(Consumer warning: This is long and possibly tedious, but if you're as fascinated by baseball's offseason as baseball's season, you might find it at least a little interesting.)
Baseball's salary ladder makes at least a little bit of sense at both of its extremes.
Young players are at the whim of their employer for three seasons, a system that rewards teams that draft and develop their own players and affords small-market teams a measure of financial flexibility.
Veteran players, on the other hand, as close to an open market as there is: They can sign contracts worth as much and for however many years as they can get, and they can benefit from periods of prosperity just as much as they can be hurt by periods of paucity. (Alex Rodriguez and Bobby Abreu represent the polar opposites on this scale.)
In the middle, though, players are subject to the whims not of the market but of to the whims of a three-person panel of arbitrators, professional dispute specialists who may or may not be experts on baseball and what it is that makes baseball players valuable. What it really does, though, is artifically supress player salaries for an extra three seasons in order to keep players tied to their original teams for a little bit longer.
Jonathan Papelbon will be the most high-profile Red Sox player to go to -- or, at least, to get close to -- salary arbitration. But Manny Delcarmen, Nick Green, Casey Kotchman and Ramon Ramirez likewise are eligible to have their salaries determined by an independent arbitrator, and whether that's good or bad depends more on their service time than on their ability to play baseball.
Baseball's collective bargaining agreement expires at the end of the 2011 season -- at which point the owners almost certainly will have to discuss the luxury tax and other ways to minimize payroll disparity across the game. That, though, would tend to drive down player salaries, and the players' association would have to get a concession or two from the owners in exchange.
Here's an idea: Restricted free agency. Read on.
I. Arbitrators value "primitive" statistics.
If you're a fan of saves, you're going to love arbitration. Check out some of these arbitration paradoxes from last season (with official major-league service time -- in years and days -- in parentheses, thanks to Cot's Baseball Contracts):
* Jose Valverde (5.090): $8 million
* Jonathan Papelbon (3.064): $6.25 million
* Bobby Jenks (3.090): $5.6 million
* Huston Street (4.000): $4.5 million
* Kevin Gregg (5.002): $4.2 million
* Felix Hernandez (3.060): $3.8 million
* Justin Verlander (3.002): $3.625 million
Let's re-rank that last list in order of Wins Above Replacement -- a Baseball Prospectus and FanGraphs statistic -- for each of those pitchers in 2008, the season before that particular arbitration award:
* Hernandez, 3.9
* Verlander, 3.3
* Papelbon, 3.0
* Jenks, 1.3
* Street, 1.2
* Valverde, 0.8
* Gregg, 0.7
The Wins Above Replacement statistic puts into context how valuable a player is by measuring how many fewer wins his team would have -- using runs created or runs allowed -- if his roster spot had been filled by an average player called up from Triple-A.
Starting pitchers inherently are more valuable than relief pitchers simply because they throw more innings. That's why the Red Sox tried to hard to make Papelbon a starting pitcher and why it's hard to believe they've dismissed the idea of making Daniel Bard a starting pitcher. A pretty decent starting pitcher is worth far more than even the best relief pitcher.
Mariano Rivera, the greatest relief pitcher the game has ever seen, is earning the same $15 million salary per year as Derek Lowe -- and Rivera even pitches for the Yankees. Joe Nathan signed a contract extension with the Minnesota Twins that will pay him a little more than $11 million next season; in other words, he'll make less than what Kevin Millwood will make next season.
Rivera led all full-time relievers in WAR in 2008 -- but when relief pitchers were lumped in with starting pitchers, Rivera ranked 42nd behind, among others, Hiroki Kuroda and Scott Baker. Even as disappointing as Verlander was a year ago -- it's easy to forget now that he had a 4.84 ERA, his worst as a major leaguer -- his Wins Above Replacement ranked him ahead of Rivera.
With the history of the arbitration process as their guide, however, both Hernandez and Verlander had to settle for a salary less than half that of Valverde pretty much only because Valverde had 44 saves last season.
(None of the three actually went before an arbitrator -- but if either Hernandez or Verlander believed he could get significantly more money than he got, based on precedent, he'd have made sure there was a hearing.)
II. Arbitration gets the whole idea of compensation backwards.
Contracts should not be about what a player has done. He's already been paid for what he has done. It's about what a player will do that year and in the years ahead.
In theory, of course, young players get better each year and thus receive a greater salary each year. Still, though, teams make arbitration arguments based on what each player did the previous season as compared to other players -- and not based on what he ought to be expected to do the next season. The panel, in fact, considers the player's "contribution to the club" -- meaning what he's done in previous seasons -- and disregards projected contribution.
When teams bid on free agents, on the other hand, they're doing so based on the production they expect to receive. This is why Mark Teixeira (.919 career OPS entering this season) and Bobby Abreau (.902 career OPS entering this season) received such disparate contract offers. The Yankees expected the 29-year-old Teixeira to keep putting up an OPS of .900 or 1.000 for the next six or seven seasons. The Angels weren't sure they could expect the 35-year-old Abreu to produce the same way he had earlier in his career.
Teixeira, of course, signed an eight-year contract with the Yankees worth $180 million. Abreu signed a one-year contract with the Angels worth $5 million because no one would offer him anything better. That's how they were valued in the free market -- and, thus, that's a pretty accurate reflection of how valuable teams in baseball saw them.
You can bet an arbitrator would have seen things differently.
III. Arbitration overvalues service time.
When the panel hears a case, it is allowed to consider as basis for comparison "the salaries of comparable players in his service-time class and, for players with less than five years of service, the class one year ahead of him."
That means that while Hernandez is right up there with Roy Halladay as one of the best pitchers in the American League, based on service time, the arbitrator can't use Halladay as a basis for comparison.
He can, however, look at Brian Bruney, Zach Duke and John Maine -- so at least there's that.
IV. There are no market forces at play in arbitration. (There's a reason the word "arbitrary" comes from the same origin.)
Xavier Nady landed a $6.55 million contract from the Yankees last January, a raise of almost $3 million on his previous salary. It wasn't as if someone else was competing for his services. The reason the two sides settled on $6.55 million was because it seemed close to what an arbitrator might have awarded, anyway, based as much on the history of the process as on Nady's actual value as a player.
Oh, and Los Angeles' Andre Ethier, a player almost certainly valued more highly than Nady in every major-league front office, settled for just over $2 million.
That's the inherent issue with arbitration: In almost every other profession, the compensation of a company's best employees is based on his market value -- in other words, he or she is paid enough so another company won't steal them away. (This is why every major company in the world pays its CEO what seems to be an exorbitant salary. No rule forces them to do so. It's a matter of value.)
San Francisco's Tim Lincecum is eligible for arbitration this winter -- and there's a pretty good chance he'll be coming off back-to-back Cy Young Awards when he does so. It's unprecedented. There's no way an arbitrator could look at past history and decide what a two-time Cy Young Award winner with just three years of service time is worth.
Owners and general managers, though, have to have an idea of how the market values certain players. They can get a sense for how much Lincecum would be worth on the open market. Something is only worth, after all, as much as someone is willing to pay for it -- and for Lincecum to get the salary he deserves, more teams have to have the opportunity to buy.
V. Restricted free agency is the solution
Here's the setup: After three seasons under team control, a player becomes eligible for restricted free agency. Any team could offer the player a contract for the next season, and the player's original team would retain a right to first refusal -- much like in the NBA and the NHL.
Let's go back to Lincecum again. If restricted free agency was in play, you can bet the Red Sox -- and several other teams -- would jump at the chance to offer Lincecum $15 million or more, a number with which the Giants couldn't compete.
One could argue that Lincecum, as perhaps the best pitcher in the National League, deserves $15 million or more. But in an effort to give small-market teams a chance to hold onto their players for more than three seasons, here's a compromise as part of the proposal:
* For a player with fewer than four seasons of service time, the original team needs only to match 50 percent of the new team's offer.
* For a player with fewer than five seasons of service time, the original team needs only to match 75 percent of the new team's offer.
* For a player with fewer than six seasons of service time, the original team needs only to match 100 percent of the new team's offer.
If the Yankees were willing to offer Lincecum $20 million, for example, the Giants would only have to pony up $10 million to retain him. A year from now, if the Yankees were willing to offer Lincecum $20 million, the Giants would have to pony up $15 million.
And if the Giants chose to let Lincecum go, the Yankees would be on the hook for the $20 million they'd offered -- plus some sort of draft-pick compensation to be sent to the Giants.
Because fans tend not to want to see excessive team-hopping, though, there's one more stipulation to include: If the Yankees landed Lincecum for that $20 million salary, they'd be committed to him at that salary for each of his remaining arbitration-eligible -- or, in this case, RFA-eligible -- seasons. Lincecum in effect would be signing a three-year contract worth $60 million and would hit the open market at the same time he normally would.
Take Papelbon as another example. The Red Sox likely are going to owe Papelbon $8 or $9 million next season either because of the decision of an arbitrator or because the two parties come to an agreement that's driven by what they anticipate from a hearing. But what if there's another team that values Papelbon more than the Red Sox? What if there's a team that would be willing to pay $15 million a season for Papelbon? Shouldn't he be able to earn that type of money if there's someone willing to pay him?
Then again, if every other team shared a common view that Papelbon walked a tightrope last season that he won't survive this season, maybe none of them would offer more than $6 or $7 million. The Red Sox then could retain him at a salary more reflective of his market value.
(Imagine how fascinating it would be for the Yankees tried to decide how much to offer Papelbon in an effort to increase the cost for the Red Sox without offering so much that the Red Sox just let him go for a salary they wouldn't want to absorb -- especially with Rivera still under contract for $15 million next season.)
An arbitrator shouldn't decide what players are worth to baseball teams. Baseball teams should decide what players are worth to baseball teams. Restricted free agency isn't perfect, but the more you can put market forces into play, the more you're going to ensure that the best players earn the highest salaries and that the smartest teams wind up with the most cost-effective players.