MLB's Proposed Pre-Arbitration Bonus Rule Echoes Tumultuous Offseason

Tumultuous Times in the Diamond Sport

Things are certainly busy in Major League Baseball ("MLB"). Following the difficulty of the 2020 Covid-altered season, the 2021 season was largely a success. However, the beginning of the 2022 season is proving somewhat tumultuous.

In addition to the filing of a new lawsuit challenging MLB's federal anti-trust exemptions[1] and the non-admission of two of MLB's greatest statistical performers to the Hall of Fame,[2] MLB and the Major League Baseball Players Association (the "Union") have failed to agree on a successor collective bargaining agreement, resulting in the present ongoing lockout. Negotiations have centered around various long-standing rules, such as free agency eligibility and uniform use of the designated hitter. Notably here though, is a significant proposed change to the potential compensation for pre-arbitration eligible players.

MLB's Compensation and Arbitration Structure

To understand the proposed rule and its implications, a brief overview of MLB's early compensation and arbitration process is warranted.

Generally, minor league and MLB players without the requisite service time for free agency play on one-year contracts.[3] The MLB calendar typically has 187 days and a 'full season' for service time purposes constitutes 172 days.[4] Between 172-187 days constitutes a maximum of 1.00 years of service time in any season.[5] Compensation is dictated by the level of competition and its associated minimum salary. In 2021, for instance, players in A-ball received $500 weekly, while in AAA, it was $700.[6] In MLB, the minimum salary for 2021 was $563,500.[7] Salaries prorate as players progress or demote through the various competition levels.

Following any season, clubs generally have the unilateral right to renew minor league and young MLB player contracts.[8] Thus, clubs retain robust control of the early careers and earning potential of their young players. Once a player accrues 3.00 years of MLB service time, that player is eligible for salary arbitration following the season.[9] This formal arbitration process is the player's first chance for a significant raise. MLB players are continually eligible for salary arbitration after each season until they reach 6.00 years of service.[10] At this point, a player becomes eligible for free agency and generally may sign with any club and on any agreed upon terms.[11]

The period before reaching 3.00 years of MLB service time is generally known as the 'pre-arbitration eligibility period.' Now, MLB and the Union are negotiating a proposed rule change where a pre-arbitration eligible player can earn additional compensation more commensurate with their actual performance.[12] This is particularly important when considering that many players were drafted at 18 years old and may not make it to their first season of salary arbitration (if ever) until aged 22, 28, or even older. In that time, most young professional baseball players hardly make enough money to get by, let alone make any contextual decent compensation.

As an example, Yankees slugger Aaron Judge was drafted in the 1st round of the 2013 draft and briefly made his debut in the majors in 2016. His first full, and rookie eligible, season came in 2017. In that year, while on a Yankees' controlled and renewed contract for $544,500, Judge would lead the American League in walks, runs, and home runs.[13] He additionally earned an All-Star appearance, a Silver Slugger Award, was named the American League Rookie of the Year, and finished 2nd in the American League MVP voting.[14] All this while the average MLB salary for 2017 was $4,450,000[15] and players performing similarly, but free agency eligible, could easily earn $20,000,000 or more.

Of course, there are legitimate arguments in favor of the clubs' player and contractual control. Perhaps most appropriately is the preservation of parity and competition in a game where the clubs are not limited by a uniform salary cap, which favors larger market clubs with deeper pocketed ownership. Still, it is a hard reality for a player performing as well as Judge did in 2017 to earn orders of magnitude less than his lesser performing peers.

Proposed Pre-Arbitration Bonus Pool

Fortunately for the players, additional pre-arbitration eligible compensation is presently being negotiated by MLB and the Union as part of the larger effort to end the lockout. However, perhaps in keeping with recent MLB curiosities, the mechanics of such additional compensation is potentially problematic.

Broadly, the proposed mechanics are essentially the following: the top 30 performing pre-arbitration eligible players receive tiered compensation bonuses from a central fund, the amount of which is currently being negotiated.[16] Additional bonus compensation can be earned for winning awards such as the MVP or Rookie of the Year. Wins Above Replacement ("WAR"), an advanced baseball statistic, would be the basis for determining the top 30 players, while the writers of the Baseball Writers' Association of America ("BBWAA") select award winners. Essentially, what the formula for WAR attempts to quantify is how many wins (positive WAR) or losses (negative WAR) a player’s performance is worth, relative to the average performing replacement level-player in MLB.[17]

The Potentially Problematic Use of WAR

Using WAR, however, is potentially problematic. WAR is both a proprietary and dynamic formula. Measures of WAR are not constant, since the formulas continually undergo recalculation to better quantify performance value in a game with ever-changing rules and circumstances. Further, WAR’s proprietary formula is created, used, and continually re-formulated by multiple non-MLB entities. MLB's website glossary alludes to three of the most common WAR formulations, from FanGraphs, Baseball Reference, and Baseball Prospectus.[18] Thus, there is no uniform WAR calculation. Further, it remains to be seen which WAR measure would be used and whether any of the entities promulgating WAR would want their statistic being the direct basis of an MLB player's compensation.

The Baseball Writers' Association of America

Adding further complication, season awards, the basis for potentially additional pre-arbitration eligibility compensation, are voted on by the BBWAA writers. This is significant given that the BBWAA writers, rightly or wrongly, often seem to take virtuous positions on certain votes, such as the Hall of Fame entrance for retired players. This offseason, the BBWAA writers collectively voted not to allow Barry Bonds and Roger Clemens into the Hall of Fame, two of the greatest statistical players the game has ever seen, for their perceived use of performance enhancing drugs.[19] The merits of such action is better covered in another article. However, for present purposes, it shows a general willingness on behalf of the BBWAA to consider non-performance circumstances in bestowing awards and recognition on players, which, given the structure of the proposed pre-arbitration compensation awards, would have additional financial implications for these pre-arbitration eligible players. This could be particularly impactful in an environment where young players are perceived to be more outspoken and brash than in years past. Conversely, it could motivate some BBWAA writers to vote for a pre-arbitration eligible player over a veteran player for a major season award such as MVP in order to provide some additional bonus compensation to a young player.

In any event, MLB and the Union are running out of time to agree on a new collective bargaining agreement. Without a new agreement in the very near future, the 2022 season may be delayed. Assuming, a new agreement is reached, it will certainly be interesting to see which long-standing rules of the game, such as the pre-arbitration system, undergo significant amendment.

Matthew D. Batista, Esq. is a transactional associate attorney in the San Diego of Klinedinst PC. His practice ranges from general corporate law, to M&A, intellectual property, and real estate across a range of industries, including sports & entertainment. Mr. Batista can be contacted at the following link https://klinedinstlaw.com/profiles/attorney/matthew-batista?all=1.

[1] See https://images.law.com/contrib/content/uploads/documents/389/152201/MLB-Antitrust.pdf (the Complaint). [2] See https://www.espn.com/mlb/story/_/id/33138890/hall-fame-voting-winners-losers-david-ortiz-gets-else-got-good-bad-news [3] https://www.mlb.com/glossary/transactions/contract-renewal [4] https://www.mlb.com/glossary/transactions/service-time [5] Id. [6] https://www.espn.com/mlb/story/_/id/28702734/mlb-raising-minimum-salary-minor-leaguers-2021 [7] The Basic Agreement 2017-2021 (the Collective Bargaining Agreement) can be accessed here: https://www.mlbplayers.com/cba; https://www.espn.com/mlb/story/_/id/28702734/mlb-raising-minimum-salary-minor-leaguers-2021 [8] http://m.mlb.com/glossary/transactions/contract-renewal [9] Assuming the player does not reach 'Super-Two Status,' also potentially under negotiation for a new collective bargaining agreement, see http://m.mlb.com/glossary/transactions/super-two; see also http://m.mlb.com/glossary/transactions/salary-arbitration [10] This assumes that the player and their Club don't agree to a contract that 'buys out' that player's arbitration eligibility; http://m.mlb.com/glossary/transactions/salary-arbitration [11] Though MLB compensation must at least reach the minimum threshold; see http://m.mlb.com/glossary/transactions/free-agency [12] See generally https://www.mlbtraderumors.com/2022/01/mlb-lockout-rumors-bonus-pool-pre-arbitration-minimum-salary.html; see also https://theathletic.com/news/mlb-willing-to-introduce-bonus-pool-for-pre-arbitration-players-but-at-fraction-of-mlbpa-proposal-sources/iZVNnxqa8cCt/ [13] See https://www.baseball-reference.com/players/j/judgeaa01.shtml [14] Id. [15] https://www.espn.com/mlb/story/_/id/31270164/average-mlb-salary-417-million-48-2019 [16] See https://www.mlbtraderumors.com/2022/01/mlb-lockout-rumors-bonus-pool-pre-arbitration-minimum-salary.html [17] See generally https://www.mlb.com/glossary/advanced-stats/wins-above-replacement [18] See Id. [19] See generally https://www.espn.com/mlb/story/_/id/33138890/hall-fame-voting-winners-losers-david-ortiz-gets-else-got-good-bad-news