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MLB's Tiered Salary System & the Cost of a Win
The collective bargaining agreement (CBA) between Major League Baseball and the Major League Baseball Players Association creates a three-tiered salary system. Like most CBAs between an employer and union, the baseball contract pays players more as they gain seniority. Baseball has three distinct compensation levels:
1) Pre-Arbitration (Years 1-3). Upon breaking into the big leagues, a player has the right to earn the league minimum salary. In 2013, that salary level was $490,000. This year, it's $500,000. However, a club has the discretion to pay a player more than the minimum. Teams regularly do this, although they don't pay much more than the league minimum. Last year, the average salary for pre-arbtration players was $560,274.
2) Arbitration-Eligible (Years 4-6). After three seasons in the majors, a player becomes arbitration eligible. Generally, a player in his first year of salary arbitration will make approximately 40% of what he'd earn on the open market. A player in his second year of salary arbitration makes about 60% of that. In his third and final arbitration year, a player will earn approximately 80% of what veteran players with similar production levels and who play the same position earn in free agency.
3) Free-Agency Eligible (Years 7+). After six years of service time, a player is able to become a free agent and seek as much money as a club is willing to pay him over as many years as a club is willing to commit (e.g., Albert Pujols). Players with more than six years of service time go contract to contract. Once one contract expires, they are free to seek another one with any team that wishes to sign them.
Wins Above Replacement (WAR) is a stat that is used as a one-stop reference for a player's total production. For position players, it includes a player's contributions batting, fielding, and baserunning. A lot of analysis of free-agent contracts is based on the dollar cost for each WAR (or "win" for short). Because of the salary stages created by the CBA, extensions that buy out a player's pre-arbitration and/or arbitration years should not be valued based on what players are signing for on the free-agent market. After all, players who have fewer than six years of MLB service time are called "cost-controlled" for a reason–they make less money by function of the CBA.
- What MLB clubs paid on average for a pre-arbitration win: $514,012.
- How much MLB clubs paid on average for an arbitration-eligible win: $2,199,023.
Evaluating a Matt Carpenter-Cardinals Extension
Cardinals third baseman Matt Carpenter is coming off a season in which he was the best second baseman in the National League. Carpenter was worth 6.6 rWAR and won the NL Silver Slugger. So, of course, the Cards traded David Freese and moved Carpenter across the diamond to his natural position of third base. The current negotiations with Carpenter indicate that the Cardinals don't care that he is changing positions again this year. Nor should they. Carpenter climbed through the organization as a third baseman. He'll be just fine manning the hot corner for the Redbirds. (PECOTA agrees, projecting Carpenter to have the top third baseman WARP in baseball this season.)
As Craig noted yesterday, FOX Sports's Ken Rosenthal tweeted yesterday that the Cardinals and Carpenter were closing in on a deal six years in length that is worth between $50 and $55 million. Derrick Goold, who first broke news of the brewing extension in the wee hours Thursday at stltoday.com, updated that article last night with a report that the contract was worth more than $51 million. So the Goold-Rosenthal range is between $51 and $55 million. It goes without saying that the contract's terms are still fluid. For this analysis, I'm going to assume that the contract is worth $55 million. (That way, if it's worth less, it'll be a better value than what we've broken down today and we can all sing the "Mo is a Genius" refrain from our favorite Dear Leader hymnal.)
The developing Carpenter-Cardinals extension will buy out Carpenter's final year of pre-arbitration status (his third season of big-league service), three years of arbitration-eligible status, and years seven and eight of his career, which would have been free-agent years. The extension will last through Carpenter's age 33 season. I'm going to use the Oliver five-year projections available on Fangraphs for Carpenter's WAR production through the first five years of the deal and then a half-win decline from the fifth year for the sixth and final year (an amount I arbitrarily selected).
Year |
WAR |
$/WAR |
Value |
2014 |
4.8 |
$514,012.00 |
$2,467,257.60 |
2015 |
4.8 |
$2,199,023.00 |
$10,555,310.40 |
2016 |
4.5 |
$2,199,023.00 |
$9,895,603.50 |
2017 |
4.3 |
$2,199,023.00 |
$9,455,798.90 |
2018 |
4.2 |
$6,000,000.00 |
$25,200,000.00 |
2019 |
3.7 |
$6,000,000.00 |
$22,200,000.00 |
Total |
26.3 |
- |
$79,773,970.40 |
Even after adjusting for the price of cost-controlled wins, a six-year Carpenter extension worth $55 million (the highest reported figure to date) has a lot of potential surplus value for the Cardinals.
Correction: This post originally stated the Carleton's article is free and not behind Baseball Prospectus's pay wall. It is behind the pay wall.