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What Can Each Team Afford to Spend?

Posted by Neil Paine on November 29, 2009

I don't need to tell you that ever since the Yankees won the World Series earlier this month, there's been a lot of renewed discussion about whether or not New York's payroll advantage finally "bought" them a championship, and if a salary cap is needed to restore competitive balance to baseball. That topic has really been talked about to death over the past few weeks, but I feel like a salary cap -- ostensibly designed to prevent the Yankees from spending $50 million more than the next highest-payrolled team -- is only half of the discussion. If all you do is put a cap on team payrolls, you're still going to have cheapskate owners who take their revenue-sharing money and fail to invest it in their teams, owners who have learned to game the system and are content to put a poor product on the field if it means they can keep more cash for themselves.

So, obviously, you need to talk about a salary floor every bit as much as a salary cap. Discussing salary floors, though, leads to the question of whether you should force owners to spend a certain amount of money on their players, whether they have it or not. Opinions on the profitability of MLB teams vary wildly depending on who you talk to -- Bud Selig routinely claims teams are operating at a loss, while Forbes magazine routinely disagrees -- so it's an open question at this point in terms of how high of a floor you can impose on some of the more (allegedly) cash-strapped teams. But here's a fun exercise we can engage in, as long as we're pretending that a salary cap/floor is even a remote possibility...

From 1985-87, MLB owners colluded against the players in free agency, artificially keeping salaries down; they were subsequently found out, and for all intents and purposes the modern era of free agency began in 1988. In 1988, the average team spent $11,555,862 on salaries, with a standard deviation of $3,386,331, while in 2009 those figures were $88,824,233 and $33,857,093, respectively. What I'm going to do is convert team payrolls since 1988 into 2009 "equivalents" using these numbers -- for instance, the 1988 Yankees spent $19,441,152 on players, so we convert that to a z-score by taking ($19,441,152 - $11,555,862) / $3,386,331 = 2.33, and then apply that to 2009 like so: (2.33 * $33,857,093) + $88,824,233 = $167,662,661. In other words, the 1988 Yankees' payroll is $167,662,661 in equivalent "2009 dollars".

Having said that, here are the top spenders in equivalent 2009 payroll since 1988:

Rank Year Tm Est. Payroll 2K9equiv
1 2005 NYY $208,306,817 $222,915,729
2 2006 NYY $194,663,079 $211,892,217
3 2004 NYY $184,193,950 $207,620,452
4 2009 NYY $201,449,189 $201,449,189
5 2007 NYY $189,259,045 $195,369,755
6 2008 NYY $207,896,789 $194,869,693
7 2003 NYY $152,749,814 $187,702,426
8 2002 NYY $125,928,583 $168,981,676
9 1988 NYY $19,441,152 $167,662,661
10 1989 LAD $21,071,562 $157,372,169
11 1991 OAK $36,999,167 $154,726,617
12 1998 BAL $72,355,634 $154,303,228
13 1994 ATL $49,383,513 $153,318,959
14 1996 BAL $54,490,315 $153,160,444
15 2001 NYY $112,287,143 $153,134,974
16 1996 NYY $54,191,792 $152,214,735
17 2001 BOS $110,035,833 $150,049,992
18 1999 NYY $86,734,359 $149,629,247
19 2009 NYM $149,373,987 $149,373,987
20 2007 BOS $143,026,214 $149,205,047
21 2004 BOS $127,298,500 $148,934,496
22 2001 LAD $109,105,953 $148,775,773
23 1995 TOR $50,590,000 $148,342,746
24 2000 NYY $92,338,260 $147,002,349
25 1989 NYM $19,885,071 $146,116,105
26 1997 NYY $62,241,545 $145,827,550
27 1991 BOS $35,167,500 $145,731,998
28 1990 KCR $23,361,084 $145,273,725
29 2002 BOS $108,366,060 $144,900,543
30 2003 NYM $116,876,429 $144,343,505

Okay, but here's a more interesting table... For each franchise, what was their highest single-season 2009 equivalent payroll since 1988?

Year Tm Est. Payroll 2K9equiv
2002 ARI $102,819,999 $137,295,974
1994 ATL $49,383,513 $153,318,959
1998 BAL $72,355,634 $154,303,228
2001 BOS $110,035,833 $150,049,992
2009 CHC $134,809,000 $134,809,000
1995 CHW $46,961,282 $135,339,161
1993 CIN $44,879,666 $135,304,373
1996 CLE $48,107,360 $132,939,514
1999 COL $61,935,837 $108,795,024
2008 DET $137,685,196 $131,985,180
1997 FLA $48,583,000 $110,413,692
2009 HOU $102,996,414 $102,996,414
1990 KCR $23,361,084 $145,273,725
1991 LAA $33,060,001 $135,382,873
1989 LAD $21,071,562 $157,372,169
1990 MIL $19,719,167 $112,582,808
1989 MIN $15,531,666 $104,816,001
2009 NYM $149,373,987 $149,373,987
2005 NYY $208,306,817 $222,915,729
1991 OAK $36,999,167 $154,726,617
2004 PHI $92,919,167 $113,473,242
1992 PIT $33,944,167 $99,782,590
1998 SDP $46,861,500 $98,184,127
1998 SEA $54,087,036 $114,089,378
1994 SFG $42,638,666 $126,543,532
1990 STL $20,523,334 $119,801,247
2000 TBR $62,765,129 $100,249,924
2002 TEX $105,526,122 $141,006,517
1995 TOR $50,590,000 $148,342,746
1989 WSN $13,807,389 $88,458,042

If you want to be a stickler and demand Montreal be excluded from Washington's history, since they are radically different markets, then the Nats' high mark is $73,882,155 in 2006, which would be (by far) the lowest on the list.

Now, am I saying all of these teams can afford to spend exactly this much today (since economic conditions have obviously changed for many of these cities since the late '80s)? No. But is it really a stretch to think they couldn't all at least approach these numbers if they wanted to? I mean, think about what this is saying: in the last 20 years, every MLB franchise has spent the equivalent of nearly $90 million 2009 dollars on their payroll at one point or another... All but three spent $100 million... All but seven spent $110 million... And more than half spent $130 million. Small-market teams, big-market teams, it doesn't matter, they all ponied up for talent at some point since '88. And the 1990 Kansas City Royals nearly spent the equivalent of '09 Mets!

So theoretically, would it really be that crazy to institute a cap-and-floor system which ensures that the players continue to be paid what they're worth, but also spreads talent more equitably across all of MLB?

17 Responses to “What Can Each Team Afford to Spend?”

  1. dave Says:

    Nobody but NYY in the top 9 for the upper chart.

  2. ImAShark2 Says:

    Wasn't the Yankees record-setting payroll from 2005 passed in 2008?

  3. rico petrocelli Says:

    A\nd the other question --what did they get for their money? I wonder how those30 teams did that year for all their investment? For example those top nine Yankee extgravanganzas won one or two pennants and no WS before 2009. How'd the 30 do? Average win total?

  4. ImAShark2 Says:

    My question was better, though.

  5. Rich Says:

    It's not like MLB is losing money. To the contrary, it's arguable that the Yankees are the cash cow that propels MLB's financial engine forward.

  6. Djibouti Says:

    "which ensures that the players continue to be paid what they're worth"

    Depends on how you define "what they're worth". According to the market situation, an average player is worth $3 million. According to a comparison to the salaries of everyone else in the United States, he's worth about $50k-$60k. Which brings up something I've always wondered about. A player's worth is mostly defined by an average marketability. In other words, players get paid millions because clubs bring in millions of dollars (of net revenue) in ticket sales, concession sales, tv deals, merchandising, etc. So in theory, couldn't every player's salary be reduced and the savings passed on to us in the form of reduced prices for everything? It goes against the open market policy of supply and demand in that if people are willing to pay $100+ for a ticket, then you can charge $100+ for a ticket, and probably has a tint of collusion as well. But wouldn't it be nice in an idealistic sense to open up the game for a year or two and cut down on the inaccessibility that comes with the perception of prima-donas making millions to play a game? I haven't run the numbers, but I imagine that if you divided every salary by 5 leaving the minimum salary at $80k and the average at $600k (according to numbers from the MLBPA website) you could offer $5 or less tickets for every seat in the stadium. Imagine a packed house for a mid-April Royals-Indians game.

    It's the same thing I've always wondered about the movie industry. A movie ticket costs $12 because a movie takes millions to make because the actors demand million dollar paychecks. Couldn't the studios give them hundred thousand dollar salaries instead and charge $5 for a ticket?

  7. Neil Paine Says:

    That's not true. If the players were paid $600k average, ticket prices would still be what they were when players were paid $3 million average. Teams charge what fans are willing to pay, without regard to salaries. Fans have proven they're willing to pay the current rate to see the players on the Yankees, or the Red Sox, or the Phillies, or whoever. If in 2010 the players suddenly made 20% of what they made in 2009, the owners would still charge the same amount for tickets as they did in 2009 and just pocket the difference.

  8. Neil Paine Says:

    This is a great FAQ about the phenomenon, and why high salaries don't drive ticket prices up:

  9. Neil Paine Says:

    ImAShark2: I definitely read that at the time. BTW, our numbers are just estimates -- they may not include call-ups, players acquired at midseason, etc. For those reasons, it's tough to concretely define a team's "payroll" anyway.

  10. Neil Paine Says:

    Oh, wait, I re-read your comment Djibouti, where you say "it goes against the open market policy of supply and demand in that if people are willing to pay $100+ for a ticket, then you can charge $100+ for a ticket". Sorry for assuming you didn't know that ticket prices aren't driven by salaries.

    At the same time, though, what you're doing is asking everyone to make less profit so you and I can go to games cheaper, which neither the owners nor the players would ever agree to.

  11. Djibouti Says:

    Yeah, it's more of a thought experiment than an actual idea because of A) supply and demand B) the loose relationship between ticket prices and salaries and C) no one would ever consent to giving up money. But as to the final point:

    "At the same time, though, what you're doing is asking everyone to make less profit so you and I can go to games cheaper, which neither the owners nor the players would ever agree to."

    The only people who would lose in this situation would be the players. From the owners perspective, look at it this way. Say an owner spends $100 million on everyday expenses (stadium upkeep, travel, management salaries, etc.) and $100 million on player payroll. Then say they take in $100 million in ticket revenue (no idea what a real number for that would be) and $200 million in other revenue. So overall they have a $100 million profit. If they then slashed payroll to $50 million and ticket revenue to $50 million, they'd still have that $100 million profit, but we'd be reaping the benefits. This assumes that there aren't any relationships between the costs and revenues, which of course there are. But the basic idea is that the players are paid what they're paid because the market has determined their worth. The market determines their worth based on what we're willing to pay indirectly for their services. So if we all woke up one day and decided $30 was too much for a shirt and $20 was too much for a bleacher seat, etc. the market (as seen by the owner's overall profit) would adjust to the point where the players would be making less money. What I'm saying is that in theory this could work in reverse in that if MLB could somehow magically reduce all player salaries, we could all pay less for the product (it doesn't have to be in ticket prices alone) while the owners maintain profit. The underlying problem is that there is no way any businessman worth his salt would turn down an opportunity to make more profit in favor of charging less than his customers are willing to pay.

  12. Neil Paine Says:

    Okay, so from the players' perspective what you're talking about would essentially be the collusion situation in the 1980s, where owners conspired to depress salaries by not bidding the free agents' salaries up -- except, here, the fans and the owners would both be colluding against the players. Then again, I think it would require a single-minded focus on money over wins from both owners and fans to make it happen, because you have to be committed to your team not outbidding everyone for premium talent. For the owners, this isn't a huge stretch, but for the fans it really wouldn't make sense to intentionally have your own team lose in exchange for a few dollars' worth of savings on tickets.

  13. ImAShark2 Says:

    Thanks, N-Paine.

  14. dchich Says:

    So, the top 30 payrolls of the last 22 seasons represent only 6 WS champs?

  15. Andy Says:

    This issue is far more complicated than has been represented here. Ticket prices are pretty straightforward. Teams price their tickets so they maximize revenue and as long as fans (or law firms, etc) want to pay the prices, they will sell. But teams make revenue in other ways. Take, for example, all the advertising money that teams receive from companies that place ads in the ballpark or on TV. (Yes, the TV station gets the money for the TV ads, but it ultimately goes back to the team in the fees paid to air the games.) Where does this advertising money go? It could be looked at the same way as ticket prices, as it's part of the operating capital for the teams that either pays expenses like player salaries or is profit for the team. Who, in turn, is paying out this cash? We are, when we buy those products that are advertised. Expense on advertising is a major portion of expense for many product companies and it is the consumers who pay for that advertising with higher product prices. So it is not just ticket buyers who are fueling the cash going into baseball teams.

    But there is another issue on the other side. Let's say that all team's revenues were cut by $20 million (by lowering ticket prices or ad revenue or whatever) and the teams then lowered their payrolls by $20 million. It means that we fans would collectively have $600 million more in our pockets while the players would have $600 million less. Does this actually make a difference? I don't think so. Yes, if ticket prices or product prices suddenly dropped, we would have more money. But eventually salaries would drop (or fail to keep up with inflation to account for that.) Advertising people might lose their jobs. The economy would shrink in some places eventually. Most people tend to look at these situations in terms of immediate impact but not on how things change over time. The fact of the matter is that baseball players spend their money--they buy big houses, cars, etc, and all that money goes to pay for jobs for other people. I frankly don't care whether the money is being spent by 1,000 fans or 10 baseball players as long as it gets back into the economy.

  16. Red Sox Owner Has A New Plan To Try & Combat Yanks Says:

    [...] any event, on a related note, Neil Paine offers some food for thought on why baseball needs a minimum payroll [...]

  17. JohnnyTwisto Says:

    It should also be noted that artificially lowering salaries will eventually lead to an inferior product, as potential baseball players choose to do something else.