Monday, November 26, 2007

Player Salary Trends in MLB

Well, it's that time of year again. When MLB sanity goes out the window in the search of the perfect new toy. It seems now, more than ever, player salaries are skyrocketing. Personally, I don't generally mind players getting paid large salaries, because the alternative is the money goes into the owner's pocket. Given the choice between paying the hard working player a substantial wage or placing the increased revenue in the pocket of an owner who did little more than turn a profit with a business that's a legal monopoly, I tend to favor paying the players.

That said, it really does seem like salaries are getting out of control. Professional athletes aren't just getting rich, but are now joining the super rich. At the end of his career, Alex Rodriguez could likely buy a baseball franchise, or at least the majority share of one. All of this got me to thinking about salaries and trends, so I took a look at MLB salaries over the past couple of decades to identify the real trends.

Here's the average player salary from 1985 through 2006 and the annual percentage increase or decrease:

Over the past ~21 years, on average player salaries in MLB rose ~10.0% on an annual basis. Of course, it's never quite that simple in baseball, because there was so much happening behind the numbers. There were a number of forces driving the players salaries up and down over the past 21 years.


After the emergence of the players' Union, the balance of labor relations began to shift in MLB. After years of essentially indentured servitude, the newly unified players gradually began to gain concessions from the owners. Two of the most important gains they achieved were the establishment of an independent arbitration process for the hearing of grievances and the requirement that all labor agreements must be negotiated through a collective bargaining process. These two less heralded gains paved the way for significant advances for the players, including free agency.

These gains can be seen in a variety of ways, one of which is that the Players' Union has gradually increased the percentage of the pie that the players receive. In 1950, MLB teams paid out an average of 17.6% of their revenue to player salaries. By 2001, player salaries had increased to 54.1% of team revenues.

In the early 1980s, the owners grew tired of continually losing ground to the players in collective bargaining, so they came together under the direction of then commissioner Peter Uberroth (pictured) and developed a collaborative plan of action. Simply put, the plan was that no owner would bid on any other owner's free agents. In 1985 and 1986, only four free agents changed teams each year and none of the eight was wanted by his previous team. This tactic of course undercut free agency by eliminating the demand for that player's services, which resulted in lower salaries. This plan constituted collusion, which was a violation of the terms of the Collective Bargaining Agreement (CBA).

Eventually, the owners paid the price for the collusion in the form of fines totaling over $280M, but over that four year period, collusion was very effective in holding salaries in place. In 1985, the average MLB salary was $476,142. In 1986, the average MLB salary actually dropped 12.4% to $417,192. In each of 1987 and 1988, there was meager salary growth of 4.2%, which still didn't bring the salaries back up to where they were in 1985.


The owners were fined for collusion when the Union won three separate cases for collusion. While the law helped eliminate collusion, it took a massive influx of revenue to get the player salaries back on track.

On December 14, 1988, CBS paid approximately $1.8 billion for the rights to broadcast the Saturday game of the week, the All-Star game, the postseason, and the World Series.

In addition, on January 5, 1989 ESPN contracted with MLB for the right to show over 175 games beginning in 1990. The ESPN contract was worth $400M to MLB.

The overall financial impact of these television contracts is stunning. Looking at the total revenue from national television contracts equalized for inflation by adjusting the values to 2002 dollars, you get a sense of the kind of impact. In 1989, revenue from television contracts was $357,000,000. In 1990, the new contracts saw that number increase all the way to $907,000,000.

Given those figures, it's not difficult to see what caused the 74.3% increase in the average player salary in 1991. The new revenue from the television contracts started rolling in during the 1990 season and the owners immediately plowed that money into signing free agents the following offseason to improve their club for the 1991 season. The owners followed up the 74.3% increase in 1991 with a 17.4% increase in 1992.

Clearly, the owners are willing to let increased revenue flow down through to the players, which is essentially how it should be.

1993-1995 LABOR UNREST

It seems highly likely that the 1994 strike loomed large over player salaries from 1993 through 1995. Owners would not have been willing to hand out large contracts with a work stoppage looming and the lost revenue from 1994 and 1995 resulted in a decrease in salaries in the 1995 season.

To this day, it seems strange that the 1994 work stoppage actually happened, as everyone lost out: owners, players, and fans included.


Baseball financial information is always difficult to discuss with any degree of precision, as these are private organizations that do not share their financial information. However, Bud Selig is on record saying that overall revenues have risen from ~$1.2 billion in 1995 to $6.075 billion in 2007.

A substantial percentage of that increase is being driven by the success of MLBAM, which includes and related businesses, and satellite radio. Revenues for MLBAM are growing at 40% a year since it was founded in 2001. In 2001, the owners agreed to share all Internet revenue equally, which means that all owners are reaping the benefits from this new revenue stream equally.

For those hoping to see a salary cap in Major League Baseball, I wouldn't count on it any time soon. The game is incredibly healthy from a financial standpoint. Revenue has increased ~6 fold since 2001 and league wide attendance records fall almost on an annual basis. The players and the owners are reaping unprecedented financial rewards, so there is no reason for either side to want to significantly change the terms of the CBA. However, there are also unintended consequences, as this rapid increase in player salaries is also changing the trade market.

That kind of increase is incredible and we've already seen what the owners are willing to do with a substantial increase in revenue: pass a big chunk of it on down to the players. So, I don't think it's a stretch to say that salaries may actually increase at a faster rate in the near future. It won't be too long until the question becomes: who will be the first $1 billion ballplayer?

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