Final Offer Arbitration
The flaws in fake free markets and how it builds baseball's distrust
Every week I write an email discussing what I learn launching and growing Reboot Motion. If you would like to receive it directly in your inbox, subscribe now.
Arbitration is baseball’s way of settling disputes in a fair and equitable way.
Wrong. Arbitration is baseball’s flawed attempt to settle disputes…but is merely symptom of larger problems.
Background
In order to understand arbitration, it is important to discuss how players and teams get there.
Prospects are signed by MLB organizations one of two ways:
US prospects enter through the amateur draft
International prospects arrive in a variety of ways that deserves its own post.
In both cases, prospects are shown their “value” through their signing bonus. The draft has a specific slotting system for bonuses while the international market behaves more like the wild west. But in both cases, athletes pegged with a higher future value generally receive larger bonuses.
After signing, nearly all players start in the minor leagues, and nearly all are paid next to nothing.
Minor leaguers happily go through this grind for a chance at the big leagues. Because with a call up to the majors comes a big pay day, right? Well, not exactly.
Team Control
After making it to the show, all players are under team control for their first six years in Major League Baseball. Time spent in the minors does not count.
For the first three years, the team can pay the player whatever they want. Unsurprisingly, this often leads to a league minimum salary.
For the next three years, the player (and his agent) may negotiate compensation with the team.
Read the two bolded statements again. From years 4-6, the player 1) is allowed to negotiate compensation but 2) is only allowed to play for one team.
Imagine demanding a raise from your employer knowing you have to work there anyway. Or try negotiating rent with your landlord for an apartment you are forced to live in.
[Editor note: Do not actually do this. It won’t end well.]
Under these constraints, it should come as no surprise that teams and players regularly come to an impasse. Teams want to pay the least amount possible. Players want to receive the most.
One variable negotiations regularly have smooth outcomes, especially when both parties know they can’t walk away…and one party clearly has more to lose than the other.
When the predictable impasse occurs, Major League Baseball has a system to resolve conflicts: Final Offer Arbitration (FOA).
FOA is different from other arbitration methods in that the arbitrator can only decide between two proposed outcomes. Prior to arbitration, the team presents the amount they believe the player should make. The player does the same. Then, the arbitrators hear arguments from each side and decide on one of those two proposals, and NOT a third number that may be in-between.
The Good
This style of arbitration has positives:
First, arbitration in general is a massive improvement from the player’s first three years, where they earn the league minimum regardless of performance.
Additionally, FOA arbitration settles disputes in a timely manner. Both sides know they cannot make egregious offers, as it will only make their case harder. And both sides knows the arbitrators are independent.
Once the decision is made everyone can get back to baseball.
The Bad
However, the process also offers major problems that pop up throughout baseball:
Broken Relationships
During arbitration, the team will argue reasons they should pay the player less (while the players argues why he should make more). Regardless of who wins, the two will work together for at least the next year and likely longer.
Having your employer- and their lawyers- present a case on why they think they should pay you less than you think you deserve cannot be good for morale.
Unwanted Variance
One of the most surprising things about arbitration is the “fixable” problems that only add variance. The items below are problems both sides should look to improve:
A lack of nuance: During arbitration, the number one determinant is the players previous statistics. This misses a variety of things- differing coaching styles, off field impact, playing out of position to help the team, etc.
Arbitrators are labor arbitrators, not baseball arbitrators. While being a labor expert is far from a negative, not being a baseball expert is. Non predicative statistics are commonly debated, leading to a mismatch of compensation and value.
Comparisons only with players “in your class”. First year eligible players are compared with other first years, second years with second years, etc. This makes the sample size unnecessarily small.
Players get paid on past performance, not future performance. For a sport ripe with analytics and projections, this makes no sense….and no GM would evaluate free agents this way.
Not only does your previous performance come into play, your previous compensation does. Again, no GM would factor this in when looking towards a long term deal.
Potential Systemic Issues
Aside from adding unwanted variance, arbitration opens up issues that could reduce overall player compensation.
I do not have enough inside baseball knowledge to know what teams do and do not to, but a few problem areas arise:
Only one bidder. This is the obvious one. When there is only one bidder, there is no true free market.
All arbitration deals are one year deals. Athletes (and all people) like certainty. A player can avoid arbitration by signing a long term deal with his club…but it has to be with his current club. Most likely, any long term deal when arbitration is on the table will favor the team.
Teams know what is measured. For arbitration to appear fair, arbitrators offer guidance on what they value. At the surface, guidance is good. However, it can be used against players. If teams know closers are more valuable than other relievers, they may limit save opportunities for a reliever heading into arbitration the following offseason.
Conclusion
Many of the problems with arbitration are symptoms of larger issues between MLB and the MLBPA.
However, there are issues both sides should look to fix- mostly stemming from the evaluation process.
First and foremost- we need better data.
Front offices are staffed with baseball lifers, data analysts, and even machine learning specialists.
There is no reason MLB cannot hire similar staff. I can guarantee the Dodgers’ and Rays’ front offices predict future value far better than labor arbitrators.
While this may seem like a tiny advancement to a much larger problem, any progress towards fair outcomes is a good thing.
And finding small progress, small win-wins, is a first step to the two sides tackling some of baseball’s larger issues…and maybe, just maybe, get everyone rowing the same direction (more to come on that next week).
Sources: A large portion of what I learned on arbitration came from the Cork’d Up Podcast with Rachel Luba and Jess Kleinschmidt. I also used Wikipedia.