Sunday, October 7, 2012

Current Salary Efficiency in the MLB

In recent years, WAR (Wins Above Replacement, read more HERE) has become one of the most discussed statistics in player evaluation. With the release of Moneyball last November and another amazing success story of the Oakland A’s (and the lowest payroll in the MLB, $49 Million) winning the AL West on the final day of the season statistical analysis could not be more in vogue.

In order to earn a playoff berth this year, the A’s had to beat the Los Angeles Angels of Anaheim. At the conclusion of the 2011 season, Albert Pujols was easily a top-5 player and the main contributor to the team that just had won the World Series. Deservedly so with this status, he signed a mega contract that will pay him $240 Million dollars over 10 years. The Angels, as can any team that spends a substantial amount of money on one player can argue that by adding a star caliber talent, it will ultimately make the whole team better and provide an opportunity to win a World Series. The question raised is how much is that argument worth? In a time where people and professional sports teams alike are looking for creative ways to save money, perhaps a new way to plan for success in baseball is to answer that question better and buy free agent players accordingly.

Taking two statistics, annual salary and WAR, we can easily determine a value that a player earns for their team by comparing it to the league average. In 2012, Albert Pujols earned $12 Million and his WAR was 4.6 (career low). Teammate Mike Trout, who as a rookie MVP candidate, posted a 10.7 WAR while earning the MLB minimum salary of $480,000 is on the opposite end of the spectrum as truly being the most valuable player (not the award, but rather the cheapest player). Under this logic, Trout 58 times more valuable to the Angels than Pujols. Think about this with your company’s sales team. If there are two sales people that are equally as talented and successful with earning revenue, yet the salary for person one is 24 times higher than person two. Whatever manager allowed for that to happen would be fired and this happens in baseball everywhere and gets amplified by front-loaded contracts. In 2021 when Albert Pujols is 40 years old and in the final year of his contract, he is set to earn $30 Million dollars.

Taking another player that sets precedence to Pujols is Alex Rodriguez. Rodriguez is in the decline of what has been a remarkable career. When he signed his contract with the New York Yankees prior to the 2003 season, General Manager's had to answer the same question that they did with Pujols last offseason. Remarkable talent that if acquired would make the whole team better, but probably not for the duration of the contract. Playoff appearances have continued to mount for the Yankees since including another World Series win in 2009. However, what the Yankees currently face is exactly the problem for paying prime players big dollars over long term contracts. As their decline steepens, their value to the franchise becomes negative and can cripple a team for those years from lack of payroll flexibility. Rodriguez made $29 Million in 2012 and had a WAR of 2.0 – this makes Trout worth 323 times Rodriguez.

Under this theory, a team that limits the number of players on their roster with negative contributions to payroll will experience the greatest amount of flexibility and have the best opportunity to improve their team in an offseason by making the right additions (again, at the right price). If all key decision makers across the sport were to agree, it would mean for a decided end to mega contracts. Unfortunately, in an environment where payroll inequity exists, this explanation offers further rationalization as to why some teams are unable to sign Albert Pujols. All teams should be aware of the risk and reward.

The innovative way of solving this issue would be to treat players like a sales team by incentivizing them with substantial incentives for good play – for instance $200,000 per home run; $10,000 per hit; $20,000 per stolen base; 20,000 per RBI. This could create a true reward system based on performance because Mike Trout is the one that deserved $30 Million this season, not Alex Rodriguez. Unfortunately, the MLB Players Association would never allow because it takes away from the guaranteed high salaries to players like Pujols and Rodriguez. What can be done is teams that are committed to payroll efficiency should take a closer look at WAR versus salary and stay away from albatross contracts.