A recent Wall Street Journal article focused on the winning ways of the Tampa Bay Rays, a team that won a wild card spot in the pennant race in spite of having the lowest payroll of all 30 teams in MLB—$63 million.
What made that outcome even more remarkable is that the Boston Red Sox competing in the same division as the Rays didn’t make it to the playoffs in spite of its $227 million payroll—the highest in MLB.
Even my beloved Cubbies—the Chicago Cubs—didn’t make it with the second-highest payroll of $218 million.
Before team owners start tightening their belts, they should look at the Los Angeles Dodgers and New York Yankees. These two teams had the best records in baseball this year. Those records, however, didn’t come cheap. The men in stripes and the men in blue had the third and fourth highest payrolls at $217 million and $200 million, respectively.
This goes to show that one can cherry-pick teams and get all kinds of results. Some teams got paid well and did poorly (Red Sox and Cubs). Others who got paid poorly did well (Rays). But the reverse is also true. Some teams got paid well and did well (Yankees and Dodgers), and some were paid poorly and did poorly (Detroit Tigers and Baltimore Orioles).
A more systematic approach in analyzing whether paying higher salaries matter in winning games is to rank the payrolls of all MLB teams by quartile and compare the average win ratio for each of the quartiles. Those quartiles of roughly eight teams each are shown in Chart 1.
Although there is little difference between the second and third quartiles, the eight teams that were paid the least had an average payroll of $81 million and won an average of 45% of their games. In marked contrast, the eight teams paying the most had an average payroll of $191 million and won an average of 58% of their games.
Regression tests more precisely show that every $1 million increase in payroll leads, on average, to a 1% increase in a team’s wins. But while these regression tests clearly show a positive relationship between payrolls and wins, the association is relatively weak, explaining only about 20% of all the variation in the team performance.
The neat thing about regression testing is that it allows one to extract the impact of higher payrolls on a team’s winning ways. While I won’t bore you with the statistical details, I need to explain Chart 2 that I’ve taken the liberty of labeling the “Doti Standings.”
Focusing attention on our local teams, notice that given the Dodgers payroll, the team should have won 91 games this season. Since the team actually won 106 games, it did 15 games better than expected. The painful loss to the Washington Nationals in the playoffs is another story.
The Los Angeles Angels, on the other hand, did worse than what its payroll suggested. While it should have won 85 games, the team only won 72 games, losing 13 more games than what would have been expected based on payroll alone.
I added an asterisk next to the teams in Chart 2 to designate those that either won its division or made a wild card berth into the pennant race this season.
Notice, with just a few exceptions, that the teams that excelled there also made the grade in division titles. The reason for this is that some teams with higher payrolls did well, as did some teams with lower payrolls. In the end, it’s not payrolls so much as things like team leadership, shrewd trades, and keen player development that rule the day.
So, what to do with the Doti Standings?
General managers and on-field managers for teams like the Rays, Oakland Athletics and Minnesota Twins should ask for big bonuses proudly showing the Doti Standings to their team owners. If they succeed, I want a cut of the action.
And for managers of teams like the Tigers, Orioles and Kansas City Royals who get fired, don’t blame me.
Editor’s Note: James Doti is Chapman University’s president emeritus and professor of economics.
