Saturday, February 25th, 2012...12:57 pm

MLB Arbitration: Final Observations

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In wake of the the Ryan Braun episode (I hesitate to call it a case yet, in that there is a substantial chance it ends up in District Court and becomes a true case), I guess need to be more specific when I say “MLB Arbitration.” We are still dealing with arbitration as it relates to player compensation, as opposed to the arbitration process for disciplinary matters like violations of the performance enhancing drug policy. Depending on how the Braun matter plays out in the next few days, we may very well devote a full post to it. For now, I will simply say it was unexpected to see Braun win his appeal, as no MLB player had successfully appealed a drug suspension, and I would be very surprised if the ruling were overturned.

Now, back to arbitration as it relates to compensation.The process of Salary Arbitration is fascinating, not because of its complexity (as you’ve seen in this series, it is really rather simple) but instead for how it operates practically. The system, like any legal mechanism, is set up to create incentives. And the incentive of this system is to avoid its use. In other words, MLB and its Players Association, through collective bargaining, have created arbitration to encourage teams to avoid the process. As previously described, both team and the player have to submit a proposed figure, and if the case goes before the panel, the panel must choose one of those two figures. We all know, basic logic dictates the team and the player will, all things equal, settle somewhere between the two numbers in order to manage the risk of an adverse decision by the arbitration panel.

But there is more to it than just that. As with any proceeding in front of a tribunal, court or otherwise, things tend to get contentious. Regardless of the outcome of this case, the parties have to resume their relationship after the case. This gives further incentive for the parties to settle. From the team side, this conclusion is obvious: in order to win an arbitration, the team has to effectively argue the player is not worth a certain amount. This almost always the team to point out the players flaws and explain why other comparable players have more value and are better than the team’s player. This is not an enviable position to be in. From the player’s side, the incentives are little less obvious, but likely no less powerful. First, the player does not want the team to argue against him any more than the team does. Second, players generally want their contract situations resolved as soon as possible. Arbitrations happen in February-by then players are in full-scale training mode for the upcoming season-players don’t want to be concerned about their salary in February. Third, the player’s leverage is strongest in advance of arbitration, because teams prefer to avoid the hearings whenever possible. (In fact, some teams have an express policy to avoid arbitration. The Red Sox, for instance, have not taken a case to the panel in 11 years). Lastly, the objectives of most players is to secure a multi-year, long-term contract; obviously that cannot be done in arbitration.

The final observation I would choose to make is that the composition of the panel is a huge factor. Some members of the panel are quite sophisticated in terms of baseball, but most are not. The result is that many decisions are made on the basis of the simple, counting stats like homeruns, runs batted in, pitcher wins and saves. Yet over the past several decades, the way we measure value and ability has evolved significantly. The “advanced” stats and “new” metrics are indisputably more accurate and more telling, yet the arbitration structure tends to reward these traditional stats, that in the context of the modern game, are not extremely accurate or telling. So stats like pitcher wins or saves, that have been empirically rendered less relevant are actually the ones that are used to determine compensation.

My personal take would be that the system needs to be tightened up to include a greater focus on advanced stats and accurate comparisons between players that go beyond the basic, superficial stats arbitration currently relies on. If that means MLB must ensure that its arbitrators are sophisticated in these metrics, then so be it. As for the system itself, I believe the incentives it creates are generally positive; the player control system does allow small and mid-market teams to hold onto their productive young players, while arbitration eligibility does allow the player to be compensated more in line with his level of production. So the system itself is successful, but it can be reformed and improved.

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