April 22, 2010

Contractual Matters

Payroll Puzzle

by Jeff Euston

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April brings warmer weather and games that count. It also brings a flurry of financial numbers: player salaries from USA Today and the Associated Press, franchise values from Forbes magazine, and often an annual piece on team spending from a local beat writer covering the hometown nine.

The salary figures never fail to generate reaction, from surprise ("Nate Robertson is making $10 million!") to amusement ("How is Albert Pujols the third-highest paid Cardinal?"). Reaction to individual club payrolls generally is more predictable and often includes the faint echoes of a bear from the Goldilocks fable, ranging from "Our payroll is too low!" to "The Yankees’ payroll is too high!"

Both Major League Baseball and the MLB Players Association add to the fun in the fall, releasing final tallies of spending for the recently-completed season. The two sides use different methods of calculation, so the figures never agree. But that does not distinguish them from figures supplied by USA Today, Forbes, the Associated Press, or your local beat writer, which rarely, if ever, agree, either. So fans get a patchwork quilt of information from multiple sources, with varying degrees of specificity, and never all in one place.

If it’s enough for you to watch a game and appreciate the talents of Ichiro Suzuki and knowing he’s well-paid, thank you very much, then you’re fine. If however you’d like to know how much a particular club paid out in cash for a particular season, prepare to wade into a swamp of numbers, with no direction home.

Even with the various methodologies for calculation, any payroll total is simply a snapshot. Mike Jacobs won a spot on the Mets’ Opening Day roster and will be listed—probably forever—in USA Today’s salary database as earning $900,000 in 2010. But two weeks into the season, Jacobs was back in the minor leagues, earning a lesser salary, replaced by prospect Ike Davis, who will make the $400,000 minimum. The amount of cash a club actually pays out during the course of a season is static, and without seeing the books, we’ll never have concrete numbers. And we won’t be seeing the books anytime soon.

The highest payroll figures generally come courtesy of Forbes magazine, which estimates franchise values, revenues, and profit for each club each spring. Forbes calculates a payroll figure for each of the 30 clubs based on salaries for the entire 40-man roster, including player benefits and bonuses. Each club contributes a significant amount—reports vary from $8 million to as much as eight figures—for a player benefit plan. However, the magazine provides no breakdown. To take a prominent example, Forbes’ 2009 "Player Expenses" figure for the Yankees is $240 million, compared to MLB’s figure of $226.2 million (calculated for luxury tax purposes) and USA Today’s $201,449,189 (as of Opening Day 2009).

The USA Today report reaches its payroll totals by adding the salaries for players on each club’s 25-man roster and major-league DL. If a player received a signing bonus, that amount is spread over the guaranteed years in the contract. So Derek Jeter’s 2010 figure of $22.6 million consists of his $21 million salary, plus $1.6 million, or one-tenth of the signing bonus of $16 million that he received under the terms of his 10-year extension signed in 2001.

In some cases, figures are discounted to reflect present-day values of salaries that are, in part, deferred. So Albert Pujols’ salary of $16 million for 2010 is listed at $14,595,953 because he agreed to defer $3 million a year for 2007-11, without interest. He’ll receive the deferred money in 10 installments of $1.2 million apiece from 2020-29. However, USA Today does not discount every contract that includes deferred money. Deferrals are not always made public, and interest rates or payment schedules are publicly disclosed for only the highest-profile players.

An additional complicating factor is player movement. For example, USA Today’s report lists outfielder Gary Matthews Jr. on the Mets’ 2010 books at $11.4 million. However, the Mets are paying only $1 million of Matthews’ 2010 salary, with the Angels responsible for the balance. But Matthews is nowhere to be found on USA Today’s breakdown of the Angels’ 2010 payroll. The result: USA Today’s figure for the Mets is overstated by nearly $11 million, while the figure for the Angels is understated by the same amount.

Worse yet is an inevitable typo that can skew a club’s payroll total by as much as eight figures. Troy Glaus earned $12,137,000 with St. Louis in 2009, but USA Today listed his salary as only $1,213,700; apparently, a zero was dropped somewhere along the way, reducing the Cardinals’ Opening Day payroll from an actual total of $88,528,409 to $77,605,109. The error was corrected online a few days later, short-circuiting a growing movement among fans in St. Louis to let ownership know that a $77-million payroll was too low.

By the end of the 2009 season, after adding Matt Holliday and Mark DeRosa, the St. Louis payroll had jumped to $101,803,475, according to MLB’s year-end payroll numbers, which are calculated for luxury tax purposes. MLB bases its figures on 40-man rosters, and the totals include salaries and prorated shares of signing bonuses; earned award, roster, and performance bonuses; non-cash compensation; buyouts of unexercised options; and cash transactions. The salary for a player with a mutli-year contract is determined by the deal’s average annual value. However, even the owners and players don’t agree on the figures. The Commissioner’s Office calculated the average 2009 salary to be $2,882,336, while the MLBPA put the average figure at $2,996,106.

Ideally, a payroll figure should represent a fair approximation of what a club actually spends in cash. And, given that most clubs deliberately operate below the luxury tax thresholds, it would be useful to have a running total of each club's payroll for purposes of calculating the luxury tax. But, again, without more information, that’s problematic.

 So what follows is a best estimate of a payroll snapshot for Opening Day 2010, reflecting 2010 spending on salaries or buyouts, plus pro-rated shares of any signing bonuses, for players on the 25-man roster and players with major-league contracts playing in the minor leagues. For anyone interested in a specific breakdown, details are available by clicking "2010" on each club’s page at Cot’s Baseball Contracts.   

Jeff Euston is an author of Baseball Prospectus. Follow @JeffEuston
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