Tagged: Arbitration

So How Does Arbitration Work, Anyway?



You may have heard about the deadline tonight for teams to offer arbitration to free-agency eligible players, of which the Arizona Diamondbacks have two. But you may wonder what it is and why it matters (or you may not wonder either of those things, you may not care at all). Hopefully this post will help describe why arbitration exists, why it’s important and why you really should care.


I’ve never worked in a baseball operations department, and I’ve not spent years of my life studying the process and weighing the risk/reward of arbitration the way baseball ops guys have done, so what I can offer you is a dime-store tour of the process.


The D-backs have two players — Adam LaRoche and Aaron Heilman — who are eligible for arbitration, with a deadline of tonight at midnight eastern to make an offer. This is not a contract offer, per se, simply the declaration of the intention to make an offer for an arbitrary hearing that would award a player a one-year contract. The player has the right to refuse arbitration and head to free agency.


There are a few different types of arbitration in the legal world, but simply defined, it’s a process wherein two parties see an independent third party, who then solves a dispute of some kind between the two. The type used for baseball is often called Pendulum Arbitration. Each side, in this case a baseball team and a baseball player, submit a number that is intended to be that player’s one-year salary for the next baseball season. The arbitrator then must choose one side’s number or the other (like a pendulum swinging from left to right) but the arbitrator cannot settle on something in the middle.


After choosing to offer arbitration to a player, if the player accepts, the team and player still have a few months to work out a contract on their own if they so choose. Arbitration hearings are then usually done around Spring Training if they don’t work something out.


So Why Should a Team Offer Arbitration?


Major League Baseball has a compensatory system designed to buffer the blow of a team losing a player to free agency. If a Type A Free Agent (there are tiers of free agency determined by a player’s accumulated time and accomplishments in the Major Leagues) leaves a team, the team then receives a first-round pick and a sandwich pick in the next year’s draft (though top 15 picks are protected… if the Diamondbacks sign a free agent this year, they can’t lose their No. 3 overall pick for doing so).


For example, the Detroit Tigers signed Victor Martinez to a contract on Tuesday. The Tigers had the No. 19 pick in the 2011 draft, so that pick will now go to the Boston Red Sox, who lost Martinez in free agency.


There is some serious benefit to offering arbitration to a player who might leave in free agency, especially if that guy is a Type A free agent. A first-round pick, even one in the bottom half of the round, carries huge value to a team.


Just from picks in the past 10 years, you could build a strong team with prominent players that have been drafted with first round picks or supplemental picks that were awarded to teams losing free agents — Adam Wainwright, Kelly Johnson, David Wright, Nick Swisher, Joe Blanton, Conor Jackson, David Aardsma, Adam Jones, Gio Gonzalez, Huston Street, Jacoby Ellsbury, Colby Rasmus, Clay Buchholz, Ian Kennedy, Daniel Bard, Chris Coghlan, Joba Chamberlain and Ike Davis all fit that description.


One of the very best prospects in baseball, Angels’ outfielder Mike Trout, was a compensatory pick in 2009 after the Angels lost Mark Teixeira to the Yankees. The supplemental-round pick the Angels got for Teixeira was Tyler Skaggs, who is now one of the best prospects in the D-backs’ system after coming here in the Dan Haren trade last July.


The catch is that a team can only receive those draft picks if they offer arbitration to that player and that player rejects arbitration and signs elsewhere. The Rangers and Rays, for example, wouldn’t even blink at the chance to offer arbitration to Cliff Lee and Carl Crawford, respectively, because with the option of signing huge, multi-year deals, there is no risk that those players would consider accepting a one-year arbitration deal.


So Why Shouldn’t You Just Always Offer It, What Are the Risks?


Well, there is the risk that he’ll accept it and, in some cases, that is a bad thing. This is particularly the case with two types of players — aging position players and relief pitchers.


In the case of an aging position player, this is a guy that has put in a lot of service time in the Major Leagues and has accumulated a lot of stats, but might be in the decline phase of his career. In his case, an arbitrator is likely to rule in favor of the higher figure (which is always the player’s submission, obviously). So the team not only risks bringing that player back on an expensive one-year deal, but also there is the risk of bringing him back at all. The team may be ready to move on, but would be stuck with a contract.


Relief pitchers can some value for a team, obviously, but offering arbitration to one involves the risk of the player accepting, and the team bringing him back on a deal that is larger than what they would normally offer in a standard one-year free agent contract.


The decision to offer arbitration is a gamble. Yes, you’d love to have the insurance of a first- or second-round pick if that player leaves in free agency, but if you think that player will accept arbitration and make a great deal of money in doing so, sometimes you’re better off declining the chance.


So Why Do I Care?


Because, as noted above, a team can bring in quite a haul of prospects through supplemental picks.


Back in 2009, the D-backs’ farm system had taken quite a hit, because the majority of the team’s top prospects were either promoted to the Major Leagues or sent away in trades (such as the Dan Haren deal that sent prospects to Oakland in return for the All-Star pitcher).


So the D-backs were in a good position to stock up the farm system. There were a number of free agents on the team that were likely to get more money in the open market than they would get on an arbitration deal, so the team offers arbitration.


That year, the D-backs lost Orlando Hudson, Juan Cruz and Brandon Lyon to free agency. But in losing them, the team got the draft picks that they used to select A.J. Pollock, Matt Davidson, Chris Owings, Mike Belfiore and Eric Smith. Today, those players are five of the top prospects in the organization.


So What Happens Now?


The D-backs will choose whether to offer arbitration to LaRoche and Heilman. If they offer to one or both of those guys, and the player(s) accept, then the D-backs will work out a one-year deal with the player. If they offer and the player rejects, the D-backs will receive draft picks when another club signs those guys. If they choose not to offer, the D-backs will receive no draft pick compensation in return for the player leaving, but will also not carry the risk of signing a player they might not have been planning on bringing back in 2011.


So offering arbitration or not to a player might seem like a small news story in November, but the decision has wide-ranging effects on the organization for years to come.