The Business of Baseball Series: Salary Arbitration

Next up in my series on the business of baseball is a topic that is front and center in MLB news this week.  On Tuesday, arbitration eligible players filed for salary arbitration.  Yesterday, Friday January 17, was the deadline for players and clubs to exchange salary amounts for the purpose of salary arbitration.  As is typical for this time, there was a flurry of “settlements” of these transactions before the Noon Eastern Time deadline for the exchange of salary demands.  As of yesterday, of the 146 players who filed for arbitration on Tuesday, all but 40 worked out a deal with their clubs.  Included in the list of players making a deal were arb-eligible Cardinals Jon Jay and Peter Bourjos, who settled for deals of 3.25M and 1.2M respectively for 2014.  As of this writing, Daniel Descalso still remains unsigned; Descalso has asked for 1.65 million while the Cardinals have offered 930,000.

Jun. 19, 2013; Phoenix, AZ, USA: Detailed view of an official major league baseball and double bubble gum wrapper in the Miami Marlins dugout against the Arizona Diamondbacks at Chase Field. Mandatory Credit: Mark J. Rebilas-USA TODAY Sports

The arbitration process is one that is generally not understood well by the casual baseball fan.  Salary arbitration in Major League Baseball was first introduced in the 1973 collective bargaining agreement.  As it stands today, any player with 3 years of major league service time is eligible for salary arbitration.  Essentially, the player has 3 consecutive years of salary arbitration (assuming the player does not sign a contract extension which covers his arbitration years) until the player reaches 6 years of service time, at which point the player is eligible for free agency.  One exception to this rule is what is called a “Super Two”.  A Super Two is a player who has between 2 and 3 years of service time and is in the top 22% of such players in the amount of service time.  Such players must also have at least 86 days of service time accumulated during the immediately preceeding season.  Super Two players are eligible for 4 years of arbitration leading up to free agency.  Active Super Two players include David Price, Eric Hosmer, and Brandon Belt.  In 2013, the service time cutoff for Super Two status was 2.122.  Cardinals starting pitcher Lance Lynn barely missed the cutoff for Super Two status with a service time of 2.119, missing it by 3 days.

Once the deadline for exchanging salary amounts passes, the next step is the arbitration hearing itself.  Arbitration hearings occur during the month of February.  The exchange deadline does not preclude players and clubs from reaching a salary agreement before the arbitration hearing; in fact, the vast majority of players and clubs do exactly that.  If there is an arbitration hearing, the process involves a trial-like proceeding before an arbitration panel where the sides, via their representatives, present their respective cases to the panel explaining why the player’s salary should be set at the amount previously submitted at the exchange deadline.

What fans need to understand about this process is that it is not a matter of “getting to” an acceptable number between the parties at the arbitration hearing.  The panel does not have the authority to do a King Solomon and “split the baby” between the two amounts.  The panel must choose either the salary amount submitted by the player or the salary amount submitted by the club.  The middle ground is only relevant in this respect:  the “midpoint” between the two amounts is what sets the standard for the panel to determine which amount to choose.  What that means is that the club must persuade the panel that the player’s value is less than the midpoint; conversely, the player must persuade the panel that his value is more than the midpoint.  Whichever side is more persuasive is obviously the one on whose submitted amount the panel will settle.

As stated previously, most players and clubs settle before the arbitration hearing.  Arbitration hearings are adversarial, and as such, the parties are going to present whatever relevant evidence necessary to persuade the arbitration panel about that party’s belief of the player’s “value”. That may include cross examination of the other party’s witnesses.   In that respect, the hearing can be very unpleasant for both sides.  I have never attended a baseball arbitration hearing personally, but in my legal career I have been a part of arbitration type hearings in the employment setting.  They can get very ugly.  In some extreme cases they can permanently damage the relationship between the parties.  Therefore, it is understandable why both sides find it in their best interests to avoid these hearings if at all possible.

That, in a nutshell, is salary arbitration.  Next in my series I will talk about free agency.