Next week, TPOP is going to rolling out our updated Prospect Surplus Values model. As with any model, it must constantly be tweaked as new information comes available and tested for legitimacy. I’m examining every aspect of the model, from front to back.
While discussing the project with Dave Cameron of Fangraphs, he mentioned that I may want to look into the arbitration percentages for players in their arbitration years. Previously, I used the rule-of-thumb 40-60-80% of potential free agent value that had been widely accepted and propagated. Considering how key of an aspect these rates are in the surplus value formula, I felt it was worth the time and effort.
To do this, I used the indispensable Cot’s Contracts and combed through each franchise’s roster. I pulled out every player that went through arbitration all three times (or four, I did this for Super 2, as well) and then signed a free agent contract after. Any player that started out in arbitration, but then signed an extension that bought out free agent years was ruled out, as these extensions are meant to suppress both arbitration year costs and especially free agent year salaries.
I found 38 such players, which isn’t a huge sample but it’s large enough to have a degree of confidence in the results. Those results are tabulated below. The first three columns after the player’s name are the salaries they received during arbitration years. The next column is the average annual value of their free agent contract. The final three columns are the percentages of the arbitration years, as they relate to the free agent contract.
|Player||Arb 1 ($, in M)||Arb 2 ($, in M)||Arb 3 ($, in M)||FA Avg Value ($, in M)||Arb 1 % of FA||Arb 2 % of FA||Arb 3 % of FA|
|Alejandro de Aza||2.075||4.25||5||5.75||0.36||0.74||0.87|
|Jorge de la Rosa||1.025||2||5.6||10.75||0.1||0.19||0.52|
A couple notes of interest:
- Jason Vargas and Neftali Feliz both signed free agent contracts that were lower than their last year of arbitration, mostly due to injury/ineffectiveness. I contemplated tossing them out, but felt it would be disingenuous to the data, so they remain as a counterbalance to some of the other lower deals.
- Jose Bautista appears to be criminally underpaid in his arb years, but remember that things didn’t click for him in Toronto until the very end of his arb-2 year. By that time, his body of work suppressed his arb-3 award.
As you can see by the bottom line, the averages come out to 25/40/62%, a far cry from the rule-of-thumb of 40/60/80%. For simplicity purposes, I’ll be referring to the rates going forward as 25/40/60.
I repeated the same exercise for the Super 2 players. As you can imagine, there are far fewer samples to choose from. But there’s still 14 and we’ve gone this far down the rabbit hole, so let’s examine these as well:
|Player||Arb 1 ($, in M)||Arb 2 ($, in M)||Arb 3 ($, in M)||Arb 4 ($, in M)||FA Avg Value ($, in M)||Arb 1 % of FA||Arb 2 % of FA||Arb 3 % of FA||Arb 4 % of FA|
In this case, the precursor rule-of-thumb of 20/40/60/80% was a little bit more on target with our results, but it still will be referred to (by me, at least) as 20/33/50/70% for Super 2 players.
So to utilize this information, select a player entering in the arbitration process and guesstimate how many WAR you think that player will be worth at the potential age of his free agency. Multiply that by $8M/WAR and then calculate backwards his potential arbitration salary accordingly. Naturally, that just gets you a ballpark figure, as you’ll want to establish a set of comparable players for him, too.
It can also be used in reverse. Let’s use everyone’s favorite pitcher, Jeff Locke, who was recently awarded a shade over $3M in arbitration. By this metric, Locke would be worth $12M on the open market as a free agent. Yes, that seems outrageous, but #4-level pitchers routinely gets $12M/year on the market nowadays, especially with the inflated cost of pitching. Chris Young signed with the Royals for 2 yr/$23M ($11.5M/year) and JA Happ signed for 3 yr/$36M ($12M/year). Number 3-level pitchers, such as Mike Leake, now get $16M/year. A true arms race, indeed. Going back to Locke, using that $12M baseline, we can pencil in his last two arbitration years as potentially $4.8M (40% of $12M) and $7.2M (60% of $12M). If you thought people got their hackles up over Locke at $3M, imagine the sturm and drang over those salaries.