Team-Controlled Players Have Seen a Pay Cut

I understand that sometimes when I write sabermetric posts that they can be hard to follow. What I'm going to try to do in the future is write a paragraph or two discussing the relevant points at the start of the article.  I'm hoping that doing this will make them easier to follow and make clear what I think are some of the most important points to note.

Abstract: In this post, I intend to show that both the cost of a free agent and team-controlled win (defined as a player with fewer than six years of service time) have increased from 1996 to 2013. The cost of a free agent win is increasing more than 3.9% annually more than a prospect win from 2004 to 2013. This indicates that team-controlled players are being underpaid compared to free agents. It also means that any attempt to determine a discount value for keeping prospects in the minors needs to consider that the value of a prospect win increases over time by 3.9%.

A few months ago, Lew Pollis wrote an article discussing the historical cost of a win in free agency from 1996 to 2013. He determined how much money teams spent on free agents in a given year (regardless of whether they were signed that year or not), used Fangraphs WAR to determine their production, and then divided the two. It is possible to use his method to do the same thing with team-controlled players and see whether their value has changed over that 17-year time frame. This makes it possible to determine whether a team-controlled win has increased in value compared to a free agent win and therefore if prospects are becoming more valuable over time.

The amount of money spent on payrolls has increased significantly from 1996 to 2013. Teams spent $984 million on payroll in 1996 and $3.138 billion on payroll in 2013. Team-controlled players (players with less than six years of service time) earned $357 million in 1996 and $1.323 billion in 2013. Extended players (players with more than six years of service time but did not sign in free agency) earned $420 million in 1996 and just $504 million in 2013 while free agents (players that have more than six years of service time and were signed in free agency) earned $207 million in 1996 and $1.31 billion in 2013. The chart below shows how much money free agents, team-controlled players, and extended players earned from 1996-2013.

The amount of production that each group produces partly explains this trend. Free agents have produced roughly 200 WAR per season from 1996 to 2013. However, extended players produced 324 wins in 1996 but only 110 in 2013 while team-controlled players produced only 478 wins in 1996 but 703 wins in 2013. The chart below shows the number of wins produced by each group annually from 1996 to 2013.

The cost of a win for each group of players has increased over the sample but the cost of a free agent and extended player win is increasing at a considerably larger rate than the cost of a team-controlled player win. The cost of a free agent win has increased from $1.04 million in 1996 to $7.03 million in 2013. The cost of an extended player win increased from $1.3 million in 1996 to $4.55 million in 2013. The cost of a team-controlled player win increased from $750,000 in 1996 to $1.88 million in 2013. The chart below shows how this changed over time.

Not only is the actual amount for a free agent win considerably more than the cost of a team-controlled player win but the annual rate of increase for a free agent win is more than twice that of a team-controlled player win. Over the entire sample, the value of a future team-controlled win increases by 5.6% (1.11/1.05) each year while for the past 10 years it has increased by 3.9% each year. Either way, this indicates that teams would save on player costs by keeping their prospects in the minors for extra time.

It appears that team-controlled players earning under a million dollars and those earning over a million dollars are seeing their cost per win increase at a similar rate. From 2005 to 2013, team-controlled players in each of these categories saw an annual increase of roughly 4%. I used 2005 to 2013 because players earning under $1 million were remarkably ineffective in 2004 while those earning over $1 million were remarkably effective. 2004 appears to be a clear outlier and therefore shouldn’t be used as a baseline.  This chart shows the change over time.

In addition, prospects do not appear to be receiving significantly higher signing bonuses.  According to the Associated Press, teams spent $150 million on the draft in 2004 and $208 million in 2013, meaning that signing bonuses have increased by only 4.3% per year over that period. This is similar to the increase in salaries for team-controlled players during that time period and therefore doesn’t indicate that teams are paying more in signing bonuses while paying less in salaries.

This indicates that both the minimum salary is too low and that team-controlled players don’t receive large enough salary increases in arbitration. In order to keep pace with free agent salaries they should be earning $3.4 million per win instead of $2.2 million per win and therefore their salaries should be roughly 50% higher. This raise in salary should come partially via an increase in the minimum salary and partially via an increase in arbitration.

Over the 17-year period, it is clear that team-controlled players are becoming considerably more valuable compared to free agents. The amount of money that it takes to purchase a win in free agency is growing at a considerably faster rate than the amount it takes to purchase a win with a team-controlled player -- team-controlled players produce nearly 70% of wins while free agents only produce 20%.

This is probably good for the game because it allows for greater parity. As it becomes more and more expensive to get value in the free agent market, then large market teams get less benefit for having a higher payroll. But it also means that prospects and other team-controlled players receive unfair compensation for their efforts.