Baseball Payrolls and Wins

Richard over at The Honest Hypocrite wrote an interesting post on baseball team payrolls and their results. There are many charts, so go over and take a look. (Don’t worry, the math’s not too heavy. It’s easy to understand and well laid-out.)

One point Richard misses, though, is that a player’s pay is by no means an indicator of his performance. So, spending money is obviously not the sole determinant of winning percentage. For example, the Oakland A’s have put together a good run of successful seasons, never finishing below second in their division since 1999, while consistently being one of the lower spending teams in the major leagues. So, smart spending is one critical component in winning baseball.

What are some examples of smart spending? Well, to a good deal about it, Moneyball is an indispensable resource. Focusing heavily on the A’s, it details what steps teams are taking to maximize productivity while minimizing costs. The “Moneyball approach” is often mistakenly used to refer to a focus on offensive players with high on-base percentages. While that is an approach that Billy Beane, General Manager of the Athletics, took, it’s was more a result of a grander philosophy than the philosophy itself. Rather, Beane’s approach, in part, used economic analysis to see which player abilities are undervalues in the free agent market place and focus their spending on that to get more bang for their buck. At the beginning of their run, on-base percentage was undervalued in the market place so they were able to lead up on slower, lumbering sluggers with high OBPs for relatively cheap. Many observers derided this approach as building a softball team, until they noticed this softball team kept winning.

As a result, the market shifted towards players with high OBPs. The A’s adjusted to the new market position, but haven’t really spoken about what their new focus is. (Although speculation is that they have focused on defensive abilities for the last few years.) Michael Lewis even suggests their different focus in Moneyball, saying that he was allowed to talk about OBP but not about some of the other metrics the A’s were using to judge players.

An example of a smart general manager being able to find room for good players is once again found in Billy Beane. The Kansas City Royals decided after the 2000 season that they could no longer afford Johnny Damon’s salary and so traded him to the A’s. However, the Royals had a larger payroll than did the A’s, but Beane found payroll room by not overpaying players at other positions. By spending their money wisely, the A’s were able to add an expensive player who a wealthier team could not afford. (The Royals seem to have a fascination for overpaying decent players, which keeps them from affording their good players, which is where their money should be spent.)

Another smart money strategy is to focus on young, cheap players. The contract with the players’ association allows players with little experience to be paid at substantially below market value. So, for example, the Phillies Ryan Howard won the MVP last year while being paid “only” $355,000. Players with less than 3 years of major league experience, with a few limited exceptions (the top one-sixth of players by service time with less than three years of major league service) can have salaries imposed on them by their clubs. After three years, they can enter into arbitration with their teams to get more money, but arbitration is tied to comparing salaries of players with similar experience, which also acts as a break on salary inflation. It isn’t until after a player achieves six years of service time that free agency kicks in and salaries really rise. So, a focus on players with limited experience can be a cost savings. (And this is ignoring that players hitting the free agent market have already hit their peaks and are likely to decline by the end of their contracts, if not immediately.)

So, player salaries will likely never be a straight comp for wins; intelligent management can overcome a smaller payroll and a larger payroll spent by unintelligent management will be wasted.