled so easily. A number of cases are more than a million dollars apart, led by Carlos Zambrano and the Cubs. Zambrano, no doubt emboldened by the winter's excess of riches laid upon pitchers of inferior quality, has asked for $15.5 million for 2007, his last year before free agency. The Cubs have countered at just above $11 million, which would keep Zambrano as their highest-paid starter, ahead of Ted Lilly, and make his salary comparable to that of the best pitcher in baseball, Johan Santana, who signed a long-term deal two years ago.

Zambrano's agents will likely point to Roy Oswalt, an excellent service-time and performance comp for Zambrano who signed a five-year, $73 million deal last summer. Representing a five-plus player, they can also compare Zambrano to the free-agent class of '06-'07, although I think Oswalt and Santana are their best arguments. Zambrano is slightly inferior to both pitchers. It's an interesting case, and given how much is at risk-more than $4 million-both sides have considerable incentive to compromise.

Chase Utley and the Phillies are nearly two million dollars apart, with Utley filing at $6.25 million. The Phillies' $4.5 million figure seems more reasonable here; Utley is just over three years of service time-his filing figure is second to Cabrera's among players in that class-and despite very strong offensive numbers and an All-Star appearance, the market price of second basemen is fairly low right now. As with Zambrano, a compromise seems in order, especially for a young player like Utley for whom the $1.75 million difference is likely significant.

The Diamondbacks and Doug Davis are more than $2 million apart, Davis filing at $7.5 million and the D'backs at $5.25 million. Like Zambrano, Davis is a five-plus pitcher who can bring in free agents as comparables. Given his durability over the past few seasons and his service time, it seems likely that he can win his case despite the large spread. $5.25 million-or if you prefer, the midpoint between the two figures, $6.375 million-seems low for a pitcher with his track record.

One key thing to remember is that while performance is important, service time is perhaps more so. Players are being compared primarily to others in their service-time class, with exceptions made for the nebulous category of "players of special accomplishment." Justin Morneau, coming off of an AL MVP award, may make this argument to win his case at $5 million, as opposed to the Twins' offer of $4 million. Only Morneau, Cabrera, perhaps Utley and Joe Mauer seem likely to be able to make a claim like this.

I usually wait until the cases roll in to make this point, but I'll close with it today. After some of the cases are decided, you're going to see snarky copy such as, "Smith lost his arbitration case, and will have to 'settle' for a 600% raise over his 2006 salary." These are popular among local sports broadcasters and the more innumerate print media. The reason for the big jump that a lot of three-year players get in arbitration isn't because arbitration is evil or because players are greedy. It's because they go from having absolutely no leverage to having some, but not free-market, leverage.

The figure that's out of line isn't the player's arbitration-induced salary. It's the number that came before it. Miguel Cabrera made $472,000 last year. Chase Utley made $500,000. Had those players had even limited leverage, those figures would have been three times that, and a free market would allow them to have made ten times those numbers, even after just two years of play. After all, we see free agents hit the market with one good season on the heels of five bad ones, and they're given contracts that show an ignorance of the latter. Players with no history of failure at all would be golden in a free-market system.

I'm not blasting the arbitration system or calling for change. I actually think the way things have worked out-remember, there was no master plan here-is a fairly good compromise. I'm just pointing out that the raises players get through arbitration are a function of their having artificially low salaries in the seasons leading up to it. When you see lines like the above-or the more subtle, "Player X is 'rewarded' with a new contract"-remember that players such as Justin Verlander and Ryan Zimmerman and Hanley Ramirez are going to be ridiculously underpaid in 2007 and 2008, because they, like the players who came before them, have no leverage at all. They're not going to be "rewarded" with anything, because teams can pay them whatever they care to.

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

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