MLB Payroll Efficiency, 2006-2008
The Commissioner's Office released the final baseball payrolls for 2008 in late December. Not surprisingly, the New York Yankees spent $75 million more than the next highest team (Boston Red Sox) and $126 million over the average MLB team.
Last year, in an effort to analyze payroll efficiency, I created a graph with payroll on the y-axis and wins on the x-axis. I added a positively sloping trendline and four quadrants to provide a visual aid in determining the most and least efficient teams in terms of payrolls and wins.
Rob Neyer suggested that I plot this same information using multiple seasons, "as that would give us a better idea of the franchises' general competence over a period of years." With the foregoing in mind, I did just that. Thanks to data provided by Maury Brown at the Biz of Baseball, I added up the player payrolls and wins for the previous three seasons and divided them by three to get an average of each.
The two tables below detail the average payrolls and win totals, sorted by the former on the left and the latter on the right. The average payroll works out to $89.86M, which means MLB has spent an average of approximately $2.7 billion in each of the past three years (for a grand total in excess of $8 billion).
Payrolls cover the 40-man rosters and include salaries and prorated shares of signing bonuses, earned incentive bonuses, non-cash compensation, buyouts of unexercised options and cash transactions. In some cases, parts of salaries that are deferred are discounted to reflect present-day values. Luxury taxes are not part of these payroll figures nor are the posting fees for Japanese players.
As shown, the Yankees led the majors in payroll over the 2006-2008 seasons, spending $70M more than the Red Sox and $126M over the average team. Nonetheless, the Los Angeles Angels have won more games than any other club during this same period, followed by the Yankees, Red Sox, and Mets. These four franchises were the only ones to average 90 or more victories the past three campaigns. Of note, the Bronx Bombers have spent $100M more per season than the Angels (and $305M over the three years), yet have one less win per campaign to show for their efforts. The inclusion of luxury taxes and posting fees would only widen the gap between the Yankees and the rest of the league.
The information in the tables can be displayed graphically as follows:
Based on this graph, we can once again categorize teams by the trendline and the four quadrants. Starting in the upper-right end of the graph and moving clockwise, the northeast quadrant includes teams that won more games than average with a higher-than-average payroll. The southeast quadrant depicts clubs that won more games than average with a lower-than-average payroll. The southwest quadrant includes teams that won fewer games than average with a below-average payroll. The northwest quadrant lists teams that won fewer games than average with a higher-than-average payroll.
The blue trendline indicates the positive correlation of team payroll and wins. The correlation coefficient works out to 0.64. The coefficient of determination (or R-squared) is 0.41, which means payroll explains 41 percent of a team's win total. A large portion of the balance is determined by the impact of "cost-controlled" players (i.e., minimum or close to minimum in years one through three and roughly 40-60-80 percent of free agent market values in years four through six, respectively) as Dave Studeman, who improved the correlation coefficient to 0.77 and the R-squared to nearly 0.60 for the 2006 season, pointed out in an intelligent piece in The Hardball Times a couple of years ago.
Furthermore, the relationship between payroll and wins is not linear. The difference between the highs and lows of wins (67-94) is much more tightly bunched than payrolls ($27M-$216M), suggesting that marginal wins are significantly more costly than average wins. In other words, going from 70 to 80 wins isn't as important — or costly — as going from 80 to 90 wins. By my count, 68 of the 78 teams that have won at least 90 games during the past 10 years have participated in the postseason. Win 90 and you have about an 87 percent chance of playing beyond the regular season.
Sticking to the graph, teams above the line were less efficient and teams below the line were more efficient in terms of getting the most bang for their buck. While average wins are a reasonable proxy of success, most teams are primarily focused on earning a spot in the playoffs to give them a shot at winning the World Series. Under the "flags fly forever" truism, I'm going to excuse any team that wins it all from the list of so-called inefficient teams. While the Red Sox may pay up for (part of) their success, the truth of the matter is that Boston is the only team that has won two World Series titles during the current decade. In other words, the Red Sox have been more efficient in winning World Championships than any team in baseball, not an insignificant accomplishment for a franchise that calls the AL East its home.
Aside from the Red Sox (and the Cardinals and Phillies, winners of the other two World Series in the past three seasons), which teams were the most and least efficient during the 2006-2008 time frame?
Six clubs have averaged more than 81 wins with payrolls under the league mean of $89.86M. The best of the best was Minnesota (winner of the "doing the most with the least" award), followed by Cleveland, Toronto, Arizona, Milwaukee, and Oakland. All but the Blue Jays made the playoffs once, which probably says as much about Toronto's competition as anything else.
I already cited the Phillies for winning the World Series last season but Philadelphia and the Los Angeles Angels deserve a lot of credit for payroll efficiency as well. The former captured the NL East in 2007 and 2008 and narrowly missed the playoffs in 2006, while the latter took the AL West the past two seasons but lost to the Red Sox in the ALDS both times. The Halos, lest we forget, are one of the eight clubs to have won a World Series title this decade.
Colorado, San Diego, Florida, and Tampa Bay share the award for "doing the best while pinching pennies." The Rockies (2007) and Rays (2008) made it to the World Series, while the Padres were awarded the NL West title in 2006 due to winning the season series vs. the Dodgers, the other team that won 88 games that year, and lost in a play-in game the following season. The Marlins, of course, won the World Series in 2003, the second in just a seven-year span.
The clubs in the northeast quadrant and above the trendline had mixed results. All of these teams won more than their share of games, but they did so at a cost. The Yankees are the biggest outliers by far, spending over $200M above and beyond the Red Sox with no World Series titles and only two postseason wins to show for their huge financial commitment. In fairness to the Yankees, they won a World Championship at the outset of the decade and missed out on the playoffs in 2008 for the first time since the strike-shortened season in 1994. All of the NEQ clubs made it to the playoffs at least once but only the Red Sox and Cardinals won championships.
Moving to the least efficient teams, Seattle wins the award for "doing the least with the most," while San Francisco, Atlanta, and Houston also won less than their fair share of games while sporting higher than average payrolls. In addition, Baltimore, Kansas City, and Washington spent payroll dollars unwisely during the past three years. Pittsburgh, Cincinnati, and Texas all reside on top of the trendline, meaning each team won about as many games as expected given their payrolls.
While relatively simplistic, graphing payrolls and wins — especially over a multi-year period — allows us to evaluate how efficiently ownerships and managements are spending payroll dollars.
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Update: The following graph is the same as the one above except that it includes a polynomial rather than linear trendline.
The polynomial trendline improves the R-squared to .49 versus .41 for the linear. In response to a reader's question in the comments section below, I listed the regressions for each and calculated marginal wins are worth approximately $3M using the linear and range from essentially zero at the left end to as much as $7M at the right end (i.e. going from 92 to 93 wins) based on the polynomial. The bottom line is that the polynomial regression does a much better job at capturing marginal payroll and wins than the linear expression.