Salary Arbitration, A Burden or a Benefit?

With outfielder So Taguchi and the St. Louis Cardinals engaged in the MLB player salary arbitration process, what better time to explain how it works? A participant in the process tells us how.

Editor's note: In his first year of eligibility, St. Louis Cardinals outfielder So Taguchi filed for salary arbitration prior to the Friday midnight deadline, as expected. Teams and players will submit their proposed salary figures on Tuesday, with arbitration hearings to be scheduled during the first two weeks of February. Taguchi's 2006 salary was $825,000.

This article will illustrate from an insiders' perspective how the process that Taguchi and the Cardinals are following works.



The salary arbitration process is not well understood and it is frequently described in a negative way by media, as well as the clubs and players. I hope to improve the understanding of the process and how it works in this article.

Salary arbitration was instituted as part of the collective bargaining agreement between the Major League Baseball Players Association (MLBPA) and Major League Baseball (MLB) in the early 1970s. The purpose was to provide a system for players not yet eligible for free agency to be compensated based on a comparison with their peers.

The first hearings were held in 1974. The highest number of cases filed in any year was 162 in 1990. In 2006, 100 cases were filed with 94 being settled before a hearing. The number of cases that actually went to an arbitration hearing peaked in 1986 (35). Over the years, 469 cases have been heard by arbitrators with the clubs winning 269 (57%) and the players winning 200 (43%).

Eligibility for Salary Arbitration

Two classes of players are eligible for salary arbitration. The first class is players with 3-5 years of major league service (MLS) and the top 17% in seniority of MLS-2 players. This class accounts for over 90% of the cases filed with most of them involving players with three or four years of major league service.

The second class of eligible players includes free agents with 6+ years of ML service. Clubs have the option to offer arbitration to free agents who were with the club the previous season and these players then have the option of accepting or declining. If the player accepts arbitration, he is bound to the club and is no longer a free agent. Cases involving this class of players rarely go to a hearing. The last hearings involving MLS-6+ free agents were in 1991 when Dickie Thon, Jim Gantner and Dan Petry, all with 11+ years of MLS, went to hearings and all three lost.

The arbitration process enables clubs to retain control of players with less than six years ML service, while the advantage to the players is that they receive salaries that are influenced by the market and their performance. The benefit to both sides is that the process is designed to promote a settlement without a hearing. If a case goes to a hearing, the arbitrators must award either the player's filing or the club's filing – there nothing in between. Thus both sides are taking a substantial risk if they allow a case to go a hearing. In the last ten years, over 90% of the cases filed have settled prior to a hearing.

A hearing panel consists of three arbitrators with one designated as the chairperson. Others present include the player (and sometimes his wife), his representatives and representatives from the MLBPA. Respected baseball analysts like Bill James and Gary Skoog have been used in hearings and several former players; Phil Bradley, Bobby Bonilla, Mark Belanger, Mike Fischlin and Tony Bernazard among others, have been employed by the MLBPA and have been present at hearings. The club is represented by an official, usually the general manager and also typically by an experienced arbitration practitioner to present the case. Others present are representatives from the Labor Relations Department of MLB, usually including General Counsel - Labor, Frank Coonelly.

The player is given one hour to present his case followed by an hour for the club to present its side. After a break to prepare rebuttals, each side is allowed 30 minutes for rebuttal. The arbitrators then have 24 hours to render their decision. There has been at least one occasion where a case was settled after a hearing. In a 1994 case involving the Houston Astros and relief pitcher, Tom Edens, the hearing was held with both sides anticipating a decision the following day. However, in the evening after the hearing, the agent for Edens called Bob Watson, then the Houston General Manager, and suggested that they settle at the mid-point of the filings. Watson agreed and the arbitrator (there was only one back then) was relieved of the responsibility of reaching a decision.

Arbitration Criteria

The collective bargaining agreement is specific regarding what is admissible and non-admissible in a hearing. Admissible items include the quality of the player's performance, the length and consistency of his performance, his record of past compensation, any physical or mental defects and comparative baseball salaries. The arbitrators are directed to give particular attention to contracts of players not exceeding one service group above that of the player.

Non-admissible items include the financial position of the player or the club, press comments on the player's performance and prior offers by either side.

Arbitration Hearing Strategies

In the player's case, emphasis is given to the strength of his performance and his awards or achievements. He is compared with players in the same service class with high salaries. The objective is to build evidence that supports a salary higher than the mid-point in the case. Sometimes another player will be brought in to testify in support of the player. A classic example was the 1998 Charles Johnson case when Scott Boras brought in Kevin Brown to testify that he had pitched to both Johnson and Ivan Rodriguez and that Johnson was better at working with pitchers. In his 1994 case vs. Kansas City, Brian McRae also benefited from first-hand testimony about his defense by David Cone and Willie Wilson.

The challenge of the club is to point out deficiencies in the performance of the player without personally demeaning the player. This is tricky but it is essential since the player is part of the club. The club can point out the lack of awards and achievements and will strive to compare the player with players in the same service class with relatively low salaries. The objective is to build evidence that supports a salary lower than the mid-point in the case.

In a typical case, each side will use a different group of players they deem comparable to support their cases. An exception was the 1994 Brian McRae case. It was the last hearing on the 1994 docket so essentially all other relevant salaries had been established. Both sides used exactly the same group of National League outfielders as comparables, all with three years of MLS and one-year contracts for 1994 at salaries close to the mid-point of $1.6 million in the McRae case. The players were Ray Lankford, Moises Alou, Luis Gonzalez, Orlando Merced and Bernard Gilkey. McRae's agent argued that his player's performance placed him among the leaders in this group and the Club argued that his performance did not measure up to these players. McRae won the case (but subsequent years have shown that he probably ranked last in this group on a career basis).

Arbitration Hearing Results

The trend in recent years is for more cases to be settled prior to hearings. This is due to several reasons, one of which is that both sides now have a better grasp of a player's value in the arbitration process and file accordingly, anticipating a settlement around the mid-point. This is illustrated in the table below.

Arbitration Hearing Results

 

Average

%

 

Number of 

Won By

 

Hearings/Yr.

Players

 

 

 

1980-1992

21

45%

 

 

 

1993-2001

11

37%

 

 

 

2002-2006

6

31%

Clubs Have Won a Majority of Decisions in Each of the Last Ten Years.

Salary Histories

The next three tables provide examples of how a player's salary changes as he moves from club control in his first three years, through arbitration, to his eligibility for free agency after six years. Each case is different.

B. J. Ryan – Ryan's case is typical of a player whose role and performance increases as he moves through his arbitration years. In his first two arbitration years, he settled with Baltimore near the mid-point before a hearing, and in the third year a salary was agreed upon before figures were exchanged. Ryan became a very effective closer in 2005 and signed a five-year contract with Toronto when he became a free agent after six years.

Jarrod Washburn – Washburn had a big year (18-6, 3.15 ERA) prior to his first year of arbitration eligibility. This gave him the leverage to command a big contract as an MLS-3. His salary continued to increase the next two years when he was essentially an average major league starting pitcher. In all three of his arbitration years, he settled on a contract with the Angels before figures were exchanged. He signed a four-year contract with Seattle when he became a free agent after six years.

Michael Barrett – Barrett was one of the fortunate players who became eligible for free agency as an MLS-2. In his first two arbitration years, he agreed on a contract with Montreal before figures were exchanged. However, his career hit a bump in 2003 when he batted .208 and lost his job as the starting catcher. He was traded to the A's and then to the Cubs who did not tender him a contract. This took away the leverage he would have had as an arbitration eligible player and the Cubs signed him to a contract with a salary far below what he was paid the previous year. He responded with a breakout season and signed a three-year contract with the Cubs in his final year of arbitration eligibility after figures were exchanged.

B.J. Ryan Salary History
                                                                                  Arbitration Filings
Year MLS Salary Status Salary, $K Club Player
2000 MLS-0 Club Control 204
2001 MLS-1 Club Control 240
2002 MLS-2 Club Control 300
2003 MLS-3 Arb. Eligible 762.5

700

825

2004 MLS-4 Arb. Eligible 1,275 1,000 1,500
2005 MLS-5 Arb. Eligible  2,600 (1)
Settled early
2006 MLS-6 Free Agent 4,000 (2)
(1)    Earned an additional $225K in performance and awards bonuses.
(2)    First year of 5-yr., $47M contract.
Jarrod Washburn Salary History
                                                                                  Arbitration Filings
Year MLS Salary Status Salary, $K Club Player
2000 MLS-0 Club Control 222.5
2001 MLS-1 Club Control 270
2002 MLS-2 Club Control 350
2003 MLS-3 Arb. Eligible 3,875
Settled early
2004 MLS-4 Arb. Eligible 5,450
Settled early
2005 MLS-5 Arb. Eligible 6,500
Settled early
2006 MLS-6 Free Agent 7,450 (3)
(3) First year of 4-yr., $37.0 M contract.
Michael Barrett Salary History
                                                                                  Arbitration Filings
Year MLS Salary Status Salary, $K Club Player
2000 MLS-0 Club Control 265
2001 MLS-1 Club Control 285
2002 MLS-2+ Arb. Eligible 1,150
Settled early
2003 MLS-3 Arb. Eligible 2,600
Settled early
2004 MLS-4 Arb. Eligible 1,550
Non-tendered
2005 MLS-5 Arb. Eligible 3,133 (4) 3,400 3,900
2006 MLS-6 Multi-Year 4,333
(4) First year of 3-yr., $12 M contract.  Earned an additional $50 K award bonus.

Conclusions

+ The arbitration process provides benefits to both clubs and players.

- Clubs retain player control for six years.

- Players receive market-influenced salaries three years before free agent eligibility.

+ The process has been in place since 1974 and has survived numerous labor negotiations.

+ The vast majority of salaries are determined by the process, not by an arbitration award.

+ The number of cases going to hearings has declined sharply in recent years.

+ Arbitration was not expected to have been an issue in labor contract negotiations this year.



Bill Gilbert is a baseball analyst and writer and member of the Society for American Baseball Research (SABR).

© 2007 stlcardinals.scout.com. All rights reserved. This material may not be published, rewritten or redistributed.


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