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Wednesday, January 7, 2009
Updated: January 13, 1:29 PM ET
The Biz: The Price of Winning

"I think every little kid dreams of someday becoming backpage tabloid fodder."

Mega-deals and all, this off-season seems par for baseball's recent financial course. The Braves could land Derek Lowe today, Manny Ramirez could head to the Bay, but mostly the Yankees are doing what they do, trying to spend their way to the World Series. Others show caution. And yet, the storyline feels the same.

The Yanks will have to beat out the relatively quiet Red Sox and bargain basement Rays for the AL East. The Rays, who took baseball's second-lowest payroll to the World Series last season, have added little but a year of valuable experience, outside of the steady bat of Pat Burrell, and still look exceptional on paper.

Three methods. Three contenders. It all begs the question: how much of a team's success can be explained by their payroll? And we mean scientifically.

The numbers say a lot. And for the high spenders, they say guarantees are nowhere to be found.

If you look at the correlation between a team's opening day payroll and their final season victory total over the 11 seasons from 1998 to 2008, some trends become clear. And yes, we know changes in owners and philosophies can change a team's methodology greatly. (We scaled each team's payroll to the level of 2008 spending to account for the fact that a $100 million payroll in 1998 was a lot more than a $100 million payroll in 2008. Based on that, $100 million then is roughly $126 million today.) Here is a a simple scatterplot of wins and opening day payroll. There is a slight positive correlation between payroll and victories as indicated by the line shown in the picture.

We conclude this: for every $7 million a team spends on payroll (at 2008 player salary levels) the team will on average win one more game. A team that spends $125 million, or $35 million more than the 2008 average payroll of about $90 million, would be expected to win five more games than average. That comes out to 86 for the season.

It doesn't seem like a lot, but at least you'd think the spenders would take comfort. Spend and win more, right? Even if handing a $21 million per year total (we're looking at you, Teixiera) should feel like more than an addition of three wins—especially when subtracting Jason Giambi's salary ALSO subtracts those same three wins! The problem for spenders, like all players of poker, isn't the money. It's the swings. There is a lot of variation around that expectation of 86 wins, as the scatter plot shows. Teams that have spent $125 million have won more than 100 games and also managed fewer than 70 victories. Spending more helps, but it's hardly a guarantee of a winning season. In fact, only about 23 percent of the variation in team wins can be explained by variation in team payroll alone. The other 77 percent is due to other factors, such as a guy getting hurt, which is just another way of saying that some teams (like last year's Rays) get a lot more out of their dollars than other teams (like last year's Tigers).

Most and Least Cost-Effective Franchises 1998 — 2008
Team Avg. Payroll Expected Wins Actual Wins Difference
OAK $59.2 75.8 87.3 11.5
MIN $55.1 75.1 84.3 9.2
STL $100.6 82.9 89.2 6.3
ATL $120.0 86.2 92.4 6.1
HOU $93.5 81.7 87.0 5.4
CWS $86.4 80.5 84.8 4.3
CLE $88.9 80.9 85.2 4.3
FLA 42.5 72.9 76.6 3.7
LAA $104.2 83.5 87.1 3.6
SF $96.8 82.2 85.8 3.5
TOR $82.4 79.8 82.0 2.2
BOS $140.7 89.8 92.0 2.2
PHI $86.8 80.5 82.7 2.2
SD $74.6 78.4 78.7 0.3
ARI $94.4 81.8 81.8 0.0
CIN $67.0 77.1 76.9 -0.2
NYY $192.6 98.7 97.8 -0.9
SEA $103.9 83.5 82.5 -1.0
WAS $50.0 74.2 71.4 -2.8
MIL $63.9 76.6 73.6 -3.0
LAD $126.4 87.3 84.3 -3.0
NYM $129.1 87.8 84.5 -3.2
CHC $105.3 83.7 80.0 -3.7
TEX $104.4 83.5 79.3 -4.2
COL $79.7 79.3 75.0 -4.3
PIT $50.0 74.2 69.8 -4.4
TB $51.0 74.4 67.6 -6.8
KC $54.5 75.0 67.6 -7.4
DET $81.5 79.6 70.7 -8.9
BAL $100.9 83.0 72.0 -11.0

Who are the most cost-effective franchises, the ones that consistently—not just in one fluke year—win more games than their payroll would imply? Not surprisingly, Billy Beane's Oakland A's take the top spot. They typically have a below average payroll that would be expected to produce 76 wins a season. Instead, they have averaged 87. The Minnesota Twins are another high-performer, averaging 84 wins a year instead of their payroll-based expectation of 75 victories.

The bad teams? Start with the Baltimore Orioles. They have spent more than the league average over the past 11 seasons and would be expected to win 83 games a season. Instead, they've managed just 72. Other poor performers are the Detroit Tigers and the Kansas City Royals. That's right: For all their bellyaching about being a small-market club, the Royals have spent as much money as the Twins but have finished, on average, 17 games behind them.

In the Yankees' case, despite their success and ability to get into position for title runs, they are in the bottom half of the league over the last 10 years in terms of wins per dollar spent. When they lock up Mark Teixeira at $180 million, a player whose stats are equal to or worse in many cases than Milton Bradley, who the Cubs just secured for a sixth of that total … Well, you get the idea. We also looked at the connection between opening day payroll and making the playoffs. The results were similar—spending helps, but it's no guarantee of reaching the postseason. In fact, the link between payroll and playoffs has gotten weaker over time. Of the 16 teams that made the playoffs in 1998 and 1999, 14 were in the top third of payrolls. In other words, 70 percent of the high spenders made the playoffs in those years while virtually none of the lower two-thirds of spenders went anywhere. But that was then. Since the start of this decade only 40% of top third of spenders have made the playoffs since the start of this decade. In fact, the top payroll teams in 2008 (Yankees, Mets, and Tigers) all failed to reach the post-season. That may be one reason why the Yankees' spending splurge has not produced a lot of outrage.

Schadenfreude for the rest of baseball is fun when the results are there.