With labor peace comes structural change. It was true when the NFL and NBA ended their much-ballyhooed lockouts of 130 and 149 days, respectively. It was also true last Tuesday when MLB quietly signed the most impactful collective bargaining agreement in league history. Unfortunately for fans, players and most teams, the new agreement will dramatically change the game for the worse.
Commissioner Bud Selig claims that the new collective bargaining agreement was designed to foster competitive balance between large and small market teams. Perhaps Mr. Selig is giving a political appraisal of a CBA clearly designed to slash costs for teams. Perhaps he simply fails to grasp the impacts of the agreement he just signed. Either way, the new deal has faced intense criticism from baseball analysts. Even a cursory glance reveals that its most substantial changes will be crushing to small market teams. Indeed, the new CBA may be the largest impediment to competitive balance in MLB history.
The biggest impacts will be through the amateur draft. In the past, teams have been free to spend unlimited sums of money on draft picks by doling out generous signing bonuses. One might think this would benefit the deep-pocketed, large market teams, but this freedom has actually been critical to the talent acquisition strategy of small market teams. Teams such as the Pittsburgh Pirates, who don’t have the payroll capacity to realistically compete in free agency, have invested heavily in draft picks to gain competitive advantage. Large market teams, in contrast, have impatient fan bases and are thus unwilling to divert resources from free agency toward drafting and player development.
The mechanics of the process are simple. Teams know in advance which players will require the most money to sign. Players may require added financial incentive to lure them from college or another sport, or they may simply be represented by Scott Boras. Either way, large market teams less invested in the draft will pass up talented players with expensive reputations. Small market teams, in turn, will overpay these players in order to gain a talent advantage. The Pirates, to use a classic example, offered Josh Bell an unthinkable $5 million bonus in the second round of last year’s draft to lure him from a college commitment after every team had already passed on him once. Thus, because of unlimited spending, small market teams take advantage of the fact that the draft is not “efficient” — players are not selected in order of their talent because of signability concerns.
The new CBA imposes strict spending limits that stick a dagger in this small market talent strategy. Under the new agreement, teams will face strict ceilings on bonuses paid in the first 10 rounds. These ceilings will range from $4.5 million to $11 million, depending on a team’s position in the draft order. For reference, the top overall draft choices from the last three years have taken home bonuses of $8 million, $7.5 million and $6.5 million. Teams that exceed their ceiling by up to five percent will pay a 75 percent tax on that overage. Teams that overpay by five to 10 will pay 75 percent and lose their first round pick in the subsequent draft. The penalties, both in taxes and draft pick forfeiture, get even steeper after that.
These new penalties will place enormous downward pressure on draftee salaries. More importantly, they will make the draft order “efficient” and prevent small market teams from exploiting their old strategies. These impacts won’t be small potatoes. In 2011, seven teams spent more than the new $11 million limit in draft bonuses. Those seven teams included the four clubs with the lowest payrolls in the league. Only one of those seven teams (the Cubs) had a payroll higher than the 22nd team in baseball.
Similar new spending limits will apply to the market for international free agents. Under the old rules, teams could spend without limit to import players from Latin America and Japan for development. This has been a major source of talent acquisition, particularly for small market teams. Once again, small market teams have taken advantage of the fact that large market teams have less appetite for the lengthy and uncertain player development process. Thus, small market teams have diverted capital toward young international free agents in the hopes of gaining the competitive advantage they cannot find through free agency.
The new CBA will put an end to this strategy. This year, teams will be restricted to a $2.9 million ceiling on international free agent signing bonuses. In subsequent years, this ceiling will range from $1.8 million to $5 million depending on a team’s winning percentage from the previous year. For reference, Miguel Cabrera’s signing bonus (from the small market Florida Marlins) was $1.9 million — 11 years ago! The new high-water marks are the $4.25 million bonus shelled out to Michael Ynoa by the Oakland “Moneyball” Athletics and the $5 million bonus paid to Nomar Mazara by the Texas Rangers. Under the new deal, teams that exceed the ceiling by up to 5 percent will pay a 75 percent tax on the overage. For a violation of 5–10 percent, teams will pay 75 percent and be allowed only one player with a bonus over $500K. For a violation of over 15 percent, teams will pay a 100 percent tax and be allowed no players with bonuses over $250K. Once again, small market teams will lose out on a major competitive advantage.
The numbers show just how damaging these two spending limits will be to small market teams. In 2011, the 10 teams with the smallest payrolls spent an average of $20 million on draft and international bonuses combined. In comparison, their 20 richer counterparts spent an average of only $15 million. That $5 million difference is substantial on the margin. Under the new deal, teams will face a combined spending limit that ranges from $6.3 million to $16.5 million. The nine teams that spent more than this $16.5 million limit in 2011 were largely members of the small market club. These nine teams averaged only $70 million in player salaries, and four of the nine were in the bottom five in payroll.
In fairness, the new CBA also incorporates a few smaller changes that should actually help competitive balance. There will, for example, be an annual “competitive balance lottery,” in which the teams with the smallest markets and lowest payrolls will be eligible to win extra draft picks after the first and second rounds. There are also new rules for revenue sharing under which teams receiving funds will be required to put up payrolls at least 25 percent higher than the sum they receive from the league. This should encourage competitive balance from the bottom. Finally (and most saliently), one extra wild card team will be added to each league. This means more teams will make the playoffs and have a shot at the title.
That said, the new spending limits will have overwhelming effects. Fans of small market teams can appreciate just how important the draft and international signing period are for talent acquisition among low-payroll clubs. The competitive advantages they once exploited will largely disappear under the new rules. Instead, these teams will be forced to divert resources back to free agency, where they will find themselves unable to compete with their large market counterparts. At the end of the day, these changes were made for the sole purpose of depressing the rapidly-inflating bonuses given to draftees and international free agents in an effort to cut costs for the league. Mr. Selig’s claim that the new deal fosters competitive balance is ignorant at best. Stay tuned.