Comparing, Analyzing, and Explaining the AP Reported 2020 Payroll

Most every baseball fan has their favorite payroll tracking resource. The main contenders are probably going to be Spotrac, Cot’s, or Roster Resource. Maybe it’s a more fringe contender, such as Baseball-Reference or USA Today. If I’m being honest, as loyal readers and Pittsburgh Pirates fans, I would hope your source of choice is ‘this guy’ with toe thumbs and a payroll fetish.

Personally, as someone who craves all things payroll, I sample from a little bit of everywhere. Cot’s is a great source for contract terms and history stored all in one place. USA Today is, for whatever reason, usually the first place to post minimum salaries for pre-arbitration players, which is always the final piece to a respectable opening season calculation. Despite some big faults, Spotrac does a pretty good job of tracking in-season changes, something the others don’t even try.

For me, however, nothing comes close to when Ronald Blum from the Associated Press catches wind of the actual, honest to goodness final Competitive Balance Tax payrolls for the prior championship season. No matter how high in regard I hold my own—or anyone else’s—work, it doesn’t change the fact that they are just estimates. Nothing can substitute for the real thing, and that’s what this report is, figures straight from the horse’s mouth.

With that in mind, I’m going to take some time to cover, breakdown, and explain how those numbers are calculated, what they mean, how they looked in 2020, as well as how they compared to my own. Frankly, this may be my favorite part of when the report comes out—comparing them to what I estimated throughout the year.

I’ve been diligently tracking payroll for three seasons now, and anytime a move happens, I update three different calculations—straight cash, Average Annual Value (AAV), and somewhat of a blend of the two, which is the figure I always cite. Despite this fact, I will readily admit it’s not “correct”, so to speak. I say that because it applies tenets of the Average Annual Value system—which is basically spreading guaranteed dollars out evenly over the life of a contract—while reporting actual cash outlays for a given season. I chose to do this from the beginning because it more closely mirrors systems fans are already familiar with, such as Cot’s and Spotrac; however, I wanted to apply the AAV principles more fully than the other sources already do. What do I mean when I say that though?

Every single payroll tracking source prorates signing bonuses and attaches them to a reported yearly salary for whatever given year they are tracking—this just seems to be how it’s done. However, when you think about it, it’s marrying two things that really don’t belong together.

In my opinion, when fans cite “payroll”, what they want to mean is money out the door in a given season, but they will often talk about something that’s usually not that at all. For example, most everyone—from outlets covering the team to fans (because that’s where they get their information)—will tell you that Gregory Polanco is the Pirates’ highest paid player this season at $11.6 million. Is this truly the case though? Not if you ask me. In actuality, there are two parts to this figure. Polanco is scheduled to make $11 million in 2021. Also, when Polanco signed his five-year contract in 2016, it included a $3 million signing bonus. What do you get if you divide $3 million by five years? For those who don’t have their calculator handy, the answer is $600,000. What do you get if you add $11 million and $600,000? That’s right, $11.6 million.

While terms of payment for signing bonuses are rarely reported, it’s often understood that they are just that—bonuses paid out for signing a contract. Typically, they are paid in full at signing, or at least within a year. Two recent examples would be Bryce Harper and Manny Machado, who both received $20 million signing bonuses that were paid within a year of signing. Sometimes they may be split up, possibly into two payments, one at signing and one a calendar year later, for example. However, is it likely that Polanco’s would be paid out in five yearly installments? No. So, most likely, Polanco will actually be paid $11 million in cash for 2021, while everyone will say he’s making $11.6. Where does this practice of prorating come from though?

Competitive Balance Tax Payroll

After a small detour, we’ve finally circled around to the purpose I set out to achieve when I first starting writing—explaining and examining payroll for Competitive Balance Tax purposes.

For those who may not know, when someone uses the term “Luxury Tax” when discussing baseball, what they mean is what the Collective Bargaining Agreement (CBA) refers to as the Competitive Balance Tax (CBT). Fans may mean one thing when talking about payroll—again, likely cash spent—however, this is what the players and league concern themselves with, and it’s not the same as cash spent.

Because nothing with the word “tax” in it can be easy, Article XXIII of the CBA is full of what are essentially accounting rules and tricks to come up with a number that really isn’t cash spent on payroll in any given season. As I’ve alluded to already, the main tenet behind the CBT calculation is the Average Annual Value of a contract, or AAV. As Article XXIII (E)(2) states:

A Uniform Player’s Contract with a term of more than one (1) championship season (“Multi-Year Contract”) shall be deemed to have a Salary in each Guaranteed Year equal to the “Average Annual Value” (“AAV”) of the Contract (plus any bonuses subsequently included by operation of Section E(4) below). The AAV shall be calculated as follows: the sum of (a) the Base Salary in each Guaranteed Year plus (b) any portion of a Signing Bonus (or any other payment that this Article deems to be a Signing Bonus) attributed to a Guaranteed Year in accordance with Section E(3) below…shall be divided by the number of Guaranteed Years.

As an aside, this is why I include prorated buyouts in my payroll calculations. The aforementioned “Section E(3) below” states that “[a]ny Signing Bonus in a Uniform Player’s Contract (and any other payment this Article deems to be a Signing Bonus) shall be attributed, pro rata, over the Guaranteed Years of the Contract.”, while Article XXIII (E)(5)(b)(i)(A) says “If a Uniform Player’s Contract contains a Club Option Year or a Player Option Year that is not deemed a Guaranteed Year…then such Option Buyout shall be deemed a Signing Bonus.” To me, it’s plain as day, and any source prorating signing bonuses but not buyouts just aren’t following their own logic. Basically, if Polanco’s salary is going to be anything other than $11 million, it should be $12.2 million—which includes the prorated $3 million buyout as well—not $11.6. But I digress…

Let’s use Polanco as an example again. We’ve already established that he’ll be paid $11 million in 2021; however, the AAV of his contract is not close to that. Polanco signed for $35M guaranteed—$29 million in base salary over five years, with a signing bonus and buyout of his first option year valued at $3 million each. If you divide that by five, you come up with an AAV of $7 million, which is essentially what Polanco is on the books for for CBT purposes. As you can see, sometimes this works in the club’s favor, and sometimes it doesn’t. For 2021, Polanco will be on the books for $4 million less than he’s actually making ($11 versus $7 million). In 2017—the year the contract started—Polanco was on the books for the same $7 million, while only actually being paid $1 million.

As you may be able to tell, while these differences can mean a team like the Los Angeles Dodgers or Boston Red Sox paying the Luxury Tax, they make literally zero difference to the Pirates. Ranging from a threshold of $195 million in 2017 to $208 million in 2020, the Pirates have hardly even made it halfway in any of those years, so while these figures are still fun to interpret and track, there’s no actual point to it.

So, how did tracking go? Personally, I came up with a $58,017,215 base total, which needs explained on a couple of fronts. One, this is significantly higher than the prorated total I calculated because CBT payrolls were based on full-season salary figures, not the prorated amounts. Also, Player Benefit Costs need added to that total, as they are part of the CBT formula. These costs are evenly split thirty ways, so while it does inflate the final total, it’s a rising tide lifts all boats kind of scenario in which every team’s payroll goes up the same amount. This season, the figure the AP reported was $15,002,327, bringing my calculation to $73,019,542. But wait, there’s more!

The AP also reported that the league gave teams tax credits due to COVID-19. According to the report, “[e]ach team was given a base COVID credit [of] $1.5 million, and individual club COVID credits ranged from $0 to $5.25 million, accrued at the rate of $600,000 for each day on the major league COVID injured list and $91,800 for each day on the minor league COVID injured list if optioned at the time.” Personally, I interpreted this to mean that each team received two credits—not payments, just paper figures to lower taxable expense—one blanket of $1.5 million and another individualized based on IL days. According to my calculations, Polanco and Keone Kela—the only two players to miss time on the Major League COVID-19 Related IL—accounted for twenty-five total days missed, which is $15 million just between them. It seemed Austin Davis also spent some time on the Minor League iteration while on option when he first was acquired as part of protocol, so that figure could be $1,377,000 higher; however, teams were seemingly capped at $5.25 million in credits. While it’s hard to believe any team would have had so few days as to truly fall below the maximum, if the idea doesn’t make sense, just think of your own personal taxes. Much like credits to lower your taxable income like student loan interest, daycare expenses, or retirement savings are capped, so too it seems were these credits.

In total, these two credits would have equaled $6.75 million, lowering my final CBT calculation to $66,269,542. Only one final question remains; how does this compare to the actual reported amount?

Per the AP (via Forbes), the Pirates CBT payroll for 2020 was $69,789,757, lowest in the league by almost $10 million. Interesting enough, they weren’t the lowest in actual cash outlay. That would be the Baltimore Orioles, who spent about $570,000 less than the Pirates. Without a deeper accounting of the Orioles individual salaries, I can’t speak to why the difference is so big, but it just again goes to show the difference between actual cash spent and paper totals that the CBT accounting creates.

Disappointingly so, my calculation is $3,520,215 less than the actual total, and while I have some theories, I can’t say for sure why the gulf is so large (well, maybe you the reader think it’s pretty good, but in my search for perfection, I view it as too high).

The biggest possibility I can find is another credit of sorts that I’m applying in my total that may or may not be correct. Article XXIII (E)(5)(b)(ii) states the following about option buyouts:

[I]f the Player ultimately does not receive the Option Buyout, then for the Contract Year covered by that option, no portion of the Buyout shall be included in any Club’s final Actual Club Payroll. In addition, any Club whose final Actual Club Payroll in a previous Contract Year had included that Buyout (or a portion thereof) will receive a deduction (in the full amount of the Buyout included in previous Contract Years) in its final Actual Club Payroll in the Contract Year covered by that option.

I know I’ve covered this here before, but to me, what this is saying is that if an option buyout doesn’t get exercised—which we’ve already established gets prorated over the life of a guaranteed contract—it needs to come off the books somehow, because prior years have been artificially inflated with buyout costs that were never actually realized. The Pirates have two players who met such criteria in Starling Marte and Chris Archer. Both players’ 2020 options were exercised, meaning they each had at least a portion of their buyouts on the books that needed credited back. For Marte, it was his entire $2 million figure, while the Pirates were hit with $387,321 between 2018 and 2019 for Archer. Therefore, I accounted for a negative $2,387,321 in my calculations. If I take that out, I’m only about $1.1 million under the actual total, which is at least more respectable. While I don’t actually think that’s why I’m off, it’s the largest possible difference I can find, and the rule is interesting, so I just thought I’d include it here.

Other immaterial differences would include salaries for players called up during the season that were slightly higher than the Major League minimum which I assigned them. I also wasn’t sure how to account for the salaries of Edgar Santana and Pablo Reyes, who lost entire seasons worth of salary over the shorted affair but would have only been suspended for half of a normal season. Finally, I assigned the actual value of the bonuses Derek Holland earned, in step with the idea of accounting for full season salaries and not prorated figures.

I struggled over this difference a lot, but unless there are just some unreported bonuses I wasn’t privy to or something, I just have to accept that I’m just a regular guy with zero sources, interpreting the rules on my own and applying them to the most accurate public facing figures I can find.

Maybe I can take solace in this—before benefits and COVID credits, Spotrac had an estimated CBT payroll of $51,150,431. Assign both benefits and credits as I calculated to that total and they are under the actual by $10,386,999.

*****

There you have it. What started as a simple breakdown of a reported payroll figure turned into much more. If you made it this far, I hope you found it interesting and informative enough. Hopefully you learned something, and feel free to leave any questions in the comments.

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