First Pitch: The Long-Term Costs Of Arbitration Decisions

The Pittsburgh Pirates exchanged arbitration figures with two players today, giving us a look at what each side is asking for in each individual case. The players who exchanged figures were James McDonald and Neil Walker. The Pirates will now receive arbitration hearings with each of these players. The sides can agree to a deal anytime before that hearing. If the Pirates go to a hearing with any one of those players, an arbitration panel would choose one of the two salary figures, based on the arguments from each side. Here are the exchanged figures.

James McDonald

Pirates: $2.65 M

McDonald: $3.4 M

Midpoint: $3.025 M

Neil Walker

Pirates: $3 M

Walker: $3.6 M

Midpoint: $3.3 M

The typical question you see when it comes to arbitration hearings is “they’re so close, why don’t the Pirates just sign these guys and avoid arbitration”? McDonald and Walker are both separated from the Pirates by less than $1 M. Fans don’t have to worry about money, so it’s easy to give up a combined $1.35 M and make sure the two players are under contract with no hurt feelings through the arbitration process. But these arbitration prices have long term impacts that are more expensive than the small differences this year.

As an example, let’s look at Neil Walker. Walker is a Super Two player, making this the first of four arbitration years. The rule of thumb for arbitration values is 40/60/80 for normal players, or 20/40/60/80 for Super Two players. Those numbers represent the percentage of what a player would receive if he were on the open market. Let’s use the exchanged salary figures to represent 20% of Walker’s value. Once that value is established, we can figure out his projected future salaries using the 40/60/80 scale for his remaining three years. That will show the long-term estimated cost of his decision.

If the Pirates Win

If Walker Wins

In year one there’s only a difference of $600 K. However, if we assume Walker maintains the same value and goes year to year in arbitration, the overall difference would be $6 M. MLBTR projected Walker for $2.9 M in arbitration, so I’d say the Pirates have a strong chance of winning here if the two sides went to arbitration. If there’s the potential to save $6 M in the process, then it would make sense to stick to their $3 M figure. If we’re going by WAR, Walker has averaged a 3.2 WAR in each of the last two seasons. That would put his free agent value at $16 M, and his 20% value at $3.2 M. That means he would be closer to the Pirates’ value if the two sides went to arbitration.

Based on this, it would benefit Walker more to try and reach a mid-point. I think the offer from the Pirates is a better representation of his value, and they’d probably win if the two sides went to arbitration.

The long-term cost is going to be higher for Walker. He has an extra year of arbitration, so he is set to get a raise three more times over his 2012 salary, while McDonald would only see arbitration two more times. Here is the summary for McDonald.

If the Pirates Win

If McDonald Wins

The difference between McDonald and the Pirates is $750 K this year. If he maintains the same value and goes year to year, the estimated difference would be $3.375 M over the three year period.

If we reverse the salary information using the 40% figure, we get a 1.325 WAR from the Pirates and a 1.7 WAR from McDonald. McDonald had a 1.7 WAR in 2012, although it’s not about the most recent year, but the overall results. In the last three years McDonald has averaged a 1.17 WAR, which is lowered by his 0.2 fWAR in 2011. I would say this could go either way, which seems to be fitting for McDonald. He looked like an ace for half the season in 2012, and looked like a 4A pitcher for the other half. He’s had two seasons that were close to that 1.7 WAR, which would translate to a $3.4 M salary in 2013. But when you factor that third season, he’s closer to the Pirates’ figure.

Since this one could go either way, the two sides would be better off meeting in the middle. The Pirates would be spending a potential estimate of about $1.7 M more, and McDonald would be losing the same potential amount. But that’s better than either side losing out on the full amount in a toss-up situation where you could make an argument for either side to win.

Why the Pirates Shouldn’t Hand Away Money

The Pirates aren’t going to just hand Walker and McDonald the amount they’re asking for, so it might be pointless to explain why that would be a bad approach. But I’ve seen so many “just give them the money” comments that I figured it wasn’t obvious to everyone why this would be a bad approach for any team.

First, you’re setting a bad precedent by just giving the player what he wants. You’re not going to have much luck negotiating with players if you set a precedent for caving over “small amounts”.

Second, those small amounts add up. As I pointed out above, there are long-term impacts for each player. If you’re not worried about $1.35 M in 2013, you’re probably not worried about $10 M spread over the next four years. But it’s not like this is an isolated incident. The fans who are saying “just give them the money” say that about every negotiation. If the Pirates actually did that, they’d be paying that extra money every year to every player. That adds up.

Finally, the main idea behind giving in and paying the players what they want is to avoid hurting their feelings. This sort of stems back to the Jack Wilson arbitration hearings. Wilson and the Pirates went to arbitration, and Wilson won. After the hearings, Wilson complained about how the arbitration process resulted in him being demeaned by his own organization. That led to people worrying that Wilson would be alienated and would jump ship the first chance he got. People don’t seem to remember that Wilson signed a three year extension just two years after that hearing, buying out free agent years.

Last year the Pirates went to a hearing with Garrett Jones over $250,000. We heard the same cries over the process. Some fans were saying the Pirates should just give him what he wanted, and avoid the alienating arbitration process. The Pirates won, yet one year later the two sides have apparently agreed to a pre-arbitration deal. We also can’t get a Garrett Jones trade rumor without hearing about how the Pirates have a high value on him and are asking for too much. So I don’t think the relationship has been damaged.

The truth is that this is a business. Fans look at the situation with emotion. They don’t care about spending money that isn’t theirs. They just care about getting the player signed at whatever cost, and keeping him happy so that his play won’t be affected. Players aren’t that fragile. Jones responded to losing an arbitration case by having a career year, then signing a pre-arbitration deal. Despite his complaints about hurt feelings, Jack Wilson followed up his arbitration victory with the best year of his career. That’s not to say that there’s a link between arbitration hearings and player performance. Ross Ohlendorf had a horrible season in 2011 after winning his hearing. What we can take from this is that the players aren’t going to be impacted by the arbitration process.

It’s a business. The players are trying to get the most money they can. The teams are trying to get players for the lowest amount they can get them. That’s true for pretty much every player and it’s true for every team. They all understand that it’s a business. All of this makes total sense until you add in the fan factor. Fans don’t care about how much money a team has to spend. Fans assume that players approach this part of the game with emotion like they do, rather than compartmentalizing things and looking at this aspect like a business.

If you’re wondering why teams don’t just give the players what they want, it’s simple. That would be horrible business. You’d lose leverage in future negotiations, you’d pay much more than you normally would pay, and all to avoid hurting the feelings of the players — which isn’t a real issue since the players don’t look at this with the same emotion as the fans. There’s just no benefit to a team to negotiate with players in this process, and there’s not much downside.

Links and Notes

**The 2013 Prospect Guide is now available. The 2013 Annual is also available for pre-sales. Go to the products page of the site and order your 2013 books today!

**The eBook version of The 2013 Prospect Guide is also available through our publisher. They also have a discount code during the month of January that allows you to save 20%. Use the code JANBOOKS13 to get the discount. This code is only valid on the eBook on the publisher’s web site, and not the books on the products page of the site.

**Pirates Agree to Terms With Garrett Jones.

**Pirates Agree to One Year Deal With Gaby Sanchez.

**Pirates Exchange Figures With Neil Walker, James McDonald.

**Pittsburgh Pirates 2013 Top Prospects: #11 – Clay Holmes.

**Winter Leagues Recap: Playoff and WBC Notes.

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