Arbitration season reopens discussion

Arbitration season reopens discussion

If, as the saying goes, a compromise is an agreement whereby both parties get what neither of them wanted, well then one need look no further than Major League Baseball's salary-arbitration process.

What began as a concession to owners and a means of tabling free agency in 1973 has evolved to the point where many players have more value as arbitration-eligibles than they would as outright free agents. And as MLB club owners and the Players' Association draw closer to their next Collective Bargaining Agreement, the arbitration issue is becoming quite a topic of discussion and, among increasingly budget-minded clubs, concern.

The issue of arbitration is once again at hand as the filing period for arbitration began on Tuesday. Players and teams will exchange figures on Jan. 19, and hearings begin on Feb. 1 for those cases not settled before then.

"It's not a good system," Giants general manager Brian Sabean said. "I don't expect it to change, but who knows what happens in the new negotiations and labor agreement? It's too much of a feather on the cap for the union. It's a system that's obviously flawed in a lot of ways. But that's been longstanding."

This is a particularly pertinent issue for Sabean, because he has a player, two-time defending National League Cy Young Award winner Tim Lincecum, who is set to break the bank -- and probably some records -- in his first round of arbitration.

But even for those clubs without such a special circumstance, arbitration is a sensitive topic, because, in many cases, it hurts the clubs it once served to protect.

Meanwhile, a system once despised by players -- who would rather have the security of a multiyear contract -- has become a boon for those to whom it is offered.

"Arbitration gives us the opportunity to compare people based on statistical comparables," agent Alan Nero said. "Free agency is free enterprise. It's based on the sole theory of economics, which is supply and demand. If there's not enough demand, your value goes down. So [for those players], it would be more to their benefit to be statistically compared to other players, rather than be in an economic system that's based on demand."

An increased number of players found themselves in that boat last winter, when free-agent contracts plummeted in an abysmal economy, while arbitration-eligible players enjoyed record raises.

That, along with the large number of arbitration-eligible players (203), led to speculation that this year's number of non-tendered players (those offered arbitration but subsequently not offered contracts by the Dec. 12 deadline, effectively releasing the player) would be higher than ever. But the actual number of non-tenders, 39, was not as high as some anticipated.

Still, an argument persists that the arbitration process is outdated.

The basics

Arbitration arose out of the ashes of the Basic Agreement arguments in the early 1970s. The players, led by MLBPA executive director Marvin Miller, followed the initial precedent set by Curt Flood and began fighting for what they deemed to be their right to negotiate their salaries with multiple suitors.

Players were tied to their teams by the Reserve Clause, and the threat of free agency was an explosive one to owners. So the sides met somewhere in the middle and agreed on the unprecedented arbitration clause. Players were to be eligible for arbitration after two years of Major League service. The eligible player and the club would submit figures to an arbitrator, who would pick one figure or the other, with no compromise.

The intent of the clause was, of course, to prevent players from being bound to unfair contracts. For the owners, the clause certainly meant an uptick in player pay, but it prevented top players from simply leaving for the highest bidder.

What few envisioned was what happened last year, when the 111 players eligible for salary arbitration (eligibility now begins after three years of service) set a new record by receiving an average pay increase of 172 percent.

"Obviously," said Tal Smith, the Astros' president of baseball operations, "it's really changed."

Nobody is more familiar with the arbitration process than Smith. After he was dismissed from his post as Astros GM in 1980, he formed Tal Smith Enterprises, a consulting firm that has assisted Major League clubs in hundreds of arbitration cases. Though he has since returned to the Astros organization, he continues to represent other ballclubs in front of the arbitrators.

But where Smith once participated in cases that could be prepared for overnight and might involve a $3,500 difference between the player's asking price and the club's offer, he now deals with cases in which the sides invest hundreds of thousands of dollars and countless hours prepping, with millions more at stake in the arbitrator's decision.

"The numbers have gotten out of hand," Smith said. "But that can be blamed sometimes on decisions [of the arbitrators], and sometimes on clubs acquiescing and trying to avoid the process at whatever cost."

Upward trend

Both clubs and players could be said to have their reasons to avoid the hearing stage of the arbitration process. More and more, arbitration cases are settled before it reaches that point, be it through a one-time compromise or a multiyear deal.

In arbitration hearings, clubs are placed in the potentially awkward position of having to point out their arbitration-eligible player's flaws. The negatives are emphasized as a means of obtaining bargaining power, so it's not exactly the type of evaluation you'd read in a glowing media-guide bio.

By and large, clubs don't want to do this, and players don't want to hear this.

Still, Smith, having been on the inside for more than 150 of these hearings, asserts that it's not quite as contentious as one might assume.

Raising the bar
According to research by The Hardball Times, the average arbitration awards rose from $68,000 in 1979 to $2.3 million in 1996, a compound average growth rate of 23 percent that has not stopped since.
Player Year Amount
B. Sutter, Cubs 1980 $700K
F. Valenzuela, Dodgers 1983 $1.00M
D. Mattingly, Yankees 1987 $1.975M
D. Drabek, Pirates 1991 $3.35M
R. Sierra, Rangers 1992 $5.00M
M. Rivera, Yankees* 2000 $7.25M
M. Cabrera, Marlins 2007 $7.40M
R. Howard, Phillies 2008 $10.00M
T. Lincecum, Giants 2010 ????
*Lost his arbitration case

"Most [hearings] are done without any rancor," Smith said. "I've only had two or three with any rancor displayed. To me, it's a continuation of the discussion that club representatives and agents use during negotiations. The only difference is you're expressing your viewpoint before an independent panel, and they're making the decision."

But each of those decisions is a precedent, and each precedent has paved the way for more and more money for players who come down the line.

According to research by The Hardball Times, the average arbitration awards rose from $68,000 in 1979 to $2.3 million in 1996, a compound average growth rate of 23 percent.

Several landmark cases helped usher in that rise. Bruce Sutter obliterated the arbitration record in 1980, when he received a $700,000 contract from the Cubs. The previous record had been $140,000.

Three years later, Fernando Valenzuela won $1 million from the Dodgers. Four years later, the Yankees' Don Mattingly pulled in $1.975 million. Four years after that, Doug Drabek scored $3.35 million. A year later, in 1992, Ruben Sierra received $5 million from the Rangers. And eight years later, the new high was established when Mariano Rivera received $7.25 million -- after losing his arbitration case.

This all culminated in the case of Phillies slugger Ryan Howard. In 2008, Howard, a first-time arbitration-eligible by virtue of "Super 2" status (a player in the top 17 percent of players with at least two but less than three years of service who accumulated at least 86 days the previous season), countered the Phils' offer of $7 million with a demand for $10 million. The arbitrator sided with Howard, the 2006 NL MVP, granting him a record amount and rattling many a small- and mid-market GM along the way.

Last year, Howard and the Phils found themselves in arbitration negotiations yet again. Howard asked for $18 million, the Phillies countered with $14 million, and the sides eventually settled on a three-year, $54 million contract before it reached an arbitrator.

Lincecum figures to become the new face of arbitration this winter. It has been speculated that he could ask for somewhere in the neighborhood of $20 million.

Indeed, that's a figure that would have caused heart attacks in '73, and still might today.

"Because [arbitration] is an attempt to give players some reasonable market opportunity, it does create contracts that may exceed the budget capability of some teams," agent Ron Shapiro said. "So some teams choose to non-tender guys."

Flipped markets

That's not the only time teams have to make a choice, with regard to arbitration.

Arbitration has become a prickly issue in free agency. Only those teams who offer arbitration to their Type A and Type B free agents (as determined by the annual Elias Sports Bureau rankings) are guaranteed to receive Draft pick compensation if those players sign elsewhere.

Not long ago, it was a no-brainer to make the arbitration offer, because players were generally worth less in arbitration than in free agency.

With the economic climate forcing teams to make more rational financial decisions, the ramifications regarding arbitration have become decidedly more complex.

"The markets have flipped," Yankees general manager Brian Cashman said. "Normally, you'd offer arbitration, because there was never a concern of a guy actually taking it. Now, it's a vehicle for a guy to make more than he'd make in free agency."

A year ago, Cashman decided not to offer arbitration to free agents Andy Pettitte and Bobby Abreu, both of whom made $16 million in 2008. Given arbitration's inherent nature (no more than a 20-percent pay cut is allowed, per the Collective Bargaining Agreement), both would have made at least $12.8 million for '09, had the offer been extended. Even the deep-pocketed Yanks weren't willing to fork over that kind of cash.

So the Yankees watched Abreu walk. He wound up signing a one-year, $5 million deal with the Angels. And they ended up re-signing Pettitte for a $5 million guarantee, plus incentives that pushed the value of his contract to $10.5 million.

It's clear, then, that the Yankees made the right move.

"Arbitration has become a very expensive proposition," Cashman said.

But it's a proposition with no realistic alternatives, at this point. The owners granted the players unprecedented bargaining power in 1973, and the players aren't in any hurry to give it up.

Arbitration already includes a 20-percent ceiling on pay cuts. The only way to avoid the gigantic contracts that eventually set the tone for free-agent contracts down the line would be to establish some sort of ceiling on pay raises. But good luck getting the players' union to sign off on that one.

One thing clubs and agents agree on is the inherent need for arbitration in order to prevent all players from becoming free agents just three years into their Major League careers.

"We get enough player movement as it is today," Smith said. "If you had complete free agency, it would be like fantasy baseball. There's got to be more stability in the game than that."

Said Nero, the agent: "Marvin Miller was a genius. He knew that if he granted free agency to the clubs, that theory of economics would crush the marketplace. But when you have players that are protected by a system in which they have to be paid like comparable players, it gives them the metrics of salary increases that create a platform when they become free agents, and it lightens the supply of free agents, so that supply and demand is in their benefit. I think Marvin will prevail."

The arbitration system has helped many players prevail since its inception in 1973. The process' full name is "pendulum arbitration," and the pendulum has certainly swung in a big way over the last 36 years.

Anthony Castrovince is a reporter for MLB.com. MLB.com reporters Chris Haft, Bryan Hoch and Brian McTaggart contributed to this story. This story was not subject to the approval of Major League Baseball or its clubs.