The Pros & Cons of Arbitration

The saga of Chris Perez has brought up a great opportunity for a discussion of the arbitration system. Perez was released at the end of last season mostly because of his expected raise in arbitration (this was largely the reason for trading Drew Stubbs as well). While some may say it was because of Perez's attitude, that hasn't changed in the past three seasons, while his contract situation has. While he did allow a few more home runs than expected in 2013, his stats have stayed similar for the past three seasons as well. The primary change was the raise owed to him in arbitration. In 2013, he earned $7.3M in his second year of arbitration and he was set to be given a raise between $8M and $12M for 2014. In free agency he signed with the Dodgers for less than three million.

It wasn't like Perez signed the first day available either. He tested the market, a market weak in proven closers, and ended up signing as a middle inning reliever for less than fellow Indians free agent Matt Albers did. How could there be such a disparity between expected arbitration value and actual market value? Something definitely seems amiss.

The purpose of arbitration is a valid one; to make sure young players are paid what they deserve while still remaining under team control long enough for the parent club to get something out of their draft picks. In general this works, if just in a limited manner. For the three seasons players are under the rules of arbitration, they generally are paid somewhere in the range they deserve. This often leads teams to simply sign great players long term, before arbitration comes up. This is the fairest of all solutions, as both parties must agree before hand to the terms, rather than in arbitration where an independent arbiter will just pick one side as the winner.

Even though the intent is good, there are massive issues in the arbitration process. From the players perspective, it starts too late. Two of the top seven AL players (Mike Trout and Josh Donaldson) in OPS in 2013 are still pre-arbitration, meaning they won't get paid for their contributions for the team. The Indians top players, like Jason Kipnis and Corey Kluber, are in a similar situation. All these players have the tremendous risk that they will not be able to their careers past the arbitration point. If he was a free agent now, Trout would likely get a contract between $20M and $30M per season, instead he was paid just $510,000 in 2013 and will get just a slight raise for 2014. If players aren't getting good value out of the arbitration system, then the teams must be.

If arbitration was favoring the teams, then why did the Indians release Perez and trade Stubbs just to avoid it. There are three major problems here from the team's standpoint. For one, the only thing the arbiters look at are past results, with no prospective on future ability. It likely would have made no difference in Perez's case that he was removed as the closer for the last week of the season and would likely not have been the Indians closer in 2014 no matter what. The arbiter would have just looked at his 134 career saves and 3.41 ERA. In Perez's view, he should have been paid more when he was actually recording those saves (he was paid about $7M for his first five seasons and 117 saves) and in the Indians view, he is not worth the $8-$12M he was expected to be given in arbitration.

Secondly, the stats used in arbitration hearings are not the same as those used by Major League teams to evaluate players. The Indians have made almost all their personal decisions in the past two seasons by picking up players who had poor seasons the prior year, but really bad luck stats, thinking the luck would turn around. Not only do arbiters not look at stats like BABIP and FIP, they place an exaggerated value on stats that have more relation to opportunity than talent, like wins, saves and RBI.

Finally, contract values are base on average contracts throughout the league. The problem with this is that the Majors are almost split in two. There are teams like the Dodgers, Yankees, Red Sox and Tigers who fight in the free agency arms race, overinflating salaries all around the league and then there are teams like the Indians and Rays would fight for the scraps. Rather than basing arbitration values on comparable salaries within the same team, basing them on league averages means that the Yankees would pay their arbitration eligible players less than they would an equal free agent, while the Indians would pay theirs comparably more. This essentially explains the reasoning behind the Drew Stubbs trade and David Murphy signing. The Indians were able to sign Murphy, who is a superior player to Stubbs, for less money than they would likely have had to pay Stubbs in arbitration.

While the Indians haven't actually went to arbitration in years, it is fear of this process that forces them to make moves like releasing Chris Perez. Perez was under paid compared to comparable veteran closers during his first few seasons and this possibly lead to his unhappiness with the team and city. Finally, when he was about to get paid, he no longer deserved the money he was going to be paid. The current system is vastly superior to the old ways of perennial team control, but there are definitely improvements to be made. For a start, beginning an arbitration like process earlier in players career, as early as the second season for players who become Major League starters early on (like Kipnis and Trout), would do a lot to make things fairer all around (although the owners would disagree). Of course, getting anyone in baseball to change their minds about how to view statistics seems to be significantly harder than it is to go deep off Chris Perez.

About Joseph Coblitz

Joseph is the primary writer and editor of BurningRiverBaseball.com and has been since it's inception in 2011. He is a graduate of the University of Akron and currently resides in Goodyear, Arizona.

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