Should baseball go to a pay-for-performance model?

With spring training right around the corner, over a hundred significant free agents remain unsigned, including the two marquee free agents of this off-season - Bryce Harper and Manny Machado. Whether it is due to analytics showing teams the folly of free agency, or outright collusion, there has been a fundamental shift in the perception of free agency which has caused two consecutive inactive off-seasons.

The glacial pace of the off-season has brought up deep concerns about the business of baseball, in particular, how players are paid. For the owners, the concern is that guaranteed contracts tie up too much money in players that are on the decline. For the players, the problem is that they receive far below market value salaries for their first six years of the big leagues before they are eligible to test free agency.

One possible solution to this problem is to move from a model that gives guaranteed contracts to one that relies more on pay-for-performance. This isn’t a completely new idea. Following the 1989 season, baseball owners presented a plan to pay players not yet eligible for free agency based on performance. Working on a committee to examine the proposal was a lawyer by the name or Rob Manfred. The system was tied to other proposals limiting free agency including a salary cap. Because of that, it was shot down by union chief Donald Fehr, leading to a lockout of the players that wiped out spring training that year.

‘’Baseball players are more than the sum of their statistics, and their statistics are affected by more things than you can take into account in generating the numbers to make that possible.”

-Donald Fehr

There were also concerns a “pay-for-performance” model would lead to players going for the fences all the time, and spurning calls by their manager to sacrifice bunt. The model was decried for not incorporating defense and being unfair for pitchers, who relied on wins, which weren’t always within their control.

Of course, players swing for the fences all the time now even with guaranteed deals. There are a number of widely accepted defensive metrics. And pitcher wins is widely understood as a statistic that doesn’t accurately measure a pitcher. We also have a widely-used metric that encapsulates a player’s value in Wins Above Replacement Value (WAR). While it is true that WAR would not capture “intangibles”, those tend not to be particularly rewarded in the current system either.

How would a pay-for-performance model based on WAR work? The exact numbers and formula for WAR would have to be negotiated between the union and owners. A very rough estimate is that with $10 billion in MLB revenues, about half should go to players, or $5 billion. There are always 1,000 WAR in a season, putting the value of 1 WAR to be $5 million.

You would still need to have some base pay, for players that were replacement-level or worse, or were injured for the season. I would recomend a base pay of $500,000 for players in their first and second year of service time, $1 million for players in their third and fourth year of service time, and $2 million for players in their fifth and sixth year of service time. You could subtract the cost of the total base pay salaries from the $5 billion owed to players (there are also pension payments and other costs to account for), and revise the dollar-per-WAR down so that players still get 50% - let’s estimate it at $4 million per 1 WAR for the purposes of illusration.

On top of the base pay, a player would be owed $4 million per WAR based on his performance that year. The antiquated arbitration system which rewards service time over production would be completely eliminated. There would be no reason to game the system for service time (except to move back free agency and that could be remedied somewhat by making it either 5.5 or 6.5 seasons of service time to be eligible for free agency). There is also no reason why you couldn’t have a player’s base pay go up as soon as he hits the service time threshold, even if it is in the middle of a season.

So for a player like Whit Merrifield in his second year of service time, he would have a base pay of $500,000, but would get in effect, a bonus at the end of the year based on his 5.2 WAR, an amount that would total $20.8 million for a total salary of $21.3 million. Could there be possible sticker shock for teams that see they have to suddenly pay a player $20 million at the end of the year? Perhaps. But teams can mitigate some of that volatility by offering more long-term deals, like the one Merrifield received. Only now those players will have more leverage to get something closer to market value.

What about veterans who have reached free agency and are enjoying guaranteed contracts? They can still enjoy guaranteed contracts, but teams should be encouraged to move to a more incentive-based model. Right now, teams are not allowed to offer contracts based on performance-based incentives, instead the only incentives allowed to be offered are for playing time (i.e. $1 million for reaching 500 plate appearances) or receiving awards.

Teams should instead be allowed - and even encouraged - to offer veterans a base salary plus incentives based on WAR. The player could potentially make even more money than a guaranteed deal if they produce, but if they fail to, they would get just their base salary (there could be a veteran base salary minimum). With teams shying away from big-time free agent deals, allowing more flexibility and incentivized deals could help thaw the spending freeze.

There would be complications of course, particularly in the transition. Teams would be asked to spend a lot more money on pre-free agency players while still having guaranteed contracts on the books. So perhaps the dollar-per-WAR payments will have to start out at a lower level and be incrementally increased as those big dollar contracts expire. And players who are now reaching free agency missed out on potentially lucrative paydays as they enter a lower-pay free agency period, so perhaps there could be some sort of compensatory fund for them. Certainly the numbers would have to be negotiated on and even re-adjusted each year. And there could be problems with players complaining about how they are used that doesn’t max out their WAR - and thus pay - potential.

But this would get both sides more of what they want. Players get rewarded more handsomely for their most productive seasons. Teams get more flexibility with unproductive, older players. This free agent period has been difficult for baseball fans, but perhaps one good thing that comes out of it is a complete re-examination of how baseball does business. And it may be time for a new model.