THE BOOK--Playing The Percentages In Baseball

Market cap may be the wrong measure to use here.  Market cap is based on future earnings.  So a company that is losing money may have a high market cap, because investors are betting it will make a lot of money in the future.  MLB is actually making money right now, and even gets the government to pay for most of its infrastructure.  I agree that the next commissioner will make a lot less, but will ramp up to Selig’s level very quickly if the game continues to rake in the money.

How about this math:

Practically anybody could do what Selig does. 

The average working guy in Milwaukee, where I guess Selig lives, makes $35,644 a year (http://www.simplyhired.com/a/local-jobs/city/l-Milwaukee,+WI).

$18,000,000 - $35,644 = Selig overpaid by $17,964,356.

Selig is a replacement-level commissioner!

David/1 - you forget about the effects of the anti-trust exemption.  Only a limited number of businesses may operate as a cartel and restrain inter-state commerce.  What would happen if you gave that exemption to e.g just 30 grocery store chains?  Would future revenue projections not be much higher?

If Selig was paid 50MM a year, would he be overpaid?  How about 100MM?  If he was paid 1MM, would he be underpaid?  How about at 250K?

I’ve come up with a way to align his salary, by using the market cap of the 30 teams, to the market cap of american businesses.  (Indeed, this may even inflate his value, since he is not really a CEO of a conglomerate.)

Anyway, for those who insist that 18MM is the “right” number without supporting your opinion with evidence or a framework, then tell me at what point you think he’s “probably overpaid” and at what point you think he’s “probably underpaid”.

This was a comment on David Pinto’s site:

Paid for results? everybody was making money in the bubble, you pay premium because you cant find that quality elsewhere, you would have to be pretty delusional to think that MLB wouldnt have done just as well with somebody else qualified making 1 or 2 mil. The sense of entitlement and out of whack compensation ideals that go on in the US are laughable. These are not players getting paid market price, these are executives for which there is a pretty large talent pool of business savy people making 100k-250k that could produce as well. But arent old boys....

I agree with that sentiment, opinion, and logic wholeheartedly.  While an employee’s compensation is often related to a company’s profits, there are many more important variables in that equation.  Simply put, an employee’s compensation is significantly related to his MRP, as was discussed ad nauseum in the Francouer/JC thread.  The problem/issue here is figuring Selig’s MRP, as compared to some baseline.  The reason you have to compare it to some baseline, as the “replacement” argument goes in determining the proper value of player salaries, is this:

What if a person - an employee or CEO or whatever, somehow produces X revenue for a company - sort of like JC proposes for the player who just “shows up” and therefore is responsible for his pro-rated share of a team’s revenue, but his skill level is so low that just about anyone (or some large pool of people) can do the same thing?  Then supply and demand will enable you to pay that person very little money as compared to their theoretical MRP.

So the question is two-fold here before we can even begin to estimate Selig’s worth:  One, how much marginal revenue does he actually provide to MLB, and two, how much revenue does he provide as compared to a “replacement-level” commissioner?

The total amount of revenue or profit that MLB produces is a small and incomplete piece of the puzzle in determining Selig’s worth.  He does not own the company.  He is merely an employee, albeit an important one (presumably).

Why should we care how much money MLB is making any more than we would care about that in determining the proper salary for the guy who cleans their offices?

Selig is an employee.  First we determine how much value he provides the company (his MRP I guess) and then we determine how much value a “replacement level” person would do in the same position (essentially we are determining the pool of persons who could do a similar job).

Then, and only then, can we even begin to estimate what he is worth.

It is fine to compare MLB to other similar companies to determine a theoretical range of “going rate” salaries for a CEO (commissioner in this case).  But even that is incomplete.  It is entirely possible that many, most, or all of those CEO’s are overpaid (according to some objective criteria), even though “going rate” is “going rate.” After all, the question, “Is Selig overpaid” does not have to mean, “According to the going rate.” There may be flaws and biases in the corporate system such that ALL CEO’s are overpaid (certainly some of them are), using some non-tautological and circular criteria, other than, “What is the going rate?” The other important question, even if you compare MLB to other companies, is, “Is Selig doing a comparable job to those other CEO’s?” And the answer is certainly not necessarily, “Yes.” All you are doing when you compare MLB to other companies is determining what a similarly skilled CEO for MLB should make, not what Selig himself should make.

Just like a team that wins 95 games does not necessarily do that as a result of some managerial skill, just because MLB is making record profits these days, by no means does that necessarily mean that Selig is wholly or even significantly responsible for that.  Certainly a thorough assessment of his skills and his responsibility in MLB’s record profits have to be part of the equation, no?

CEO’s are not magically entitled to a gigantic share of a company’s profits any more than the CFO, president, or floor sweeper is entitled to that.  By that logic (that Selig is entitled to some gigantic salary because MLB is doing so well), shouldn’t the manager, CEO, President, GM, or some other executives of the teams be entitled to the same gigantic portion of that team’s profits?  You can “say” that Selig “runs MLB” or that the CEO of the Yankees “runs” the Yankees, but that simply is not true.  Selig is an employee - so is the CEO or the President of the Red Sox or the Yankees.  They may or may not be technically at the top of the employee chain of command, but they are still one employee among many that enable and are responsible for the company earning a profit.  And again, it all boils down to competence and supply and demand.

Finally, if I own a company which makes a boatload of money, and I hire my idiot brother-in-law to “run” the company, is he automatically entitled to earn a gigantic salary?  I say no.  And we have no idea whether Selig is not that idiot brother-in-law (or something in between that and a world class CEO).

Screw it.  I’m 27 years old and I watch friggin Wheel of Fortune on a 42 inch television, while there’s people living in homeless shelters just a few miles from my front door.  I’m overpaid.  Selig’s overpaid.  And anyone else on this site, who’s commenting here while they’re at work, is overpaid.  Power to him (Selig) for making so much that it inspires people to post about it.

In my brief time in corporate America, my honest observation of compensation is that it’s up to every individual to get as much as he or she possibly can.  Every extra dollar that my CEO is paying me is essentially coming out of his pocket; I can make a pretty rational case in my mind for being better served by those additional dollars than he would be.

There’s always going to be people that are overpaid and underpaid, and it’s almost impossible to know for sure who they are and by how much.  Look at all the performance data we have on MLB players, and we still can’t actually assign a value to them that everyone agrees on.  So given that we’ll never know how much someone is worth, I don’t think we can fault people for negotiating as high a salary as they’re able.

didnt the market just determine selig’s salary?  if the owners could get anyone, or no one, to do selig’s job they why dont they do that and just whack the 18 mil up amongst themselves?

the owners may have miscalculated selig’s worth to their franchises but it’s not like anyone had a gun to their heads.

also on a semi related tangent brought up by #3, MLB’s anti-trust exemption gets brought up a lot when it comes to how MLB and the owners make money, but what is it really worth to them?  if congress took away the exemption tomorrow, would anything change?  MLB has a monopoly on baseball talent but they dont have anything close to a monopoly on athletic talent and competes with other sports leagues and other entertainment period for eyeballs, ad dollars an discretionary cash. would consumers and baseball fans be better without the exemption?  im not saying i know the answer but i have yet to hear about anything that describes the tangible affect of the exemption on baseball.

kendynamo/7: There are lots of things that would change as soon as the anti-trust exemption was lifted:

1) Minor-league baseball team relocation to major markets.  At present, MLB controls the locations on minor-league teams.

2) Major-league teams moving into other teams’ territorial markets - eg: Oakland to San Jose.

3) I’m guessing Mark Cuban would own the Cubs.

4) Teams could make merchandising deals with any company.  Steinbrenner booked a deal with Adidas

5) There’s no effect now, bit in past, MLB would have been liable for triple damages for collusion.  Unlike other leagues, collusion is not actually illegal for baseball - it’s just banned by the CBA.

6) Most significantly, the system of controlling young players would be in trouble.  The slotting system would be challenged as an anti-trust action.  Or forcing a non-union member (most minor leaguers) to play for one given organization.  There’s some possibility that any given player could sue to make himself a free agent, which could then invalidate the draft, the minor-league system and the salary structure for players with less than six years of experience.

7) Could we see a situation where high-revenue teams - Yankees, Mets, Dodgers, Cubs, Red Sox and a few others broke off and formed a separate league?  Suppose the luxury tax was more onerous?  Right now, MLB has exclusive baseball broadcasting rights with ESPN, Fox and pretty much every other network.  With the anti-trust exemption, they could block the new league from having its games televised.

hawerchuk: are any of those things illegal activities according to the sherman anti-trust act?  1-4 are, to my understanding, just rules that all owners mutually agree to abide by.  they would still be in place if the anti-trust exemption is lifted.  5-6 and any other labor disputes are all controlled by the CBA and the anti-trust doesnt come into play. i dont get how MLB could block another league from getting on tv like you say in 7. 

my understanding of the anti-trust ruling is far from complete but wasn’t it used to legitimize MLB’s labor policies of the past which were obviated by the 1975 CBA?  now what does it do?  other baseball leagues can start if they want.

#1 and #4 are definitely anti-trust violations.  #2 is questionable - other leagues do it, and presumably nobody wants to sue for it.  #3, we don’t have enough details - but certainly MLB’s interference in the Giants’ sale and move to Tampa threatened the anti-trust exemption.

#5 - if you are covered by the anti-trust act, I believe it takes precedence over any other agreement you might sign.

#6 - I don’t know enough about how the law affects the draft and free agency in other sports, but baseball has far more latitude due to the exemption.

#7 - MLB could act to force ESPN and Fox to not televise the games of the other league.  If the NFL did that, it could be sued (though as we saw with the USFL, damages would not represent the real loss of revenue.)

Anyways, my original point was that baseball doesn’t operate by the same rules as the vast majority of businesses in the country and can guarantee revenue by acting in ways that would cost other businesses quite a bit in court.

though i am not any kind of expert on this, i dont see the sherman act having any real affect on the issues you brought up.  for example, in #1, minor league teams willingly enter into agreements with MLB teams.  plenty of independent leagues exist that can do whatever they want and play in markets claimed by MLB teams.  St. Paul, MN and Newark, NJ have teams, or at least did last time i checked.  as for drafted players, then can play in other baseball leagues or play different sports outside of the domain of MLB should they choose to.

if MLB had no exemption, i dont see why they couldnt do everything they are doing now.  assuming they didn’t and an action wasn’t “covered” by the sherman act, what would compel them to stop?  someone would have to sue and then the DOJ would have to take up the case and then rule against MLB and in the interest of consumers. but who would sue?  fans?  players?  owners?  other leagues?  they’re all willfully entering into legally binding contracts like everyone else in the business world.  so again, i hear about how baseball operates under different rules but i have yet to see an instance where the sherman act, as it’s currently applied, would force MLB to break up it’s “monopoly” or operate differently.

Without the anti-trust exemption, and individual player or minor-league owner could theoretically bring down the entire system with a lawsuit.  The practical implication for the moment is that MLB has to compensate owners a bit less than the other sports do when they operate in violation of the anti-trust Act.

can you give an example?  what would they be suing over (assuming exemption is stripped)?  what is MLB doing now (specifically) that would be illegal without the exemption?  why arent other sports leagues that have no exemption being sued for doing that same thing?  while googling up on the topic i found this to be pretty intesting:

http://works.bepress.com/mitchell_nathanson/3/