Player Compensation and the Current State of Negotiations

June 18, 2020

From the dugout – and Jim Jacaruso, as he takes a look at the business side of baseball

This is part two of a multi-part series on Major League Baseball and some of the issues in the time of COVID-19, especially in light of its relationship with its fans. You can read part one here; part three here

If the leagues, teams and players can agree to safety protocols, the major point of contention is player compensation. The players contend that the earlier agreement covers compensation; but the owners’ are insistent that the agreement allows for renegotiation depending on financial situations.  The key financial consideration touted by the owners is the lost revenue from playing games with no fans in attendance. Empty stadiums would result in a loss of almost all game-day revenue, approximately 40% - 50% of total revenues.  Each team also has different revenue streams.  

What is certain is the financial impact on the baseball industry is immeasurable with a trickle-down effect from ownership to the players to stadium vendors.  Teams have the money from their season ticket purchasers and, from all reports, teams are reluctant to offer refunds for cancelled games, instead choosing to issue credits for future ticket purchases. A big hurt on the fans!

Revenue streams will resume when fans can attend games, at some capacity, while practicing social distancing.  However, even with the resumption of games, the following revenue streams will be diminished: 

  • national and local television and radio revenue,
  • walk-up ticket purchases,
  • luxury suite sales, some with player appearances,
  • food and beverage sales
  • apparel sales, and
  • programs and souvenirs of a stadium visit.

Players want their contracts enforced and to receive pro rata compensation for the scheduled games.  Owners want to pay the players on a pro rata basis, with a further reduction for lost revenue streams.  Once again, the fans are the biggest losers; season ticket holders have their money tied up and, even if MLB teams issue refunds, that process will, most certainly, be painstakingly long.  Putting aside the financial components, the players lose playing time if the season is cancelled; older and fringe players may never recover from the layoff. Minor leaguers will be without a season to hone their skills, making it more difficult for most players to reach “the show.”  There is also the psychological hit to the community.  Sports, particularly, baseball, have always been an outlet during a crisis.  Baseball will surely take a hit if the NHL and NBA resume their season in some form (and remember --hockey and basketball players have already earned and received the majority of their compensation this season). 

The NHL recently announced its Return to Play Plan in tournament format.  The top four teams from each conference will play in a round robin to determine seeds while sixteen teams will play eight best-of-five series to determine the Stanley Cup field.

The NBA will have a brief eight-game finish to the regular season with only 22 of the 30 teams completing their seasons.  The 16 teams that currently qualify for the playoffs plus six teams within six games of their conferences’ eighth and final seed.  The NBA and the NBAPA are still working out some kinks and there may be a play-in game to determine the last seed in each conference.  As of the time of this writing, all games will be played at the ESPN Wide World of Sports complex at Disney World in Orlando Florida. 

Even without fans in attendance, the NHL and NBA have an advantage over baseball since the will not have any weather concerns.

Baseball had better act quickly. As history has shown, a protracted stoppage over greed between billionaires and millionaires may be the last straw, causing irreparable harm to the game. MLBPA is not without blame.  They have abandoned their minor league and amateur players, a continuing trend through the years, by agreeing to an amateur draft that may only consist of five rounds; not the customary forty.  MLBPA only represents players on the forty-man roster and appears to be abandoning any semblance of a unified front with other professional players. MLBPA also agreed to reduce bonus slots for undrafted free agents at a significant cost to the amateur players and, obviously, a tremendous savings for MLB.

The owners are asking the top salaried players to receive approximately 45% of their prorated salary using a ratio comprised of 82 games (numerator) over the original 162 games (denominator). It is not clear where the owners delineate the player base, but the owners are proposing that lower salaried players take less of a reduction.  The players, of course, want their salaries pro-rated without a discount. With both MLB and the MLBPA holding to their positions, might class warfare be seeping into the negotiations? 

Here is a chart estimating how the owners plan affects the ten highest paid players:

 

Top Ten  Ave. Salaries 2020 Salary* Pro-rated** Proposal***
Mike Trout 38,500,000 19,487,654 8,769,444
Gerrit Cole 36,000,000 18,222,222 8,200,000
Max Scherzer 35,900,000 18,171,605 8,177,222
Zack Greinke 35,000,000 17,716,049 7,972,222
Steven Strasburg 35,000,000 17,716,049 7,972,222
Nolan Arenado 35,000,000 17,716,049 7,972,222
Justin  Verlander 33,000,000 16,703,704 7,516,667
David Price 32,000,000 16,197,531 7,288,889
Manny Marchado 32,000,000 16,197,531 7,288,889
Clayton Kershaw 31,000,000 15,691,358 7,061,111
*Average contract salary through the life of the contract
**Assuming 82 of the 162 regular season games are played
***45% of the pro-rated salaries

 

                                      

About James A. Jacaruso Jr.

James A. Jacaruso Jr. is a Personal Wealth Advisors Group Director with more than 25 years of tax compliance and planning experience focusing on personal and fiduciary income taxation, gift taxation and wealth transfer planning.