EMPIRICAL PAPER

Baseball Salaries Based on Performance

Baseball Salaries Based on Performance

Introduction

Major League Baseball (MLB) players are among the highest paid workers in the American economy. Their minimum salaries are several times that of the average American salary, and the average wages are an even greater multiple. They enjoy a minimum salary of $400,000 per year, an average salary exceeding $2 million per year, guaranteed contracts, and arguably the strongest union in American history. Stories of the financial escapades of professional baseball teams and the salaries they pay their employees are common in the sports and business press.

It was not always this way however. It was not until the mid 1980s when professional baseball players blazed the trail for all professional athletes by gaining the right to bargain competitively for their wages. Before that time, the reserve clause meant players were bound to their original employer for the duration of their careers. The labor market for ballplayers was a classic monopsony. Furthermore, players typically had a very low opportunity cost to play in MLB; most had little schooling and the only opportunities were outside of professional sports.

So what determines the salary of a player in such an environment? Market pressures surely did not force owners to pay players salaries commensurate with their marginal revenue product.

A. Background

Empirical studies of relationship between salary distribution and performance have broadened in recent years. Most early studies explored the issue using individual level data. Some studies support the aspect that more differentiated prizes are desired, using baseball data. It has find that the wage distribution has significant influence on individual performance. Other studies conclude that more salaries produce positive effects when MLB department is examined. It is interesting to note that studies find mixed evidence for the effects of salaries based on productivity (pay-for-performance salary). That is, a positive relation between pay-for-performance salary and individual research productivity, while a negative relation for collaborative working.

B. Theoretical Framework

Most current empirical studies use the payroll in absolute terms as one of the control variables to examine the effect of salary dispersion on performance. However, it is possible for different teams with the same level of payroll in different years, while the relative payroll is quite different. Salary arbitration as it applies to professional sports is practiced in Major League Baseball (MLB). In the event that a player and club cannot agree on a salary in contract negotiations, a third-party arbitrator (or panel of arbitrators) determines the player's compensation. The arbitrator's decision is binding on both parties, meaning the decision settles the negotiation. In contrast to grievance arbitration, salary arbitration is limited to issues of compensation. A salary arbitration system grants the arbitrator(s) the authority to evaluate evidence of a player's performance, ability, leadership, and other intangible value in order to render a final decision. Salary arbitration is a common practice in broader union-management negotiations, and in sports it has been instituted as a condition of the collective bargaining agreement (CBA) between the players union and the management negotiation team ...