Addressing the MLB’s Payroll Disparity

Photo courtesy of Dodger Blue.

For many baseball fans, the allure of Opening Day is up there with Thanksgiving and the Fourth of July. Spring is in the air, and all thirty fan bases are told that the coming season might be theirs to win it all. Yet, with the growing payroll disparity between MLB’s richest and poorest franchises, many teams – by virtue of their reduced spending capacity – did not have a legitimate shot to contend for a World Series when the 2023 season began a few weeks ago. Major League Baseball would be wise to address this issue with a salary cap, a floor, or both.

When teams finalized their rosters for this season, the Yankees, Mets, and Padres boasted payrolls as much as six times higher than the likes of the Orioles, Pirates, and A’s.[i] The Mets opening day payroll was $354 million; the A’s currently sits at just under $57 million.[ii]

Payroll is not entirely determinative of a team’s success, and smaller market teams can and sometimes do outperform their richer peers. The significantly-outspent Guardians forced the Yankees to a fifth game in last year’s ALDS, and the Rays have found a way to compete year in and year out despite losing countless big-name players once they hit free agency. There’s something to be said for a small-market team whose front office is able to have success given limited resources. Anyone familiar with the story behind Moneyball[iii] understands – at least in theory – the appeal of the little guy outsmarting and outplaying the proverbial Goliath in a playoff series.

Win totals are, however, strongly correlated with payroll, and the teams that spend more money usually win more games.[iv] This reality is nothing new, but the extent to which some teams spend money and other teams do not has grown in recent years. The reason for this is not entirely clear, but perhaps the analytics revolution is a good place to start. As teams have become more analytically advanced – exponentially so in the last five years – they are able to forecast their probability of success in an upcoming season with more and more precision. Given their current major league roster, minor league prospects, and future draft picks, teams can project how likely they are to make the playoffs or win a World Series.[v] If the playoffs are a long shot, the smaller market teams have to consider whether it’s a worthwhile investment to increase their payroll or essentially just wait until next year.

Teams are guaranteed considerable revenue through MLB’s revenue sharing system, but most of their revenue comes from ticket sales, concessions, and TV money.[vi] If the season is unlikely to result in success and these revenue streams are likely to be down, teams are better off – the thinking goes – saving some money in payroll and earning a higher draft pick the following season. “Tanking,” as the practice has come to be known, diminishes the on-field product and essentially takes teams out of the running before the first pitch is even thrown. The result is less fan buy-in and lower revenues when the season is over.  Ballparks might be half empty for months of the season, and even usually-devoted hometown fans may have trouble naming more than a handful of players on their team’s roster. The end result isn’t good for anyone.  

On the other end of the spectrum, the richest teams don’t have to worry about their bottom lines to the same extent and can spend as much as they want. Often the beneficiaries of extremely lucrative TV deals, these teams have the resources to go after as many high-priced free agents as they see fit. The recent addition of multibillionaire team owners like Steve Cohen of the Mets gives some teams essentially limitless resources to spend on players.

So, what has Major League Baseball done to address this? Not all that much. Since 1997, the league has had a competitive balance tax (often known as the “luxury tax”) which imposes a penalty on teams that spend over a certain amount in a given year on payroll. The tax does make owners pause before exceeding the threshold, but many teams are still willing to do it. Six teams did so last year, despite paying steep penalties as a consequence. The threshold is also set so high – with no penalties before $230 million – that teams can vastly outspend other teams and not face any tax in most cases.

In the most recent Collective Bargaining Agreement, MLB and the players union agreed that payroll disparity (the tanking issue in particular) needed to be addressed. But the solutions were far from radical, and the problem is likely to persist. The top-six draft picks are determined by lottery, and more teams make the playoffs now than ever before; teams should theoretically have less of an incentive to tank with these new rules in place.[vii] If, however, this offseason’s free agent signings (or the nearly complete absence of any for some franchises) are any indication, the problem has not been solved.

Baseball has long been unique among the other major sports leagues in that it lacks a traditional salary cap or salary floor. While there are certain nuances that distinguish the “soft” cap in the NBA versus the “hard” caps in the NFL and NHL, teams in those leagues more or less have to set their payroll in line with their peers. Teams either cannot or are discouraged from spending too much, and there are also penalties for spending too little.[viii] The vast payroll discrepancies that are abundant in the MLB are much harder to come by in the other major professional sports leagues.

While it likely wouldn’t happen until the CBA expires a number of years from now, MLB should seriously consider implementing both a cap and a floor to try and level the playing field. The cap would ensure that more than a handful of teams are competing for the best free agents and would help to limit the super teams – at least on paper – that we’ve come to know in New York and Los Angeles. Just as importantly, the floor would eliminate tanking by forcing teams to put together a respectable roster regardless of what their offseason projections might look like. Big market teams would almost certainly resist the cap, and small market teams would want a larger piece of the revenue sharing pie in order to bring their payrolls up to the floor. Owners of such teams might complain that they cannot turn a profit having to spend so much money in a smaller market. The latest valuations that list every MLB team at over $1 billion, however, would suggest that these teams are likely doing better than they’re letting on.[ix] The players union might be divided, too. A cap could reduce the earning potential of top-tier superstars, but the floor would help ensure a market for second-rate free agents.

Coming to an agreement would clearly not be easy, but the clubs and players should understand that the long-term health of the sport is on the line. The league recognized the importance of attracting a younger audience in ensuring the future wellbeing of the sport and was willing to implement significant rule changes prior to this season.[x] The league should view the payroll disparity and the competitive imbalance with a similar sense of urgency so that fans of all teams can look forward to Opening Day in a meaningful way.  

[i] MLB Team Payrolls, USAToday, Scott Boek

[ii] Id.

[iii] Lewis, Michael. Moneyball. WW Norton, 2004.

[iv] The Strong Connection Between MLB Payrolls and Wins, AXIOS, Kendall Baker.

[v] Which Advanced Metrics Matter Both to Front Offices and The General Public, TheAthletic, Lindsey Adler.

[vi] How Major League baseball Could Crack 11 Billion in Revenues in 2022, FORBES, Maury Brown.

[vii]MLB, MLBPA agree to new CBA; season to start April 7, MLBNews, Mark Feinsad

[viii] NFL Salary Cap Rules Explained, FoxBusiness, Thomas Barrabi.

[ix] 2023 MLB Team Value Rankings, SPORTICO.

[x] Pitch timer, shift restrictions among announced rule changes for '23, MLBNews, Anthony Castrovince.