January 28, 2010

Squawking Baseball

The Age of the Payroll Floor

by Shawn Hoffman

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Welcome to the age of the payroll floor, or at least the mandate to spend some esoteric minimum if you're taking other teams' revenue-sharing dollars.

First, some background: new union boss Michael Weiner has made it one of his top priorities to enforce the following clause in baseball's collective bargaining agreement (Article XXIV (B)(5)(a), if you want to read the whole thing):

(E)ach Club shall use its revenue sharing receipts (from the Base Plan, the Central Fund Component and the Commissioner's Discretionary Fund) in an effort to improve its performance on the field. Each Payee Club, no later than April 1, shall report on the performance-related uses to which it put its revenue sharing receipts in the preceding Revenue Sharing Year. Consistent with his authority under the Major League Constitution, the Commissioner may impose penalties on any Club that violates this obligation.

The Marlins were an obvious first target, since they've really pushed the limit on how little you can spend on player payroll, while presumably being one of the biggest beneficiaries of revenue sharing. And so far so good for Weiner-the Marlins publicly promised to spend more on payroll going forward, in a joint statement with Major League Baseball and the union. Terms of the agreement haven't been announced-and won't be, if MLB has its way-but the Marlins have already signed Josh Johnson to a long-term deal that seemed unlikely during the fall, and seem more willing to keep Dan Uggla, despite the big raise he's gotten through salary arbitration.

The union probably won't stop there. The Pirates are supposedly next, and it's always possible that Weiner will expand the push to include any other team that is spending less than $50 million or $60 million. The short-term goal is pretty clear: if the union can pressure two or three teams to spend an extra $10 million on payroll, that's $20 million or $30 million that's being transferred to the players. But the long-term goal might be even more ambitious: the union could very well be trying to impose a soft payroll minimum, much like the luxury tax serves as a soft maximum.

In a lot of ways, it makes sense: the luxury tax is a real rule with real penalties for teams that spend more than what is deemed socially acceptable by MLB. But there's no similar penalty for teams that spend too little. A tax on payrolls under some very conservative number-much like the luxury tax, which very few non-Yankees teams have reached-seems pretty reasonable, especially if those teams are receiving revenue-sharing dollars and are turning healthy profits.

But there are some huge problems to get around first. One, obviously, is that it effectively creates a soft cap/floor system, which future generations might not be so careful with. I've written enough on this subject already, but it's important to remember just how dangerous a hard cap/floor system is when teams have even slightly disparate revenues-the NHL's system has already put a team through bankruptcy, and even the quasi-socialist NFL voted unanimously to overhaul their program.

An even bigger issue, at least in the short run, is that it could set up a terribly flawed incentive structure for the teams. Note the language in the CBA: "...in an effort to improve its performance on the field." That's a critical precedent: spending on player payroll isn't the only way to improve your on-field product. Teams that aren't going to contend are far better off allocating that money into other areas, including player development, infrastructure, the draft, and international signings, to name a few.

The Pirates are a good example here. During the Kevin McClatchy/Dave Littlefield era, the Pirates consistently brought in unnecessarily expensive big-league veterans to fill out their roster, while never daring to pay above slot in the first round of the draft. Anyone with a calculator could see the inequity-the same team that took Daniel Moskos over Matt Wieters in order to save $4 million in June of '07 traded for an all but comatose Matt Morris a month and a half later, taking on every penny of the $13 million he was still owed on his contract. Morris would make 16 starts for the Pirates, putting up a 7.04 ERA, before being cut by the team's new regime in April of '08.

The current Pirates' front office has completely reversed that policy: in the last two years, they've gone over slot several times in the draft, and invested millions to rebuild a Dominican program that Littlefield had pretty much left for dead. Meanwhile, they've traded away just about every major-league player who wasn't going to be part of their next competitive team, leaving this year's payroll at a now-dangerously low level. They're taking plenty of hits in the press and at the gate, and will continue to for the time being, but at the very least, they now have a process in place that actually makes some sense.

Any new policy in the next CBA has to recognize this dynamic. The current agreement's language is pitifully vague regarding the subject, but it's there for a reason: teams at the bottom end of the success cycle have no reason to spend on major-league payroll, and in fact it can actually be counterproductive. If the clubs are required to spend a certain percentage of their net revenue-sharing dollars to improve their teams, those other categories-the draft, international free agents, et al-need to be counted.

That probably wouldn't be a very satisfying result for some media members who have been particularly vocal about this, since MLB keeps most of the international signing and infrastructure numbers under wraps. But without that stipulation, this simply becomes a tax on small-market teams, which defeats the purpose of having revenue sharing in the first place. Using this as an opportunity to promote amateur and player development spending among small-market teams is a far better approach, and the owners need to keep this in mind when it's time to negotiate the new CBA.

Shawn Hoffman is an author of Baseball Prospectus. 
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