Baseball Business: How do teams decide how much to spend on players?

Welcome to our "Baseball Business" series! In these articles, we explore the interesting world of baseball from a business point of view. We look at how baseball teams make money, spend money, and make smart choices that help them win games while staying financially healthy. Today's article explains how baseball teams decide how much money to spend on players.

The Player Budget: Salary Caps and Luxury Tax

Unlike some sports, Major League Baseball doesn't have a strict salary cap that teams cannot go over. Instead, it has something called a "luxury tax threshold." Teams can spend more than this amount, but they have to pay extra money (taxes) if they do.

For example, in 2023, this threshold was around $233 million. When a team like the New York Yankees spends more than this on players' salaries, they must pay extra money to the league. This money gets shared with smaller teams to help them compete.

Player Value: WAR and Performance Metrics

Teams use special numbers to figure out how good a player is. One important number is called "WAR" or "Wins Above Replacement." This measures how many more wins a player gives a team compared to an average player who might replace them.

Imagine if Mike Trout, who often has a WAR around 8 or 9, was replaced by an average player. This means his team might win 8 or 9 fewer games without him! That's why Trout signed a contract worth about $36 million per year.

Contract Types: Rookie Deals vs. Free Agency

Younger players who are just starting in the major leagues make much less money than veteran players. Players like Juan Soto started on a small salary when they first joined their teams.

Let's say a team discovers a young pitcher named Jamie who throws really fast. For his first few years, Jamie might only make about $700,000 per year. But if Jamie becomes one of the best pitchers in baseball, he could later sign a contract worth $25 million or more per year when he becomes a "free agent" (able to sign with any team that wants him).

Market Size Matters

Not all teams have the same amount of money to spend. Teams in big cities like Los Angeles or New York usually have more money because:

• They sell more tickets
• More people watch them on TV
• They sell more team merchandise like hats and jerseys

The Tampa Bay Rays might find a player worth $20 million per year but can't afford to pay that much. Meanwhile, the Los Angeles Dodgers might easily pay that amount for the same player.

Being Fair and Smart

Teams need to be both fair and smart with how they spend money. Being fair means:

• Honoring contracts they sign with players
• Not tricking players about their value
• Treating all players with respect regardless of salary

Being smart means:

• Not spending too much on one player if it means they can't afford other good players
• Planning for the future, not just the current season
• Making sure younger players get chances to play and develop

Conclusion

Deciding how much to spend on baseball players is complicated! Teams must balance their desire to win games with their financial limits. The best teams find ways to get valuable players without spending too much money, allowing them to build complete teams that can win championships while staying financially healthy for many years.