How To Fix MLB's Economics

MLB’s economics are broken. A few writers have noticed that teams just aren’t as interested in free agents any more. Joel Sherman claims that he supports players making a “ton of dough” in a $10 billion a year industry, but that this flawed system pays players for declining deals. He also noticed that deals exceeding both $100 million and $20 million per year have largely been unsuccessful. Jeff Passan noted that it has taken a long time for free agents to find homes this season and thought it signaled collusion. Turns out, he learned that people don’t think the MLB's current structure makes sense any longer. Teams are no longer interested in paying players for previous performance that they aren’t likely to repeat.

In addition, MLB has a problem with tanking. A number of mid/large market teams have decided to do complete rebuilds and cut spending. Passan writes in his article that “There’s less interest in winning than I’ve ever witnessed before,” one union official said. “MLB has done a fantastic job of convincing the public that’s OK. I think fan bases are accepting of losing now. Sometimes they even want their team to lose.”

According to Passan, a veteran agent is strongly considering recommending a salary cap. Union officials are openly talking about how this could result in a work stoppage. The health of the game is in the balance because it would be hard for baseball to recover from another strike. But if MLB wants to avoid a strike, they’ll need to change the compensation structure and do something about tanking. Here are the changes I recommend.

The first change would be to the amateur draft. Teams are now rewarded for being the worst team in the league by receiving the top pick in the draft. The difference between receiving the first pick in the draft and even the third pick in the draft is significant – the first pick was valued as worth nearly three times more than the first pick in 2013. In addition, teams receive a significant slot amount for the first pick  – enough to pay for that pick as well as add talent later in the draft. This gives teams an incentive to be the worst in the majors.

The amateur draft should be changed so that half of a teams’ draft pool is determined by market size and half is determined by their record in the previous season per the slot value system (all slot values are cut in half). MLB determines each teams’ market size in the CBA for revenue sharing purposes, and they can use that analysis to decide which teams deserve more draft money than others. After the fourth round, draft order will be determined by market size as opposed to record.

In addition, MLB should have a lottery open to all non-playoff teams for the first five draft slots so that there is a further disincentive to tank. It is one thing to tank if a team will receive the #1 pick and a significant draft pool. It’s another thing to tank if they might get the sixth pick and receive only a slightly higher draft pool.

If small-market teams receive higher draft pools than large-market teams, then this means that free agent compensatory picks and competitive balance picks can be eliminated. Instead, small market teams will receive one franchise and one transition tag every five years. A small market team (ranked 21-30) can tag a player that has been under their control for the past two years. If a team tags a player with the franchise tag, then if the team is able to keep that player under their control, they’ll be compensated for one-third of his cost out of revenue sharing funds. Same idea for the transition tag, only the team will be compensated for 20%. Mid-market teams ranked (14-20) receive one transition tag every five years. Players that receive one of these tags can’t be traded for three years afterward and their teams receive no compensatory cash if the player is traded.

The minimum wage should be increased from $550k to $1.6 million. Teams receive significant production from team controlled players, so these players should see significant rewards. In addition, forcing teams to pay fair values for team controlled players will reduce the financial incentives to tank. A team that uses only minimum wage players will see its payroll increase from $13.75M to $40M. Such as increase could cost MLB between $300M and $450M. In an ideal situation for the players, MLB teams would eat the entire cost of the minimum wage increase. In the current situation, where the union has limited leverage, veteran players may need to take a 5-10% decrease in salary to help pay for a minimum wage increase.

Players will remain under control for six years, with players that have three years of service time eligible for arbitration. To reduce the likelihood of roster shenanigans, a player will receive credit for a full season of service time if he is on the roster for eighty days in one season. The Super Two rule will remain as is.

Revenue sharing would be significantly reduced. Instead of the current 33% level, teams should be taxed at 16.5%. There will be two forms of revenue sharing. The first set, taking 6.5% of revenue, will go from large-market clubs to small-market clubs based on market size. This revenue will also cover payments for players that receive a franchise or transition tag.

The second set, consisting of 10% of revenue, goes to all teams that make it to at least the division series of the playoffs regardless of market size. This reward should be at least $100 million per playoff team and strongly encourages teams to try to win their division and at least make it to the playoffs as well as discouraging tanking. This cash should be enough to help even low-revenue teams keep a playoff dynasty intact.

One of the major problems that large market teams have with revenue sharing is that some small market teams don’t always spend that money on players. This method primarily helps small-market teams that are willing to spend money to keep their best homegrown players. Other teams will see their revenue sharing payments slashed.

Nathaniel Grow argues that the MLBPA has limited leverage to convince MLB to increase salaries. With free agents losing their appeal, I think he’s largely correct. However, there is significant friction between large market clubs and small market clubs. Large market clubs have stopped allowing the Athletics to receive revenue sharing. In addition, large market clubs have complained about how small market teams support themselves via revenue sharing. Other teams in large markets complain about how they’re paying more than other teams in the same market. Meanwhile, the Rays were hoping for more assistance via draft reform. Both would get what they want from this proposal.

A plan like this would help ensure competitive balance, incentivize teams to win instead of tanking and reward players based on production instead of seniority. This would be a significant upgrade from the current system that rewards teams that tank and encourages teams to spend billions of dollars on players that can’t produce. If MLB doesn’t change to a system like this in the future, teams will quickly discover that this system doesn’t work and there are better uses of their money. That’s likely to lead to players receiving an increasing smaller portion of the pie and ultimately a strike.