The Perfect Solution For the 2017 Baseball Season and Beyond
PAY-FOR-PERFORMANCE!!
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With the 2017 season under way, now is an appropriate time to revisit baseball’s ever-increasing salaries.
Many teams have made enormous financial sacrifices by compensating and, subsequently, relying on a few select players to lead them to glory.
Are these sluggers worth the outrageously absurd amounts?
Frank Glassner, CEO of Veritas Executive Compensation Consultants, decided to see if the players’ actual hitting and pitching statistics contributed to their high salaries.
Baseball has been called “a game of numbers,” and in no other sport do a player’s statistics better reflect their accomplishments on the job.
Likewise, as in any other business field, an employee’s compensation depends on how well they carry out their duties. As the only major American sport without a salary cap, baseball salaries seemingly get higher every season. For 2017, the average salary of players on opening day rosters was $4.47 million, a slight increase over the previous record set in 2016 and more than the top paid players made 20 years ago. This does not even take into consideration amounts each individual receives from endorsement contracts. Additionally, the minimum salary (currently $535,000) has more than doubled since 2000, and has more than quadrupled since 1990. “The current salary structure in Major League Baseball is bloated and obscene,” said Glassner. “Exorbitant sports salaries and compensation packages have become synonymous with the player as ‘pay for ego’ vs. ‘pay for performance.’”
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An ideal salary plan for players would be one based on the same principles and procedures used for successful executive pay plans – plans that are based heavily on incentives that pay-for-performance.”
Under the current flawed baseball pay system, baseball players’ salaries correlate more with age and tenure rather than actual performance (ISS would really frown on this…).
In the Veritas baseball pay plan, players would receive a uniform base salary, and the bulk of most players’ compensation (if they are successful) would be in the form a performance-based bonus determined by the Wins Above Replacement (“WAR”) statistic.
WAR is an advanced statistic that is intended to estimate a player’s overall contribution in a single number value.
Since WAR is far more comprehensive than traditional baseball statistics like batting average, homeruns, earned run average, etc., it can provide a more accurate representation of a player’s worth to his team.
This methodology would also sidestep any potential issues related to one type of statistic being valued more than another (e.g., power hitters being penalized for having lower batting average).
Additionally, the sum of WAR calculations for individual players on a team have been found to strongly correlate with actual wins and losses.
Wins Above Replacement (“WAR”) – What is it Good For?
To summarize, Wins Above Replacement estimates how many more wins a team would have with Player A playing a full season, compared to a replacement level player (e.g., minor leaguer or low quality major leaguer).
So for Miguel Cabrera of the Detroit Tigers, his 2016 WAR of 4.9 would indicate he added about 5 wins to his team’s total over the full season, relative to if he was swapped out for a replacement level player.
Conversely, the New York Yankees Alex Rodriguez had a WAR of -1.2 in 2016, meaning that the team would have been about 1 game better with an available minor leaguer playing in Rodriguez’s spot.
The majority of players are in the -1.0 to 1.0 range, while all-stars are usually in the 4.0-5.0 range, superstars are in the 5.0-6.0 range, and MVP candidates are above 6.0.
Based on data from baseball-reference.com, the breakdown of WAR for players in 2016 was as follows:
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Position Player WAR Calculation
The actual calculation of WAR is detailed and complex, but it can be broken into more digestible components.
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Pitcher WAR Calculation
Pitcher WAR is based on overall runs allowed (earned and unearned) and innings pitched, with various adjustments to determine how a replacement level pitcher would have done facing the same circumstances.
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In greater detail, the following outlines the Veritas incentives for performance program: Veritas Baseball Compensation Plan Base Salaries
Under this plan, all players would receive the current league minimum salary of $535,000.
This flat salary does not differentiate between rookies and 10-year veterans, or between no-names and all-stars.
However, better players will have the opportunity to earn significant performance-based bonuses based on actual achievement over the course of the season.
Performance-Based Statistical Bonuses:
In addition to the fixed base salaries that do not change with current year performance, the bulk of pay in the Veritas plan is variable, depending on statistical achievements, namely Wins Above Replacement.
Over the 10-year period from 2007-2016, the average league leader had a WAR of 9.54.
Using this as an upper bound and applying the current top salary in baseball (Clayton Kershaw of the Los Angeles Dodgers at about $35.5 million) to performance at this level, each point of WAR would be worth an additional $3.65 million in compensation.
Therefore, the overall compensation would be calculated as: Compensation = Base Salary + Performance-Based Bonus Compensation = $535,000 + WAR x $3,650,000
To summarize, potential payouts would be as follows under this structure:
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Applying the Veritas Baseball Salary Plan
Baseball is littered with outrageous salaries, in some cases for players that are no longer even on active rosters.
While these inactive players obviously would not be able to achieve any of the performance objectives in the Veritas plan and would not earn much money, it is more useful to analyze the performance-based pay of active underachievers.
Shortly after a career year in 2011 (8.2 WAR – MVP candidate-level production), outfielder Matt Kemp signed an 8-year, $160 million contract with the Los Angeles Dodgers.
After a solid 2012 in which he played decently but missed 56 games, Kemp missed half of 2013, and had terrible production when he did play.
2014 and 2015 were slightly better than 2013, but still considerably worse than his peak, yet Kemp was earning over $20 million each year.
In 2017, now with the Atlanta Braves, Kemp is set to make $21,500,000.
Assuming that he is with the team from the Spring Training report date of February 17 through the end of the season on October 1, that is 226 days of work, or $95,132.74 per day of work.
By comparison, the median American household income was $56,516 in 2015, or approximately $216.54 per day of work.
Applying the Veritas plan to Kemp’s performance in the 2016 season (0.0 WAR – a replacement-level season), he would have earned the league minimum of $535,000, a far cry from the current situation:
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“Under this plan, if players performed at their maximum, they could actually earn their current mega salaries,” said Frank Glassner.
“The incentive to perform at their optimum would be simple: better performance, more money.”
In contrast, let’s apply the same plan to 24-year-old Boston Red Sox slugger Mookie Betts, one of the league’s most exciting young players at the moment, whose 2016 salary of $566,000 is about 1/38 as much as Kemp earned.
In 2016, Betts had a breakout season, making the All-Star team, winning the Gold Glove award for being the best defensive right fielder, winning the Silver Slugger award for being the best offensive right fielder, and finishing second in the AL MVP vote.
Betts’ 9.5 WAR was second only to perennial superstar Mike Trout.
Under the Veritas plan, he would have earned $35,210,000:
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The discrepancy between top performers and underachievers is just as apparent with pitchers, who, by the nature of their job, are prone to inconsistency and injuries.
It is not uncommon for pitchers with mega-deals to be injured for entire seasons and still receive full pay, but what is more common is inconsistent, sub-par performance.
Take Matt Cain, for example, who signed a 5-year $112.5 million contract extension with the San Francisco Giants prior to the 2012 season, taking effect in 2013.
Cain had a very good 2012, prior to the extension kicking in, including an All-Star game appearance and a perfect game.
However, Cain had a big drop off in 2013, the first year of the extension when his salary jumped to $20,000,000, and 2014-2016 were even worse, with a series of injuries limiting his innings pitched.
In fact, the 4 worst seasons in Cain’s 12-year career were the 4 covered by this lucrative contract extension so far.
Cain has had negative WAR in the past 2 seasons, meaning that despite earning $21,000,000 each year, he was worse than a replacement-level player called up from the minor leagues.
His 2016 WAR of -0.7 would have earned the league minimum, or 1/39 of his actual salary:
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At the other end of the spectrum is St. Louis Cardinals ace Carlos Martinez, who made the All-Star game in his first full season as a starter in 2015.
Martinez put up similar numbers in 2016, and since he was still under his first contract, he earned only $539,000 (although he recently signed a 5-year $51 million contract and will earn $4.5 million in 2017).
If Major League Baseball had adopted Glassner’s system, Martinez would have had big payouts even sooner, and would have made $20,245,000 last season:
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Putting it All Into Perspective
With the significant increase in scrutiny on executive performance, pay for performance is generally applied to corporate executives across the country today.
“Why not apply this same concept to professional athletes?” said Glassner. “Especially now, since salaries have skyrocketed at an alarmingly high rate.”
Unfortunately, Glassner notes, in the end the fans are the ones who lose if the current system continues.
“If sports teams dared to adopt a pay-for-performance plan, and treated their players like CEOs and key executives, it could actually improve the game,” said Glassner.
“Players may become more motivated to improve skills and undertake a training regime reflective of their salary.
Owners certainly wouldn't complain about rewarding performance and the real winners would be the fans.
They would get to see an improved game with all players trying their hardest, no matter where their team is in the standings.”
Based on the Veritas pay-for-performance plan, as well as the performance of Kemp and Cain, or lack thereof, their teams may wish to revisit their 8 figure per year contracts.
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Veritas Executive Compensation Consultants, ("Veritas") is a truly independent executive compensation consulting firm.
We are independently owned, and have no entangling relationships that may create potential conflict of interest scenarios, or may attract the unwanted scrutiny of regulators, shareholders, the media, or create public outcry. Veritas goes above and beyond to provide unbiased executive compensation counsel. Since we are independently owned, we do our job with utmost objectivity - without any entangling business relationships.
Following stringent best practice guidelines, Veritas works directly with boards and compensation committees, while maintaining outstanding levels of appropriate communication with senior management. Veritas promises no compromises in presenting the innovative solutions at your command in the complicated arena of executive compensation.
We deliver the advice that you need to hear, with unprecedented levels of responsive client service and attention.
Visit us online at www.veritasecc.com, or contact our CEO Frank Glassner personally via phone at (415) 618-6060, or via email at fglassner@veritasecc.com. He'll gladly answer any questions you might have.
For your convenience, please click here for Mr. Glassner's contact data, and click here for his bio.
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