A Clarification of My Last Post on Salary Arbitration

The two anonymous comments to my January 23 posting offered good observations and questions, and they point out my need to be more precise about my last sentence -“One of my arguments has been that salary arbitration usually works because most of the time the parties agree to a figure at the midpoint or slightly below the midpoint.” Thank you for forcing me to apply more rigor to my statement. This reply to the first anonymous response became so long that I decided to move it up to the main page because I wanted more readers to see it. Plus, the response deserves a wider audience on the main page.

I will offer some thoughts about how the Astros, Marlins, and Rays methods are pushing the balance towards management in a follow-up to this reply.

My argument that the salary arbitration system actually works is that it usually produces a settlement instead of forcing a hearing. Furthermore, there are strong incentives for both parties to submit a reasonable figure if numbers are exchanged. So I would have been more accurate concerning my position if I had said - “One of my arguments is that the salary arbitration process usually works because most of the time the parties agree to a figure without the need for a hearing.”

Many observers of the process focus on the teams and players that proceed to a hearing first and the group that exchanges numbers second. This ignores all of the cases that are settled either before the exchange of figures or prior to a hearing. Look at some of these recent figures -

Year - Cases Filed - Cases Settled - Number of Hearings

2005 - 89 - 86 - 3 (Teams won 2 out of the 3)
2006 - 100 - 94 - 6 (Teams won 4 out of the 6)
2007 - 106 - 99 - 7 (Teams won 4 out of the 7)
2008 - 110 - 102 - 8 (Teams won 6 out of the 8)

Since the beginning of the process in 1974, my research lists the total number of cases filed at 3,043 (all of the lists that I have seen concerning salary arbitration differ as to some of the numbers in the 1970s and early 1980s). Of that number, 2,554 were settled, 484 proceeded to a hearing, and 5 were released (neither settled nor a hearing). That is a ratio of 83.9% settled cases and 15.9% hearings (the additional 5 cases account for the 0.2%).

So, my evidence for the revised statement is that 84% of the cases are settled, and that is, I think, the point of single-offer or final-offer arbitration. Now, the system is supposed to produce reasonable figures from both camps. If one of the figures is not plausible or defensible, you have created every incentive for the other side to go to a hearing because the chance of winning has increased significantly. Over the years, the teams have won 58% of the cases (279-205). The last time that the players exceeded .500 was 1996 (players won 7 of 10 hearings).

I am including a listing below showing the results of players and teams who exchanged numbers but settled before a hearing during the past five years. Note that during that five year period, 68% of the cases were settled at the midpoint or below the midpoint. This was part of the source for my original last sentence because that is what has happened in a strong majority of the recent cases. However, as I was properly taken to task, that is evidence for a different conclusion. My argument is that these statistics support the conclusion that the majority of cases are framed by the two exchanged numbers at an agreeable point for both parties. The general thought of hearing decision-making is that you determine the midpoint between the two figures. If the player is worth $1 or more above the midpoint, the arbitrator chooses the player’s figure. If the player is worth $1 or more below the midpoint, the arbitrator chooses the team’s figure. The decisions at hearings are supposed to be made within 24 hours by a panel of three. For many years a single arbitrator made the decision. An article last year at the end of the hearing season quoted veteran arbitrator Stephen Goldberg as follows: “Each arbitrator casts a vote but my impression is that 99 percent of the decisions are unanimous.” Ameet Sachdev, “Former NU Professor Says Multimillion Dollar Salary Hearings Have Grown Less Contentious,” Chicago Tribune, February 26, 2008. If Mr. Goldberg is correct as to the voting, he is arguing that the presentations are quite strong for one side or the other.

Notice that the next largest percentage (22%) are the 40 multiyear deals. This year there are already five multiyear deals between teams and players who filed numbers (Prince Fielder, Milwaukee Brewers; Zack Greinke, Kansas City Royals; Jason Kubel, Minnesota Twins (pending a physical); Nick Markakis, Baltimore Orioles; Jayson Werth, Phillies). The multiyear deals portion of the data merits its own posting and discussion.

Major League Baseball Salary Arbitration
Players and Teams Who Exchanged Numbers But Settled Before a Hearing
Results - 2004-2008

Year - Multiyear Deals - Above Midpoint - At Midpoint - Below Midpoint - Total
2004 - 5 multiyear - 1 above - 6 at midpoint - 8 below - 20 total
2005 - 8 multiyear - 3 above - 5 at midpoint - 21 below - 37 total
2006 - 7 multiyear - 8 above - 9 at midpoint - 14 below - 38 total
2007 - 10 multiyear - 4 above - 12 at midpoint - 22 below - 48 total
2008 - 10 mulityear - 2 above - 7 at midpoint - 21 below - 40 total

Multiyear Deals - 40 (22%)
Above Midpoint - 18 (10%)
At Midpoint - 39 (21%)
Below Midpoint - 86 (47%)
Total - 183 (100%)

I apologize if this posting is too long or not in your area of interest. I appreciate the comments because, as I stated above, they force me to be more rigorous in my work on this topic. Also, I think one of the purposes of the blog is to get feedback.