Exploring the Correlation Between Winning and MLB Salaries: Part I

This is Part I of a three-part series. This section serves as an introduction to the other two sections. It also provides background on the history of free agency. 

Money doesn’t buy happiness, but does it bring rings? We'll unveil the data of money and championships in Part II of this series. 

In Part III of this series, we’ll explore the concept of “Moneyball,” and determine if the movie got it right.

Picture a world where an employer controls an employee for the duration of his working life. The employee doesn't have to worry about his long-term status with the company. Sounds like a good deal, right?

What if that employer also severely underpays the employee and can send him to another company without interjection. Doesn't sound as good.

MLB operated like this for nearly a century under the old reserve clause. The reserve clause allowed teams to indefinitely keep their existing players prior to the free agency era.

This system hurt player contracts because they didn’t have the right to an open market. The only way that a player could become a free agent was if the player was given “unconditional release,” which means the team doesn’t want the player anymore. The player could also change teams in the current one decides to trade him.

In 1970, owners and players agreed to the 10/5 rule, meaning that a player with 10 service years, including five with the current team, has the right to veto any trade. While that only applies to a few players, others have no-trade clauses in their contracts. Five years later, free agency replaced the reserve clause system which was practiced since the late 1800s. 

Free agency sparked a fear that contracts would balloon into amounts owners couldn't afford. To this day, an often-cited problem with the game is the skyrocketing contracts, all guaranteed. For example, stars Robinson Cano and Albert Pujols recently signed $240 million contracts. Alex Rodriquez has made nearly half a billion in his career.

Still, some players don't receive their true value because signing top-tier free agents can cause that team to lose a first-round draft pick. 

For all of these mega-deals, many more players are bound to small minor league contracts, where they lack union protection under MLB's collective bargaining agreement. Former minor league players have filed a class action lawsuit saying their wages didn't meet legal standards. 

This isn’t like the NBA or the NFL where draftees instantly make the team and can become free agents after four seasons. In MLB, it takes six years of service to become a free agent. And that’s if they make it to the big leagues.

About one-third of all first-round picks and half of second-round picks never make it to the majors, according to my analysis of the MLB draft from 1976-2005.

Teams are spending more than ever before on player contracts. In addition to free agents, teams are locking up younger players to long-term deals, buying out arbitration and free agent years, effectively closing the market on the player.

In 2014, 18 teams had a record opening day payroll, although adjusting for inflation that figure drops to eight or nine. Those teams are the San Diego Padres, Toronto Blue Jays, Milwaukee Brewers, San Francisco Giants, Cincinnati Reds, Kansas City Royals, Washington/Montreal Nationals/Expos, Detroit Tigers, and possibly the Colorado Rockies, depending on the final 2014 CPI. 

Here is the source where I found opening day payrolls. I’ve seen differing totals everywhere, but the 2014 totals are also here, and 2013 here.

The average team had $103 million on its opening day payroll in 2013, which is an 85.6 percent nominal increase from 2000. Adjusting for inflation (CPI), it’s really a 37.2 percent increase in that period.

Here’s the full chart:  

The only time CPI decreased from 2000-13 was in 2009, when the recession hit. MLB contracts have increased at a relatively fast pace. 

To move on any further in this series, it's important to understand a few concepts.

R-square… I’ll be using a lot of scatter plots in Part II and III. Basically, R-square is the amount of variability explained by a best-fit curve. The higher the R-square (which ranges from 0 to 1), the more the curve explains the data. An R-square of .9 would explain 90 percent of the variability from the data.

Payroll Rank… This is just where a team ranked in amount of money on its opening day payroll. Because there are 30 teams in MLB, the average payroll rank is 15.5.

Here is a chart displaying the correlation between payroll rank and inflation-adjusted opening day payrolls from 2000-13:

The R-square of this chart (.8891) and correlation (-.908) is pretty good. Don't worry about the negative correlation; all that means is this graph has a negative slope. Not shown, but I’ve also plotted unadjusted payroll dollars. The R-square was (.772) and the correlation (-.8443) which means we’ve explained half of the variability that we previously could not explain with this new chart. The 11 percent which we currently cannot explain is likely because salaries have increased faster than inflation.

MLB Standing … I don’t break ties when doing MLB standings. If the New York Yankees and Boston Red Sox both finish with the best record in MLB, they both finished in 1.5^th place, because 1.5 is the middle between 1 and 2. MLB, and any other sports organization, has arbitrary tie-breakers. If three teams finish with the best record, then they’re all in second (1 + 2 + 3) / 3 = 2. This is done so the average MLB standing is 15.5. 

Here is the scatter between MLB standing and win percentage, from 2000-13:

All I can say is too bad Seattle. The Mariners are the top outlier in this scatter. They won an MLB-record 116 games in 2001, and did NOT win the World Series. This graph is on point until about 29^th in MLB standing. It’s hard to predict how bad the worst team in MLB will be.

Check back for further installments on this three part series.