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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

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