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December 2, 2009

Prospectus Today

The Risks of Arbitration

by Joe Sheehan

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The deadline for offering arbitration to free agents passed last night, and once again a fairly small number of players received offers, just 23 of 70 ranked free agents. I've written in the past that for almost all ranked players, this should be a fairly simple decision: almost any player good enough to be a ranked free agent is good enough to warrant having back on a one-year deal with a salary determined through arbitration. Given that this offer is a necessary step in receiving draft-pick compensation for free agents-if you decline to offer arbitration, you forfeit the right to compensation-it's long been my contention that teams should err on the side of making the offer. The downside is very small.

So you would imagine that seeing two-thirds of the available pool not get an offer would wind me up a bit. You would imagine that the Yankees' decision to let a starting corner outfielder and their third starter walk away without compensation would come in for criticism, just as it did a year ago:

The Yankees made a mistake by not offering arbitration to [Bobby Abreu and Andy Pettitte], the biggest mistakes any team made in this round of decisions.

Think about how that turned out, though. Abreu, paid $16 million in 2008 and likely to make at least that much in arbitration, eventually signed a one-year deal for $5 million in guaranteed money. Pettitte, also paid $16 million in 2009, limited his options by choosing between the Yankees and not pitching at all, and signed for a base of $5.5 million. The Yankees correctly surmised that the market value of those players was less than what they would have to be paid through arbitration, and acted accordingly. Similarly, players such as Adam Dunn and Pat Burrell, seemingly falling into the space where a one-year deal would be both an attractive option and one not terribly likely to happen, were cut loose only to sign surprisingly inexpensive contracts. The players who were offered arbitration, such as Orlando Hudson, Juan Cruz, and Manny Ramirez, had a terribly difficult time finding employment with new teams, because of the loss of a first- or second-round draft pick attached to signing them.

That was last year. With that experience under everyone's belt, the equation has changed at every decision point. Players entering free agency, having witnessed last year's carnage for everyone below the top few guys, are certainly more likely to accept arbitration if offered. Teams, knowing this, have to be more conservative about making that offer, as it's entirely possible that it will be accepted and that the player's 2010 salary could be higher in that case that it would be through free agency. This is particularly true in the case of Type-A free agents; after watching players like Hudson and Dunn wander into February looking for work in part due to the compensation attached to a decision to sing them, a second-tier Type-A is much more likely to accept an offer than he would have been one year ago. The market has shifted in a number of areas, from the value placed on veteran players below the level of star, to the recognition that paying for service time is often a waste of money, to the recognition of the value of the picks lost in compensation.

As a result, the old rules no longer apply. Whereas a year ago I thought it was a mistake for the Yankees to let Pettitte walk away, I see the sense in it this time around. A year ago I would have thought the Tigers were being overly risk-averse by not offering arbitration to Placido Polanco. Now, I'm convinced they made the right decision, because Polanco would certainly look at Hudson's experience and accept a one-year deal at no worse than 80 percent of what he made last year. The Yankees' decision to not offer arbitration to Johnny Damon looks peculiar coming off a good season at $13 million, but that means his arbitration salary could reach past $15 million-and there's no way the market will value him that highly.

This leaks down into the Type-B free agents as well, many of whom are coming off big contracts but who don't have nearly the same kind of market value they did when they were signed. It may mean that the Astros, Angels, or Giants will miss the sandwich pick they won't get when Miguel Tejada, Vladimir Guerrero, or Bengie Molina signs elsewhere, but in all three cases, the gap between an arbitration award and a market salary, or even the commitment of a roster spot, dwarfs that value.

This isn't to say that teams handled the process perfectly this season. The Rangers' decision to offer arbitration to the desiccated remnants of Ivan Rodriguez makes no sense from a baseball standpoint. They have, in Taylor Teagarden, a strong-armed catcher with a below-average bat, and plenty of good counterparts to him in Jarrod Saltalamacchia and Max Ramirez. Rodriguez doesn't complement Teagarden, and as such, would be a poor use of the roster spot should he accept.

Moreover, even accounting for the changed market dynamics, teams erred a bit too much on the side of conservative in holding back arbitration offers for some players. The Dodgers declined to offer Hudson or Randy Wolf arbitration, and while that decision may have been influenced by the team's off-field situation, neither move makes all that much sense from a baseball standpoint. In both cases, a one-year deal for an arbitration salary would be a reasonable price to pay for the talent, and with Wolf in particular, the risk that he would return seems small. He's looking to get his last long-term deal after delivering his best season in years; that first- or second-round draft pick the Dodgers would have received when he signs that multi-year deal elsewhere would be valuable.

The Marlins' decision to decline arbitration to Nick Johnson was a surprise. Johnson doesn't have the kind of stats that pop in an arbitration hearing, largely due to his inability to stay healthy. However, his high OBP makes him very valuable, especially to a Marlins' roster which lacks that skill. The risk/reward here would seem to have favored an offer. I would say the same about the Brewers' Felipe Lopez and Mike Cameron, both players whose secondary skills are stronger than their primary ones. There are roster issues in both cases-the 2010 Brewers should have a returning Rickie Weeks and a newly-acquired Carlos Gomez playing the positions those two played-but I wonder if a team like the Brewers can walk away from potential assets like the sandwich picks so easily.

The Cubs' decision to let Rich Harden walk is one I would question as well. Harden's lack of innings means he's not going to do terribly well in arbitration, his base salary is fairly low, and he, like Wolf, is almost certainly going to look for the security of a long-term deal this winter. Harden strikes me as the one classic case this year, where having a player on a one-year deal would be a perfectly acceptable scenario, and a team declining that option is making a mistake.

These decisions, taken as a whole, reflect the evolution of a market. Not every team sees it the same way, but by and large, the industry is valuing experience less, valuing common talents less, and recognizing one of the first principles of performance analysis: talent in MLB isn't a bell curve, but the right edge of that curve, with a few tremendous talents, and then a large pool of similar ones. There's nothing special about Randy Winn or Jermaine Dye or Jon Garland, and what separates them from comparable players-experience-isn't something worth paying millions of marginal dollars for. The industry is getting smarter, and it's going to make for better baseball for all of us.

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

Related Content:  Arbitration

35 comments have been left for this article. (Click to hide comments)

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3n2sports

I understand that it's a long standing institution, but why isn't baseball rethinking its arbitration process. It's fairly ineffective at properly evaluating player talent both in real terms (according to our WAR/WARP/whatever) and in how clubs perceive it. With clubs focusing more and more on effective methods of evaluating how much a player should cost, shouldn't the arbitrators be doing this too?

There's a lot said against the Elias rankings and the pick compensation system. A newer, more refined arbitration system could help in fixing both of these issues.

Dec 02, 2009 12:04 PM
rating: 2
 
CRP13

Unfortunately, the long-standing institution of arbitrary arbitration is a tradition of traditionalists who decry the decline of out-dated data sources and scornfully scoff at modern metrics for the measurement of merit.

Seriously, please click the little minus button below this (my) post. I deserve it.

Dec 02, 2009 12:23 PM
rating: 8
 
3n2sports

I'll spare you the minus on account of clever word play.

Seriously though, the traditional baseball world seems to be slowly improving its ability to evaluate players if you want to count the BBWAA voting this year (and their inclusion of Stark and Carroll) as representative. Even if they aren't, arbitration has to be climbing in importance for the players' union. I can't imagine it will be more than 1 or 2 CBA's before the union will focus the brunt of its bargaining power on it.

Anyway, the people I really want to question are "The Media". So much hubaloo has been made in the more enlightened media about the Elias rankings being broken and the player compensation taxing good players while more or less failing at its purpose of redistributing talent. The arbitration process is what supports them. Improve that system and you don't need the other two. The rankings would be obsolete and player compensation can either be abolished or be awarded on the basis of ANY player declining arbitration (with supplemental round picks as the bonus). The media never complains about arbitration, even the sabr blogs barely peep about it. The media should be raising a ruckus not worrying about trifles like Elias rankings.

Dec 02, 2009 13:05 PM
rating: 0
 
CRP13

I mostly agree. Personally, I like the arbitration system because it contributes to making the baseball off-season almost as interesting to nerds like me as the playing season is.

I do think that somebody needs to take a hard look at the Elias rankings and realize how ridiculous they are. I'm not even sure who these "Elias" people are; it's all very mysterious and clandestine. What are they trying to hide? I suspect a conspiracy.

Dec 02, 2009 14:02 PM
rating: 2
 
Ira
Other readers have rated this comment below the viewing threshold. Click here to view anyway.

lol!

Dec 02, 2009 13:54 PM
rating: -7
 
wonkothesane1

It has to be collectively bargained. Since it hasn't been anything that either side really cared about, it hasn't been changed. There's no player evaluation agenda going on here where anyone is preaching or detracting advanced metrics. It's simply not a high profile enough issue to come up at the bargaining table.

Dec 02, 2009 12:53 PM
rating: 1
 
Nick Smith

"Now, I'm convinced they made the right decision, because Polanco would certainly look at Hudson's experience and accept a one-year deal at no worse than 80 percent of what he made last year."

The 20% pay cut rule doesn't apply to players with more than 6 years of service time. The Tigers could have offered Polanco whatever they wanted.

Dec 02, 2009 12:11 PM
rating: 0
 
BP staff member Joe Sheehan
BP staff
(17)

Poor choice of words on my part. I was alluding to what the Tigers might offer rather than that rule, which as you correctly note, doesn't apply to FAs.

Dec 02, 2009 12:49 PM
 
Dr. Dave

How was it to the Yankee's benefit that Bobby Abreu signed with the Angels for $5 million? I somehow can't see them patting themselves on the back for not paying more than his current market value, given that they had to do without his services in order to get that outcome.

If they simply didn't want him at any price, that's different. But if he would have been a better option than what you end up doing instead, and you have deep pockets, it's surely better to pay too much than to see your competition get a bargain.

Dec 02, 2009 12:14 PM
rating: 0
 
saigonsam

How much better could the Yankees have done last season? Sure, maybe Abreu was better than the alternative, but the money they saved might have been put to better use as part of the compensation for the big three they signed.

Dec 02, 2009 18:39 PM
rating: 0
 
Dr. Dave

You missed my point. Joe was saying that not signing Abreu was shown to be a good decision *because* Abreu signed for so little in the end. I don't see the logic there.

Dec 03, 2009 17:45 PM
rating: 0
 
saigonsam

I understand, but I think Joe was alluding to the fact that market prices had dropped, as demonstrated by the Abreu contract. For example, if you bought a house in the last year, you would not want to pay what it would have cost in 2007, even if in the end, someone else purchased it at a bargain. Instead you could go out and find another house at 2009 prices.
Making the (huge) assumption that the Yankees don't have unlimited resources, they were probably better off using that extra savings to beat the Angels offer for Teixeira.

Dec 03, 2009 18:04 PM
rating: 0
 
BP staff member Joe Sheehan
BP staff
(17)

The Yankees read the market for Abreu's services better than I did, and surmised that spending $16 million or so on him would not be an economical use of resources. While I can't prove it, I suspect that had Nick Swisher not dropped into their laps, the Yankees may have re-upped Abreu at a price between what he made in 2008 and what he eventually signed for.

It is also probable that not having to worry about Abreu's potential salary made it easier for the Yankees to make the three signings they did. For all the talk about unlimited resources, the Yankees do seem to have limits, especially given the luxury-tax penalty they pay.

Dec 04, 2009 08:52 AM
 
Dennis
(749)

The Brewers likely declined to offer arbitration to Lopez and Cameron not because they didn't think the players were worth a one year deal at whatever salary the system decided on, but because they thought they could use that money better to get some much need starting pitching. How does the possiblity of having to pay the pair upwards of $18-$20 million affect your thoughts on declining them arbitration? Surely that would have limited what they were able to spend on pitching.

For what its worth, I think the Brewers made a mistake not offering Felipe Lopez arbitration as I'm sure he's looking for a long-term deal after his best season in years, but I agree with the decision on Mike Cameron, as he was much more likely to take the offer.

Dec 02, 2009 12:46 PM
rating: 0
 
BP staff member Joe Sheehan
BP staff
(17)

I don't know that there's pitching out there to buy for that kind of money, so I don't know that that rationale holds well for me. If the Brewers trade Gamel (or, I guess, Fielder) for more expensive pitching, then it makes sense. I'll be curious as to how they spend the money.

Dec 02, 2009 12:52 PM
 
Drew

I think this article is missing something - it really just comes down to one thing - will they accept arbitration or not? For much older players like Abreu, Cameron, and Pettitte it's much riskier, since they are not as likely to be seeking a long-term deal, but for players like Felipe Lopez, Wolf, and Rich Harden, there is simply no way they aren't looking for at least a 2-yr deal. Not offering them arbitration is a massive mistake.

Ultimately, even players like Hudson, Cabrera, and Cruz all signed contracts. They may have been for bargain basement salaries, but their clubs were correct to offer them arbitration.

Let's say this year's crop of players is more savvy, and as a result they are more likely to accept arbitration. Using Harden as an example (I would use Wolf, but that one is too easy). At most he is looking at an 8-10m salary if he accepts arbitration. He was worth 8.2m last year and 20m the year before. At 28, he is still in his peak, and it's reasonable to assume that a weighted projection of his value would be AT LEAST 8m. There is essentially no downside to offering him arbitration. If he accepts, the Cubs have a high-upside, injury prone pitcher signed to a one-year deal. If he declines, they get two picks, which are likely to be worth 5m+ according to Victor Wang;s model.

Dec 02, 2009 13:33 PM
rating: 4
 
ZacharyRD

I very much appreciate it when, like here, you own up to bold calls that turn out wrong, as with the Yankees last year - it makes you a more credible writer the rest of the time when you are right.

Dec 02, 2009 13:33 PM
rating: 11
 
thenamestsam

While I agree with Joe that there's no way the market values Damon at approx. 15 mil a year, for the Yankees a 1 year deal at that value wouldn't be the worst thing in the world. It seems to me that the 1 year cost for a team with such deep pockets might be worth the flexibility to go after Crawford/Beltran etc. in next year's market, and so I'm surprised they didn't offer him arbitration as there would seem to be very little downside for the Yankees. This seems to suggest to me that they're seriously considering a run at Holliday(or they think they can resign Damon for 1 or 2 years at significantly less than they could in arb. which seems unlikely).

Dec 02, 2009 17:24 PM
rating: 0
 
sockeye

One of the more intriguing things here to me is that teams offering arb have to balance the drawback of paying above market price (if the player accepts) vs. the benefit of getting that extra pick.

But one thing that modulates the value that extra pick is the pattern we see each year in some guys falling in the draft due to above-market ("slot") or signability demands. If a team feels like they can transfer savings from the MLB payroll to the draft, then they can hedge their bets by NOT offering Arb, signing a replacement at market value, and then using that savings on going over slot for, say, a Rick Porcello. This may be better than the weighted risk that you inflate your major league payroll for the chance of an extra pick that will only serve to water down your draft budget.

In other words, cut Polanco and use the money to sign Porcello and Felipe Lopez (or his equivalent), instead of risking paying Polanco in the hopes of an extra pick that would make you choose Jason Castro and then Greg Reynolds with the extra pick.

Dec 02, 2009 19:17 PM
rating: 0
 
NL2003

It's interesting the Cubs didn't offer Harden arbitration. The Twins claimed him on waivers last August, but the Cubs wouldn't trade him. Now they let him walk for nothing. Why didn't they take something from the Twins, at least?

Dec 02, 2009 20:17 PM
rating: 5
 
3n2sports

An excellent question. Maybe Jim Hendry believes in miracles...or he got confused and thought he had a club capable of breaking off a 20-2 run with Harden in the fold.

Seriously, Wolf has been the most popularly mentioned non-offer, but Harden's makes the least sense to me. Could be the Cubs are aware of a new(ish) health issue.

Dec 04, 2009 12:13 PM
rating: 0
 
vtadave

Interested in hearing BP's take on the Dodgers' lack of offers to Hudson and particularly Wolf. I'd be surprised if it was anything other than "they're broke", but BP has always made me rethink my initial take on many things.

Dec 02, 2009 22:16 PM
rating: 0
 
BP staff member Joe Sheehan
BP staff
(17)

Yeah, all I have is "they're broke." Hudson I can almost understand, given what happened a year ago. Wolf...that surprised me, and I say that as someone who doesn't like his future.

Complicated ownership situations are bad. I think about the Cubs last winter, or the Expos/Nationals for a while...you can't run a baseball team if there's no authority to sign off on expenditures.

Dec 03, 2009 08:01 AM
 
BP staff member Jay Jaffe
BP staff

Unless they're broke, it's a pretty appalling indictment of their front office, but I do believe this is a McCourt/money issue where Colletti's hands are tied, which is consistent with the facts that over the past two years...

* they have consistently gone payroll-neutral at the expense of trading good prospects when it comes to their major in-season trades (Carlos Santana in the Blake deal, Andy LaRoche in the Ramirez deal, 2007 2nd rounder Michael Watt in the Maddux trade).

* they have paid the lowest draft pick bonus figure of any team, and have skimped internationally to an alarming degree as well.

The bottom line is that McCourt can't afford the frills relating to anything beyond This Year.

Four years ago, Nate Silver found that the value of the draft picks in compensation for a Type A was about $9 million for a pick in the second half of the first round (16-30) and another $3 mil for the supplemental. Inflation and our own WARP have both changed things a bit since then but if anything the yields are higher. Generously figuring the Dodgers might have spent anywhere between $1-2 million per bonus, that's maybe $6 million spent to generate at least $24 million worth of future value.

This from an organization whose nucleus is homegrown talent drafted by Logan White and one that turned lower first round picks like Billingsley, Loney and Martin (not all White's, IIRC) into key components on a team that reached the postseason in three years out of four.

Dark days for the Dodgers.

Dec 03, 2009 08:45 AM
 
Schere

One thing that bugs me about the process is that you "lose" a type A player to whom you've offered arbitration, and you sign a different type A, you net a sandwich pick. That makes no sense at all.

Dec 03, 2009 06:41 AM
rating: 1
 
PeterBNYC

Joe, based on my conviction that the Yankees haven't used a draft pick well since Jeter, what about their hedging their 2010 rotation decisions by signing Harden and Wolf to one-year deals with an option? Instead of blowing huge dollars on Halliday? Or is their fear that Boston gets Halliday and gets a clear advantage in the division? (Not likely, IMHO.) Regards,

Dec 03, 2009 11:46 AM
rating: -1
 
RedsManRick

If arbitration values are routinely exceeding those produced by the markets, then it would seem arbitration is broken. The current system seems to use the same assumptions as those selling real estate derivatives -- the market price can only go up. Between that and the fact the pick compensation limits the free agents options, it no longer seems to serve anybody well. The team risks retaining the player at an unreasonable salary and the player risks a limited or non-existent market for his services because of the pick compensation.

If the idea is to encourage stability, why not just institute a tax that goes in to a fund which pays a certain percentage premium to any player resigning with an organization for whom he's played for a certain time period. This would reward the players financially and would give teams a bit of a leg up when retaining their own players.

Dec 03, 2009 12:10 PM
rating: 0
 
3n2sports

Why not just offer a compensation system of supplemental picks to any free agent who is offered arbitration, declines, and is signed by another club. The round of the supplemental pick can be related the previous season's record as a way to spread talent to weaker teams.

The backbone of such a system is an accurate arbitration process.

Or easier yet we could just do away with compensation

Dec 04, 2009 12:20 PM
rating: 0
 
joeboxr36

Bengie Molina was a Type A Free Agent, first round compensation.

Dec 03, 2009 12:54 PM
rating: 0
 
Flynnbot
Other readers have rated this comment below the viewing threshold. Click here to view anyway.

Sort of amazing that at no point do you acknowledge you completely misread the market last year, Joe, other than saying what you initially labeled was the biggest mistake of that round of decisions was correct.

Oh, and Polanco ends up with a 30% raise and a three-year deal. Then again, that's not exactly a stretch when his old deal was for $4.6 per---the odds that the market was so soft he'd only get $3.7 million for one year, or 80% of his old deal, were minimal. Crack research there, Joe.

Dec 03, 2009 15:10 PM
rating: -6
 
Benjamin Harris

That's odd. The way I read it the entire article was an acknowledgement that he misread the market. He opens the article by directly refuting his own quote from last off-season.

Dec 04, 2009 08:26 AM
rating: 1
 
BP staff member Joe Sheehan
BP staff
(17)

I should have included a pic of the "W" I carved into my chest, denoting my being wrong. Maybe I'll put it up on Twitter.

Dec 04, 2009 08:54 AM
 
Benjamin Harris

As far as Polanco is concerned what Joe was saying (I believe) was that IF the Tigers had offered him arbitration then he would have accepted to guaruntee himself the 80%. The reason he got a larger offer, in part, was that the Phillies did not have to relinquish draft picks to sign him. Had he been offered arbitration and rejected it, it's extremely unlikely that he would have received the offer he did.

Dec 04, 2009 08:33 AM
rating: 1
 
BP staff member Joe Sheehan
BP staff
(17)

That and it didn't occur to me that a team would pay Placido Polanco's Decline Phase $6 million a season. The Phillies would have been better off offering Feliz arbitration.

Dec 04, 2009 09:00 AM
 
Flynnbot

Would you have thought that Marco Scutaro would have gotten $12.5 million guaranteed over two years (including the buyout) at 34 years old from the best front office in baseball, and giving up a draft pick to boot?

Dec 04, 2009 09:10 AM
rating: -1
 
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