The impact of MLB's soaring payrolls

ByJayson Stark ESPN logo
Thursday, April 16, 2015

Remember when $100 million used to be a lot of money?

As in: Steinbrenner money, Fenway money, Chavez Ravine money -- and that was about it?

Well, wave au revoir to those days. You know what they call a $100 million payroll in baseball in 2015? A bargain.

If you look closely at the Opening Day payrolls of all 30 teams, you'll notice something amazing. You know how many franchises started this season with payrolls of $100 million or more, according to the annual estimates by The Associated Press?

How about 22. Yep, you read that right: 22.

As recently as a decade ago, in 2005, that number was three. As recently as three years ago, in 2012, that number was still only nine.

But nowadays, there is so much money flowing into this sport -- even at a time when a lot of people somehow seem to think that baseball is dying -- that teams we used to describe as "small market" have now crossed that $100 million threshold.

The Royals. The Twins. The Brewers. They're all in the $100 Million Club. And here's what that's telling us:

This sport is healthy. As healthy as Jillian Michaels. As financially healthy as Mark Zuckerberg.

"What baseball now has is a robust revenue stream that's impacting all teams," says longtime sports economist, author and Smith College economics professor Andy Zimbalist. "So it's only logical that it would impact more payrolls."

And what's happening at the bottom of the payroll scales is just as important as what's happening at the top.

Only six teams have payrolls below $90 million. Three years ago, there were 16. Just three teams are under $85 million. As recently as two years ago, there were 13. So even the teams at the bottom of the payroll ladder, says Giants president Larry Baer, "are spending enough to win."

And that, obviously, is a huge development for a sport in which economic disparities were once so pronounced that even the commissioner of baseball was claiming, not so long ago, that 25 clubs were losing money and only the rich teams ever won.

Well, you don't hear that talk anymore. And for good reason. The sport has changed. The cash registers are ringing. The Yankees have missed the playoffs two years in a row. The Pirates, Royals, Indians and Rays haven't. And just about everyone has $100 million (or more) to spend. So what does all this mean? Let's take a look:

Who needs a cap?

Yes, baseball remains the only sport without a salary cap. But, with only a few exceptions, that no longer feels like the monstrous issue that owners made it out to be a decade or so ago.

The sport has found a way to re-engineer its financial system in other ways. With massive revenue sharing. With a luxury-tax rate that even inspired the Yankees to try (unsuccessfully, as it turned out) to get themselves under the $189 million threshold.

With debt rules that have had an impact on how a number of teams spend. With a phase-out, over the past three years, of loopholes that used to allow teams in large markets like Washington and Houston to cash massive revenue-sharing checks.

That system is still far from perfect, obviously. The Oakland and Tampa Bay ballpark situations are colossal problems. And there are rumblings that the largest payers into the revenue-sharing pool -- the Yankees, Red Sox, Dodgers and Cubs -- want to see major changes in the formula that determines which teams get to spend their money (and how much of it).

But in the big picture, with the exception of the $272 million Dodgers -- whose unique combination of circumstances makes them a conspicuous exception to the rule -- the spread between the top and bottom of the payroll scale is less meaningful than it's been in years.

"The bottom is coming up, and the top is coming down," says Zimbalist. "So for the most part, I don't think it's something to worry about."

There's reason to believe (and spend)

There is a simple explanation, says Tigers president Dave Dombrowski, for why so many teams now spend money they used to save for another day: They think they can win. They think they have a chance. Because they do.

"There's a competitive aspect to it," Dombrowski says. "With the competitive balance that we have now ... and with the extra wild card, more clubs are in contention. They're more willing to go the extra mile."

So there's another level to this payroll explosion than merely saying there's more money in the sport. Teams have more reason to spend that money, in an age in which 28 teams have made the playoffs since the dawn of significant revenue sharing in 2003.

"There have been a number of reforms to promote competitive balance, and in many ways they've been a success," says Zimbalist, who has provided input toward those reforms in his work as a consultant for MLB. "So more and more teams feel like they have an opportunity to go to the postseason. And here's how that works: Say you're the Pirates and your revenues are growing. Then that makes [owner] Bob Nutting happy. But you're not going to spend it on players unless you think there's a payoff. And now there is."

Players share the riches

And speaking of payoffs ... have you noticed how the battles fought by owners and the players' union no longer feel as if they're all about money? They may clash over issues like PED suspensions and home-plate collisions. But you don't need to be Max Scherzer's accountant to know that, as payrolls rise, player salaries -- in a related development -- keep rising along with them.

"What we see is that the industry is healthy and doing well," says Tony Clark, the executive director of the union. "I think payrolls have been a reflection of how well the industry is doing for as far back as you'd like to go."

And the player share of revenues -- which sits just below or just above 50 percent, depending on how you calculate it -- has remained fairly constant for more than a decade, at a level equal to, or even slightly above, the share of players in other sports. So if there's a skirmish over money issues in the lead-up to the next labor deal, it doesn't figure to be because players are unhappy with the system. Unless they're, say, Kris Bryant, why would they be?

It's changing team building

And another thing: Whatever happened to the good old-fashioned money-dump deals of yesteryear?

"When you get to the trading deadline now," Dombrowski says, "there are not as many players available. One reason for that is that so many more clubs feel like they have a chance to make the postseason. But you also have a situation where clubs, compared to a few years ago, are not making those kinds of moves for financial reasons anymore. So when you build your club now [heading into the season], you have to build more depth."

But you have to build differently in the offseason, too. So many teams lock up their younger players with long-term deals that the free-agent market is skewing older and more challenging. Plus, it isn't just the Yankees and Red Sox driving that market anymore.

"What that does to Hal Steinbrenner," Zimbalist says, "is to say: 'You'd better stop playing that game your father played. You've got to be more frugal.' If you're the Yankees, you've learned that you don't want to get involved in another 10-year deal for A-Rod, or an eight-year deal for Mark Teixeira, or a seven-year deal for CC Sabathia. ... The teams with high payrolls, that are paying players on those long-term contracts, end up in trouble -- because they end up paying 40-year-olds $25 million."

It's easier to see the future

Another reason you now see even the smaller-market teams locking up their young stars is that it's easier to see over the payroll horizon now. They don't have to project revenues a year at a time anymore. Because so much of that revenue flows from sources beyond just selling tickets, they now know there will be money in the checking account for years to come.

"One reason you didn't lock up a player before," Baer says, "was that you knew what revenues looked like for one or two years. But over three or four years, you didn't know. Now, when you look at the next three or four years, it's hard to forecast this thing completely cratering, so you don't feel as risk-averse. I mean, we signed Buster Posey for nine years. Let me tell you, if we were still at Candlestick Park, nine years would have scared the daylights out of us."

You can't blame the system anymore

It used to be the world's greatest excuse for having a lousy team. Just repeat the safest line in the book: "It isn't our fault. It's the system's fault."

But if you still think it's "the system" that's determining which teams win and which teams don't, try paying attention!

First off, consider this: Of the six teams that still have payrolls under $90 million, four of them -- the Pirates, Indians, A's and Rays -- have played in the postseason just in the past two years. But meanwhile, at the other end of the scale ...

Of the nine teams with the highest payrolls last year, five missed the playoffs. Three of them finished last. And of the 12 teams with the biggest payrolls, only two (the Giants and Nationals) even won a postseason game. Just one (guess who) won a series.

Yet even the Giants, at $172 million, go into this season with a payroll $100 million lower than the Dodgers, only three years removed from a 2012 season in which those roles were reversed (with the Giants outspending L.A. by more than $20 million). So Baer says his team has reached the point where he barely notices payroll anymore.

"Our view now," he says, "is: Tell me who the 25 players are. Don't tell me what we're spending."

The fact is, though, that it was never true that you could simply buy your way to a parade. The Yankees of the late '90s just made it look that way. Zimbalist says studies of the relationship between payroll and won-lost records show that dollars spent have long accounted for only about 22 percent of a team's winning percentage.

"So what that tells us," he says, "is that 78 percent of the variation in win percentage is explained by factors other than payroll. Some of that is sabermetric smarts. Some of it is scouting smarts. Some is good fortune. Some is team chemistry. Some is the manager. Some is dumb luck. There are a lot of factors that influence it. But if you look at it over time, it's actually been fairly consistent."

And here's what that really means: Now that baseball has reached a point where nearly every team has enough money to spend, winning is actually determined mostly by baseball decisions, not dollar signs. What a concept.

"I really think we're moving toward that place," Baer says. "We're not perfectly set in that place. But let's say this: It's a lot closer than it was five years ago."