Salaries, Performance, and Owners' Goals in Major League Baseball: A View through Data (2003)

The quantitative literature on baseball has also been developing rapidly over the years. Most of the current literature deals with baseball as a market phenomenon in which owners are the firms in the business of entertainment while the players are the ones supplying the input to the production process. Examples of such articles are provided by Ferguson et al. (2000) and Richards and Guell (1998). Numerous articles deal with the effects of free agency and arbitration on salary structures (e.g., Miller, 2000; Bodvarsson and King, 1998; Fizel, 1996). The article by Marburger (1994) examines the effect of bargaining power on salaries, and Krautman (1999) discusses the difficulties in using salary as an estimate of a player's marginal revenue product. There are also articles dealing with race as a factor in determining salaries (e.g., Marburger, 1996), or even the market for baseball cards (McGarrity et al., 1999). There have also been several studies dealing with fan attendance in baseball. Kahane and Shmanske (1997) consider the relationship between team roster turnover and attendance. Knowles et al. (1992) study the relationship of demand for tickets to the uncertainty of the outcome of the game, and Domazlicky and Kerr (1990) consider the relationship between baseball attendance and the designated hitter. Whitney (1988) investigates fan interest (attendance) and team performance (winning games versus winning championships). At the aggregate level, Schmidt and Berri (2001) found that there is a significant relationship between competitive balance and attendance in Major League Baseball. The study by Horowitz and Zappe (1998) examines the determinants of baseball veterans' end-of-career salaries as a function of past performance and other criteria, and it is akin to the spirit of our study, but with a more specialized focus. In this study, we consider player salaries and performance at the individual as well as the team level using recent data. Our purpose is to see if individual and team performance measures that are associated with player compensation are different or similar to those associated with team owners' objectives. Research related to this question has not been reported in the literature. Thus, our main contribution is the examination of game performance characteristics that is of economic interest to both the players and team owners. Although the scope of this study is limited to players other than pitchers, we found some interesting results in terms of the underlying variables of performance from the perspectives of players and the owners. Most firms view compensation as a means of motivating as well as retaining employees. If compensation is closely tied to key performance measures, then it is reasonable to expect that employees work to maximize those measures in order to maximize their compensation. Further, if performance measures are chosen which maximize the firm's performance and are most likely to help the firm attain its goals, then the objectives of employees and the firm are aligned. In many organizations, achieving performance-based pay may be difficult to implement, and in others, selecting the correct measures may be a problem. Sales representatives are often compensated in accordance with the sales volume or revenue they generate. In many cases, sales are made at a loss near the end of an accounting period, and representatives can make their numbers. In such cases, the employees have responded predictably to their compensation plans, but not necessarily in the best interest of the firm. The measurement of performance is less of a problem in professional sports than in most other industries. In particular, Major League Baseball (MLB) offers a wealth of measures pertaining to a player's performance on the playing field. In this study, we considered the relationship of individual performance to salaries and to the performance of teams. We examined the important characteristics of player performance as they may influence the compensation received by the player. …