At the time salary arbitration was first implemented in 1973, Charlie Finley, a former owner of the Oakland A’s, said: “We’ll be the nation’s biggest assholes if we do this.” Citing Charlie Finley’s disapproval and the massive pay increases of first-year salary arbitration eligible players, many sports writers, such as Maury Brown, the founder and president of the Business of Sports Network, have concluded that “salary arbitration almost exclusively benefits the players.” See Breaking Down How Salary Arbitration Functions in MLB.

In his recent blog entry, Debunking Salary Arbitration Myths – Part 1, Jay Reisinger, a partner at Farrell, Reisinger & Stallings and manager of the firm’s sports law practice, discredited the notion that MLB’s salary arbitration system favors players and hurts owners. Mr. Reisinger revealed that, by focusing on the huge raises of first-year salary arbitration eligible players, that position is misleading. According to Mr. Reisinger, an accurate understanding of the salary arbitration system also acknowledges the equally significant benefits conferred upon clubs.

For instance, clubs exercise a certain amount of control over arbitration eligible players. Clubs can tender or non-tender the player, at their discretion, depending on the player’s expected salary in the arbitration system. If the player’s expected salary in arbitration is higher than his value to the club, the club can non-tender the player and make him a free-agent. If, on the other hand, the player’s expected salary in arbitration is roughly equal or lower than his value to the club, the club can tender the player a contract. If the player is unsatisfied with the offer, his only recourse is to submit his salary to final and binding arbitration. Basically, from a club’s perspective, arbitration is a low risk affair because the club has already determined that the player’s expected salary in arbitration is roughly equal or lower than his value to the club.

Another major benefit discussed by Mr. Reisinger is that clubs are protected. The key criterion in salary arbitration proceedings is the comparative baseball salaries of players “with Major League service not exceeding one annual service group” above that of the player going to arbitration. In essence, the arbitration panel tries to determine where the particular player fits within a very narrow market of players which does not include players who have accrued significant raises through free agency. Clubs, therefore, are shielded from free market forces and their inflationary effect.

Rather than a system that benefits players and hurts owners, Mr. Reisinger sees the arbitration system as a necessary compromise between two parties pursuing divergent interests through collective bargaining. Generally clubs want competitive balance and bargain for a protectionist regime that includes more restrictions on player mobility and player compensation. Players want to increase their earning capacity and bargain for a laissez faire approach. Ultimately, how good or bad the salary arbitration system is depends on your point of view, and on how well you deem the system to be protecting your specific interests as a club owner or a player. As a baseball fan, one can only hope the league and the players union avoid a strike or lockout by reaching an agreement once the current CBA expires.

In order to truly understand the salary arbitration system, it helps to look at its role as part of MLB’s larger monetary structure. Ed Edmonds, the Associate Dean for Library and Information Technology at Notre Dame Law School, explains the impact of salary arbitration on a MLB player’s salary life cycle and, consequently, on a team’s roster in his Marquette Sports Law Review article A Most Interesting Part of Baseball’s Monetary Structure – Salary Arbitration in its Thirty-Fifth Year (Fall 2009 Volume).

As Mr. Edmonds points out, the current CBA divides all players into three groups: 1) players controlled under the reserve clause, 2) players eligible for salary arbitration prior to free agency, and 3) free agents. What sets each group apart is the amount of leverage each group has with respect to their employer or potential employers. Players controlled under the reserve clause have no leverage. They are bound to one team and play for around the league minimum. That player’s salary bears no resemblance to the player’s market value. Mr. Edmonds offers Tim Lincecum as an example. Lincecum received $405,000 in 2008, his first year in the majors (the league minimum was $390,000). After putting up dazzling numbers (18-5 record with a 2.62 ERA and 265 strikeouts in 227 innings pitched), Lincecum only managed to increase his salary to $650,000 in 2009.

Free agents are on the opposite side of the spectrum. Being able to consider multiple offers gives free agents substantial leverage, which they can use to drive up their price tag. To illustrate the effect of free agency status on a player’s salary, Mr. Reisinger compares C.C. Sabathia to Tim Lincecum in his blog entry. Even though Lincecum is statistically similar to Sabathia, Lincecum recently signed a two-year, $23 million contract that will cover his first two arbitration eligible years, meanwhile Sabathia will make $23 million in the 2010 season alone.

Salary arbitration eligible players “occupy the middle group between players with no leverage and those . . . with substantial leverage.” The arbitration process offers them an opportunity to earn a significant raise yet their compensation remains below market value. One example Mr. Edmonds uses is Prince Fielder. In 2007, his second year of Major League service, Fielder was 3rd in the MVP race. Fielder earned salary of $670,000 in 2008. After another outstanding campaign in 2008 and armed with the leverage of salary arbitration, Fielder signed an $18 million, two-year contract prior to the 2009 season.

It’s true, the salary arbitration process usually results in substantial raises for first year eligible players (e.g., Fielder received $6.5 million in 2009 – a 870% raise). However, the substantial raise a player experiences once he is eligible for salary arbitration is a function of the suppressed salaries he received in his first 3 seasons without leverage. In 1973, Charlie Finley and other owners enjoyed considerable restraints on player mobility and player compensation. Then the time to compromise arrived. The current arbitration system is a result of that compromise.

Armando Velasco is a second year law student at Tulane Law School, where he is pursuing a certificate of specialization in sports law. He is the Chair of the Tulane Sports Law Society’s National Baseball Arbitration Competition and a Junior Member of the Sports Lawyers Journal, volume 17. This upcoming summer he will be a summer associate at Goldman, Antonetti & Córdova, PSC.

Pete Parise is that kind of guy.  He wasn’t even drafted in the 50 round MLB draft.  How can you call that kind of guy a “prospect”?  But again, who cares?  He is down in Jupiter right now, fighting for an opportunity to start the season in Major League Baseball with the St. Louis Cardinals.  And while a year ago, many people did not know if he would even start above Double-A in 2010, some people think he has a chance to break camp in the Big Leagues.

Derrick Goold of the St. Louis Post-Dispatch is one of the head honchos who covers the Cardinals.  He lists Parise in his top 5 Cardinals prospects to follow this Spring Training.  Whether Parise is or is not a prospect, he is someone to keep track of leading up to the season.  As Goold notes in his piece,

An underrated righty who hasn’t been heralded in the multitude of prospect rankings, Parise earned a nonroster invitation the old-fashioned way — he earned it. The bulldog righty sports a quality sinker, and he seized the closer job with Pacific Coast League champ Memphis last season.

Sports Agents

• Arn Tellem’s column in The Huffington Post is awesome.  Especially appreciate referencing The Big Lebowski [Holstering the NBA].
• Up-front payment sounds ludicrous [Yet Another Sports Agent Sponsorship Scam].
• David Falk’s take on the Gilbert Arenas mess [Team Could Cite Good Citizenship Clause to Void Arenas's Contract].

Sports Business

• I can’t wait to see the Census Bureau’s advertisement… [Super Bowl Sales as Economic Indicator].

Baseball

• It’s hard to believe that Tim Lincecum only made $650,000 in 2009 [MLB Salary Arbitration – Will Tim Lincecum Break the Bank?].

Coaches

• Tracy Dildy (a client) knows how to recruit Chicago [DePaul losing local talent].
• Are coaching contracts even worth the paper they are written on? [Broken Promises, Useless Contracts: The Current State of Coaching]

Football

• Cool story on the period leading up to the Jets picking Mark Sanchez [O'Connor: How the franchise grabbed its franchise QB].

I’ve spoken about it on the radio and wrote about it here on SportsAgentBlog.com.  Josh Johnson wanted a 4-year deal similar to the contract Zach Greinke received last year (4-years and $38 million).  The Florida Marlins would only offer a 3-year deal worth $23 million.  The gap seemed tremendous; something that would probably lead to a one-year deal between the parties before heading to possible arbitration.

But then something very interesting occurred.  Call it fortuitous timing for Josh Johnson and his agent, Matt Sosnick.  The Florida Marlins were told by Major League Baseball and the MLBPA that the team needs to increase its payroll to make it consistent with the money it gets from revenue sharing.  In essence, the baseball world was coming down on the Marlins for not spending enough money on its players.

Michael Weiner, executive director of the Major League Baseball Players Association, said, “In response to our concerns that revenue sharing proceeds have not been used as required, the Marlins have assured the union and the commissioner’s office that they plan to use such proceeds to increase player payroll annually as they move toward the opening of their new ballpark.”  Was this the Marlins’ first action taken to assure the union and commissioner’s office that they will use the proceeds?  The Marlins and Johnson came to an agreement yesterday: 4-years, $39 million.  This looks awfully close to the Greinke contract, and far from the Marlins’ initial demand.  A win for Sosnick and Johnson for taking their time to sign.  One never knows when news will come up to help your side.

According to Jerry Crasnick of ESPN,

The deal will pay Johnson $3.75 million this season, $7.75 million in 2011 and $13.75 million in each of the 2012 and 2013 seasons.

Sports agent Alan Nero, formerly of CSMG and currently with Octagon Baseball, had a few quotes in an MLB.com article concerning arbitration.  He stated,

“Arbitration gives us the opportunity to compare people based on statistical comparables. Free agency is free enterprise. It’s based on the sole theory of economics, which is supply and demand. If there’s not enough demand, your value goes down. So [for those players], it would be more to their benefit to be statistically compared to other players, rather than be in an economic system that’s based on demand.

Marvin Miller was a genius. He knew that if he granted free agency to the clubs, that theory of economics would crush the marketplace. But when you have players that are protected by a system in which they have to be paid like comparable players, it gives them the metrics of salary increases that create a platform when they become free agents, and it lightens the supply of free agents, so that supply and demand is in their benefit. I think Marvin will prevail.”

Nero seems like a big fan of the current system of arbitration.  And he should be!  An arbitrator may not set the arbitration eligible player’s salary below 20% under what he received the year before.  At the same time, there is no proscribed ceiling.  Thus, a team cannot propose a figure below $4 million on a player who received $5 million last year, yet the player can counter by saying he is worth $10 million or more.

Statistics-based negotiations also take a lot of subjectivity out of the equation.  That said, there is much subjectivity in putting weights on different values.  What is more important, a pitcher’s K/BB ratio or his ERA?  That same question persists in free-agency; however, there are many other variables involved that may not be as important in an arbitration setting.

A few other important notes in the MLB.com article: 1) Players and teams can invest up to $100,000+ dollars just on the preparation and actual arbitration appearance, and 2) It is awkward to make players have to sit through hearing about their flaws.  Point #2 is actually one of the reasons I, and former CFL player Doug Brown, believe agents are necessary for players.

Basketball

• We don’t need a Jewish Jordan.  Omri Casspi is quite acceptable [Welcome, The King Of Israel].
• A noble effort that Arn Tellem promotes outside of his normal practice [Peace of My Heart].

Baseball

• Josh Johnson is “beyond pissed” [Sources: Chapman Offer Upsets Johnson…].
• The five-year deal runs through 2014 [Umpires, MLB agree on deal].
• College baseball season approaches.  Watch these guys [2010 Louisville Slugger Preseason All-American Team].
• “If you get a serious nibble from one of those big spenders, and this is where your client wants to play, you cannot — you will not — let that team off the hook” [A New Year's resolution for agents].

Football

• Mark your calendars for January 15th [More undergraduates than ever in NFL draft?].

Sports Agents

• Dan Fegan dropped some heavy money to support his ex-NBA client, Chris Dudley [Kitzhaber leading the way in campaign dollars].

What: 2010 Tulane Law School National Baseball Arbitration Competition

When: January 22-24, 2010

Where: Tulane University Law School. Map.

The Tulane Law School Sports Law Society has been busy inviting law schools to compete in the 2010 Tulane Law School National Baseball Arbitration Competition. I received an email invite last week, asking if my school (University of Florida Levin College of Law) would be interested in attending.

The Baseball Arbitration Competition is a simulated salary arbitration competition modeled closely on the salary arbitration procedures used by Major League Baseball.  Each team will represent either the assigned player for that round or the team for which that player plays. The goal of each round is to determine the salary for that player for the upcoming season by persuading the arbitrator(s) that the position advocated for is more appropriate.

The competition assumes that each party has previously submitted their final offer, and that good faith negotiations have concluded.  Each problem will include these final offers; the competitors’ objective is to persuade the independent arbitrator, through both a written submission and through oral arguments, that the offer tendered by their client is the most appropriate compensation for that player.  Players used for this competition will, barring unforeseen circumstances, be actual Major League Baseball players eligible for salary arbitration in that year.

The deadline for registration is 5:00 p.m. on December 15.

Cost: $150 per team (2-3 people per team. Only 2 people may participate in any single round).  Schools may bring up to 2 teams.  Click here to register.

Competition Website | Competition Rules

Darren Rovell has a very interesting piece on his blog that describes the development of Jack Marucci’s bat company, which has its products used by some of Major League Baseball’s best hitters.  Marucci’s clientele includes Pujols, Howard, Ibanez, and Teixeira…hitters who come to mind when you think of “power swing”.  I agree that it is interesting that Marucci has not paid any players to use his bats or endorse his product.  There is no stronger endorsement than a person using a product out of pure choice, with no monetary consideration involved in the equation.  It is also very rare that a professional would do this, and actually pay for the product (or have his team pay for it), instead of getting free product at a minimum (and possibly being paid to use the product, if it is a prominent player).

Not everyone has a product that players may willingly purchase, however.  With that statement in mind, I thought that this was a particularly telling part of Rovell’s piece:

As for whether big hits by players using his bats help out sales?

“We see it,” Marucci said. “Someone watches Jason Werth hit a home run last night. They see our logo in the paper or during the replay -– HD has helped us a ton -– and they find us.”

So while Marucci does not pay for this beneficial publicity, the quoted passage says a lot about endorsements, in general.  Players and fans have no idea whether Jayson Werth is paid to use the Marucci bat when he steps up to the plate, but they are paying attention to the equipment that successful players are using.  This should be of use to companies deciding whether it is worth it to supply free equipment to players and their agencies of record, in exchange for the use of such equipment in the hope that someone will notice it and possibly make a related purchase, or at least spread word about the company.  For the higher-end players, free equipment may not be enough, and actual payments to the player may be justified by the increase of exposure, especially in an era where practically everyone has an HD TV.