The Captain's Blog

The Dodgers came within one game of winning the World Series, but they didn’t fall short in the final MLB payroll rankings. For the fourth straight year, Los Angeles led all teams with nearly $247 million spent on players, widening its lead over the Yankees as the sport’s top spender.

2017 Final MLB Payrolls

Note: Final payrolls encompass the 40-man rosters and include salaries, incentive bonuses, and pro-rated shares of signing bonuses, present value of deferred payments, buyouts and other cash payments and non-cash compensation.  These payrolls ARE NOT AAV valuations used for luxury tax purposes.
Source: MLB release published by AP

The Bronx Bombers may still be smarting over their loss to the Astros in the ALCS, but you can bet Hal Steinbrenner doesn’t mind looking up at the Dodgers’ payroll. In 2017, the Yankees trimmed their payroll by over 7% to $208.4 million, their lowest total since 2006. And, they weren’t alone among big market teams who tightened their belts last year. Even the Dodgers’ shed over 4%, joining the Red Sox and Tigers as other high payroll teams seeking a little relief.

Year-Over-Year Payroll Changes (Final), 2017 vs. 2016

Note: Final payrolls encompass the 40-man rosters and include salaries, incentive bonuses, and pro-rated shares of signing bonuses, present value of deferred payments, buyouts and other cash payments and non-cash compensation.  These payrolls ARE NOT AAV valuations used for luxury tax purposes.
Source: MLB release published by AP

Having big market teams cut back seems like bad news for the players, but only nine of the 30 clubs recorded a reduction in player expenses, including three teams (White Sox, Padres, Athletics) in the midst of a rebuilding plan. The rest of the league spent more on payroll in 2017, with, ironically, the Miami Marlins recording the largest jump at 44%. Eight other teams saw double-digit increases in payroll, including the World Champion Astros, who reported their fourth straight bump of at least 25%.

2017 Players’ Share of MLB Revenue
Notes: Revenue is net of stadium debt service (MLB reports “over $10 billion in gross revenue“). For 2017E, revenue is estimated as 7.1% greater than Forbes 2016 calculation (the average of the previous two years’ growth). All other 2017 data are actual. Total compensation is actual payroll + player benefit costs + players’ share of the postseason revenue pool. For pre-2015, benefit costs were determined by working backward from the known 2015 amount and assuming a 4% growth rate (CBA calls for increases up to 10%).
Source: MLB releases published by AP (actual payroll, post season revenue), baseball-almanac (older postseason revenue) and Forbes (net revenue)

In total, teams spent $4.2 billion on current payrolls, which include salaries, earned bonuses, pro-rated shares of signing bonuses and deferred payments applied to the current year. That represented a 4% increase over 2016, a deceleration from recent seasons, but the continuation of an upward trend. When combined with the $408 million players receive in benefits and $84.5 million cut of post season receipts, the players’ share of the MLB revenue topped $4.7 billion (excluding other items that may not be factored into payroll calculations). That compares to gross revenue of “over $10 billion” and a 2017 net revenue estimate of $9.6 billion (see footnote under chart above), indicating that players continue to hover around an even split of the industry pie.

Year-Over-Year Payroll Changes (AAV), 2017 vs. 2016

Note: Based on Average annual value of contracts plus pro-rated items, earned bonuses, and defined benefits of $13,606,000 (vs. $12,953,201 for 2016), which, according to AP, includes items such as health and pension benefits; club medical costs; insurance; workman’s compensation, payroll, unemployment and Social Security taxes; spring training allowances; meal and tip money; All-Star game expenses; travel and moving expenses; postseason pay; and college scholarships.
Source: MLB releases published by AP

In addition to reporting final 2017 payrolls, MLB also released the AAV versions used to calculate the luxury tax. The Dodgers and Yankees sat atop that list as well, and were joined by the Giants, Tigers and Nationals above the $195 million tax threshold. AAV payrolls do not represent actual amounts paid during the current year, but they may be a better indicator of teams’ future spending intentions. In 2017, AAV payrolls increased 3.3%, which lagged real payrolls, but accelerated from the 2.5% rise in 2016 (see here for the 2016/2015 AAV changes). Although big market AAVs were suppressed, as expected, large increases by teams not approaching the tax threshold more than made up the difference. This is a trend that could continue in 2018 as the baseball world salivates over an epic free agent class next winter.

Year-by-Year Luxury Tax Payments by Team

Note: Baseball’s first luxury tax was in force from 1997-1999. The current system was instituted in 2003.
Source: bizofbaseball.com and MLB releases published by AP

According to official numbers released by the commissioner’s office and reported by the Associated Press, five teams were required to pay the competitive balance tax (CBT) in 2017, led once again by the Dodgers and Yankees. In total, a tax of $61.2 million was assessed, representing the third highest amount collected in the tax’ history, but continuing a trend of decline since the peak in 2015.

Once again, the Dodgers faced the highest tax bill. The team’s payment of $36.2 million was also the second highest levy since the CBT was started and more than doubled the Yankees’ assessment. Although the Dodgers have been the most heavily taxed team over the past three years, the Bronx Bombers have still paid the most since the first payroll penalty was instituted in 1997. Over that span, the Yankees have paid a tax of approximately $350 million, or 60% of the total.

Percentage of Luxury Taxes Paid Since Inception

Note: Baseball’s first luxury tax was in force from 1997-1999. The current system was instituted in 2003.
Source: bizofbaseball.com and MLB releases published by AP

Since 2013, the Dodgers and Yankees have paid a combined $276 million in luxury tax, or nearly half of the amount collected in 20 years. However, in 2018, both teams are on track to either significantly reduce their tax, or eliminate it altogether. Thanks to a monster free agent class in 2018, as well as a more punitive tax system implemented with the most recent CBA, baseball’s two biggest spenders have been actively seeking to trim payroll below next year’s threshold of $197 million.

The luxury tax has clearly become more punitive. Not only have rates risen, and surcharges been added, but penalties related to draft picks and international bonus pools have also been incorporated. So, it’s not surprising to see teams operate with more deference to the threshold. This has led some to suggest the MLB Players Association (MLBPA) flubbed the last CBA negotiation, but concerns over the players inadvertently agreeing to a quasi-hard cap seem misguided without context.

For starters, as noted above, current payrolls increased by 4% in 2017, the first year of the new CBA.  Although that was down about 0.5 percentage points from 2016, and represented the smallest increase since 2011, there are some caveats hidden in the numbers.

As mentioned, if big market teams are gearing up for a shopping spree in 2018, and not cutting back as a new course of business, then a more robust increase in player payrolls may simply be deferred by one year. With the spending levels for some teams becoming more choppy, a final analysis of the CBA’s impact on salary growth will require a look at the whole picture, not one year.

Another mitigation is the increasing trend of backloading contracts. For example, when Giancarlo Stanton signed his mega-deal in 2015, the largest payments were structured at the end of the contract. The result is to deflate annual salary growth in the short term. Beginning in 2018, however, Stanton’s salary increases exponentially, nearly doubling from last year’s amount. As backloading becomes more common, this effect should cancel out, but for now, it may be having a deflationary impact on reported payrolls.

The new international signing rules are another drag on payroll, but, in this case, the MLBPA probably doesn’t mind. Under the old posting rules, Shohei Ohtani probably would have commanded a salary well in excess of $20 million, but now the two-way wonder will only kick in the league minimum when final payrolls are calculated. That might seem like a big loss for the MLBPA, but until he signed his contract, Ohtani wasn’t actually a member of the organization. If paying Ohtani less means teams have more to spend on current MLBPA members, the union might not mind if the teams come out ahead when signing international and amateur players.

There are many nuances to baseball’s economic picture. The lack of transparency combined with arcane accounting rules make a deep dive into the game’s financials a challenging task. But, at least on the surface, the business appears to be very healthy. With a CBA that doesn’t expire until 2021, there’s lots of time to determine who got the better of the negotiations. In the meantime, both the players and owners are likely to get much richer before we find out.