How much should the Reds spend on their payroll?

You’ll find more than fifty shades of opinion on that, from austere discipline to costly dominance. In December, the Reds front office assured fans that the team’s payroll would continue to increase again in 2015. Owner Bob Castellini said:

“We’re not rebuilding. If we were, Johnny Cueto would be gone. Mike Leake would be gone. The payroll is up.” (Fay)

General manager Walt Jocketty went a step further and characterized the size of the increase.

“It’s not increasing to the level it would need to have been able to keep the guys we traded. It’s still increasing quite a bit over last year, but everyone’s salaries are jumping up. We knew that going into last year.” (Rosecrans)

Now that extensions have been negotiated, arbitration avoided and free agents signed, how much will the Reds spend on payroll? How does their spending compare to other clubs and previous Reds payrolls? And has the club followed through on its promise to fans made several weeks ago?

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This chart shows the Reds annual payroll back to 1988  and provides the context to evaluate its size and growth.

Payroll.8814

[The bright green bars represent years that Marge Schott owned the team. The blue bars represent the years Carl Lindner, Jr. owned the team. The red bars show payroll levels under Bob Castellini. The three olive-colored bars were during Schott’s ownership but her legal status regarding the team was in limbo. The numbers are adjusted for inflation (based on Bureau of Labor statistics).]

Marge Schott, the first woman to own a major league team, bought the Reds before the 1985 season. Schott boosted payroll in the aftermath of the 1990 World Series championship. Due to various offensive statements she made,, Schott’s day-to-day management of the team was suspended, resulting in a sharp decline in salaries in 1998. Schott sold the club to billionaire Carl Lindner Jr. early in the 1999 season. Linder kept payroll fairly constant, although under his ownership Barry Larkin signed a final lucrative contract (2001-03) and the team agreed to a 9-year, $116.5 million deal with Ken Griffey, Jr.

After five consecutive losing years under Lindner’s ownership, Bob Castellini led a group that purchased the Reds in December 2005. The first six seasons, Castellini kept total payroll within a narrow range while the roster was undergoing turnover. Beginning in 2012, the Reds payroll began to grow, jumping $30 million between 2011 and 2014. Castellini set the Reds 2014 payroll around $114 million, including signing bonuses.

The gigantic rise in Reds payroll over the last generation reflects overall trends in major league baseball. Player salaries have skyrocketed due to two major factors: free agency and the explosive growth in the sport’s revenue.

Prior to 1975, a reserve system allowed teams to own players as long as they wanted. Even though contracts were generally just one year in length, players could only negotiate with the team that owned them. The reserve system (so-called because teams could “reserve” players) dated back to the 19th century. Prior to the establishment of the amateur draft, the one time a player could choose his team was at the start of his career. Even that limited freedom came to an end in 1966 with the new draft, as players were bound to the club that selected them.

In December 1975, three years after the Supreme Court rejected Curt Flood’s challenge to the reserve clause, players won the right to free agency from an arbitrator’s ruling. (It should be noted that MLB teams still have up to twelve years of control over individual players – six in the minor leagues and six in the majors). As you would expect, clubs pushed back against free agency rights, triggering charges of illegal collusion and several decades of labor unrest. But the impact of a freer labor market on player salaries was evident right away.

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[Chart from the Business Insider]

The second major cause of rising player salaries has been the explosive growth in revenues coming into the sport. The primary drivers are the sale of national and local broadcasting rights and online platforms. Baseball income has grown from less than $2 billion (gross adjusted revenue) in 1995 to a staggering $9 billion today.

MLBGrossRev1995-2014

[Chart from Forbes]

The Reds benefit like all 30 major league teams from national broadcast contracts and online/mobile platform revenue, as well as from league revenue sharing. Regarding local sources of income, the Reds’ Fox Sports Ohio contract expires in 2016. It’s believed FSO currently pays the club $30 million per year for broadcast rights. Based on recent experiences of teams in similar markets, it’s reasonable to expect a new deal will at least double that payout, possibly including an equity share for the club.

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The 2015 Reds may not be an old team, but they do have a large number of players who have reached arbitration eligibility. Three (Todd Frazier, Devin Mesoraco and Zack Cozart) hit that status for the first time in 2015. Other players (Aroldis Chapman and Mike Leake) were already in the arbitration system and earned large salary bumps. The Reds have contracts with 13 additional players for 2015. This table shows 2014 salaries, 2015 salaries and dollar increases for those 18 players, sorted by size of increase.

SalaryIncrease15

Most of the growth in payroll commitment for 2015 was for the arbitration-range players.

The Reds shed salary from 2014 by trading Jonathan Broxton ($7 million), Mat Latos ($7.25 million), Chris Heisey ($1.76 million) and Aflredo Simon ($1.5 million). They also released Ryan Ludwick ($8.5 million), Logan Ondrusek ($1.425 million) and Jack Hannahan ($1 million).

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The salaries of those 18 players add up to about $107 million. That includes subtracting the $4 million payment from the Phillies toward the Marlon Byrd commitment. The Reds owe about $8 million in “dead money” to players no longer with the organization. They’re paying Ryan Ludwick $4.5 million, Bronson Arroyo $1.36 million and we got Jack for that too, for $2 million. That brings the total payroll up to $115 million. League-minimum salaries for 7-9 remaining roster spots (nine if Sean Marshall and Skip Schumaker start on the DL) add another $4-4.5 million.

Payroll.0515

That puts the Reds current payroll commitment to a number around $119 million. That’s a $5 million step increase over 2014. The above chart shows what the Reds spending on payroll looks like in the Castellini era, including 2015.

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The Reds paid the 11th highest Opening Day payroll in MLB last year, the most in the NL Central. While that’s less than half what the LA Dodgers spend, it’s still a big commitment considering the market size of Cincinnati. Yes, if you widen the criteria to include folks within a two-hour drive, the team’s footprint includes Columbus, Dayton, Lexington, Louisville, Indianapolis and parts of West Virginia. But two-hour drives tend to be infrequent, planned trips, not conducive to spur-of-the-moment and frequent attendance.

With salaries league-wide galloping ahead, the Reds will slip a few spots in the payroll pecking order, even with the 5 percent increment. But they’ll still remain in the group of teams bunched in the middle-third of the league, with payrolls between $115-$120 million.

The service-time and contract structure of the team hand-cuffed the club. They had to trade and release players to accommodate the raises due the remaining roster. That left a small amount to sign Marlon Byrd and Burke Badenhop at bargain-basement prices.

It’s impossible for outsiders to know what dollar figure Bob Castellini submitted to Walt Jocketty as the budget for 2015. Maybe it was $120 million. Maybe it was higher and there’s a little wiggle room if the right player (read: outfielder) becomes available the next few weeks or at the trade deadline. If instead, the owner had written $130 million on the napkin, the Reds wouldn’t have had to shed Mat Latos and/or Chris Heisey – or they could have reached a bit higher for a left fielder and bench players.

The bottom line is that the front office has followed through on its stated intention to increase payroll. Whether that amount gives Reds fans pain or pleasure (or both) remains to be seen, starting April 6.

14 Responses

  1. redmountain

    Thank you for this. Some may think the Reds are paying too much, some too little. I think this shows pretty honest business. Castellini has followed through on trying to make this team competitive. As has been shown here, money does not necessarily buy a team championships. Next winter about 20 million will probably have to be shed, so it will be interesting to see if salaries will go higher and where will it be spent. Also, how will new TV revenue effect decisions.

  2. WVRedlegs

    That’s almost a Billion dollars in salaries paid out by Mr. C. And the Reds have, 2 NLC division titles, 3 playoffs, no post season series wins, only 2 playoff game wins for a 2-7 playoff record, and only 4 of those 9 games in Cincinnati.
    Sigh. Better than some teams, and worse than others.
    In business when total revenues outweigh total expenditures, it is a success.
    In baseball, success is measured on the field. Someone is letting ownership down here, either management or the players.
    I heard at lunchtime on MLB Radio today that the Cardinals have 19 more post-season wins over the last 4 seasons than the next highest team in that time span. I’m not sure if the radio guy had that right or not, it could have been back to the 2006 season maybe or thereabouts when the Cards won a WS. Either way it made me sick.

  3. charlottencredsfan

    One has to wonder if the ASG was played in Peoria this year, would a true rebuilding process commence.

  4. Art Wayne Austin

    No doubt business, common sense has reigned since Castellini bought the club, Jocketty delights in working for Bob, the nucleus of the players are motivated and the fans will turn out in record numbers. There is one, fan wish, build a domed stadium in 2030 eliminating game cancellations. I, for one, traveled 160 miles from WV once only to be greeted in Cincinnati by a cloud burst. I’m not privy to financial arrangements for stadiums but setting up reserves now for that day would be a good idea.

    • Daytonian

      If you pay for it, we’ll build it. But even the good folks in Minnesota did not make local taxpayers bear the cost of a roof!

    • renbutler

      A dome? Seriously?

      I’d stop going to games. If you had an open-air stadium with a roll-out roof, like in Seattle, well now you’re talkin’…

  5. Jeremy Conley

    This is an incredibly informative article Steve, thanks.

    It seems to me that for small- and mid-market teams, the question is how are you going deal with your homegrown players. The Reds payroll has been steadily increasing over the last few years but they haven’t actually added much talent from outside the organization.

    The reason is that the arb eligible players are all getting raises and some talented homegrown players have gotten big contract extensions.

    The upside for the fans is that we get to watch mostly the same team from year-to-year, and feel like we have a connection to the team. The downside is that we’ve spent so much on the guys that we have, that we rarely have money to add any talent when we need it. Eventually, that gets to the point we got to last year, where we had the most expensive team in the division but not nearly the talent to win it.

    Contrast that to how the A’s operate. They never let a player stay throughout all of their arb years, so fans feel disappointed when their favorite young guys get traded. Imagine if the Reds had traded Bruce after the year he clinched the division with his home run. That’s what it’s like to be an A’s fan every year.

    The upside is that they always have a steady stream of young players from their trades, they always have money for mid-level free agents like Scott Kazmir to fill a hole, and they always have at least a little money at the deadline to add players they need down the stretch. The result is that they are in contention almost every year at a much lower cost than the Reds.

    Neither one is necessarily better, but the Reds model is definitely more boom and bust, and the A’s is more sustainable every year. We had the boom from 2010-2013, I’m just worried that now we’re in for the bust.

  6. Tom Gray

    Sometimes injured players (Marshall) could have their salary covered by insurance rather than payroll. Don’t know for sure.

  7. Art Wayne Austin

    Boy, we have been a big loser signing Ludwick(Note JC) and Marshall. Please, no more multi-year contracts for fragile players.

  8. redsfan06

    Going forward, the payroll challenge looks to be different than it was in the early years of Castellini’s ownership. The Reds have the Phillips contract through 2017 and long term commitments to Votto and Bailey. The multi-year signings have not worked out to the Reds favor due to injuries – Votto, Bailey, Marshall, Ludwick , Schumaker (although his signing is questionable anyway), and to some extent Phillips. This year looks like the beginning of an era requiring a balancing act to augment the big contracts with newly developed players and/or inexpensive free agents.

    The amount of dead money is significant and could double this year depending on Marshall’s and Schumaker’s ability to return. At least the dead money will be gone after this year, except for the deferred payments to Arroyo. Steve, any idea how the Reds compare to the rest of the teams in this area?

    It leads me to the conclusion that the Reds will probably not re-sign Cueto. As much as I like having him, if I was Walt I would be worried about the injury bug with the kind of money Cueto is going to command. The team could figure out a way to pay a CY Young quality pitcher each year, but they cannot afford to blow the money on the DL.

  9. azredsfan

    The Reds have a revenue problem , NOT a payroll problem. The Dbacks just got a 1.5 BILLION dollar Fox Sports AZ deal that will cover 15-20 years. The Dbacks deal covers AZ with a population/ TV sets at about 7 million sets. FOX Sports AZ has a 40% penetration into the sat/ cable market. The Reds with FS Ohio covering most of Ohio and Kentucky along with FS Indiana along with northern Tennessee and Eastern West Virginia, the sat TV deal should be at least 1.5 Billion dollars over a 15 year period. The Reds have historically high FSO ratings over the years. It’s time to sign a new deal with FS Ohio, FS Indiana and West Virginia now to protect the reds bottom line and their players like Cueto, Leake Chapman et all.

    • Jeremy Conley

      Those are all good points, but clearly they have a payroll problem too. You can’t have the highest payroll in the league and be projected to finish 4th or 5th and say that the only problem is that you don’t have enough money. Clearly other teams in your division are spending less for a more talented roster.

      Even the Yankees and Dodgers can have payroll problems. At some point, you have to start spending your money wisely. Having more money can let you get away with more mistakes, but not infinite mistakes forever.

  10. Vanessa Galagnara

    It is not how much you spend, rather it is how concentrated your funds are. The Reds have to much money tied up on Votto, Phillips, Bruce and Bullpen

  11. doctor

    To further point out the growth and change in payrolls along the timeline above, under Marge Schott, the reds had the highest payroll in NL in 1993, 2nd in Majors to Toronto. and then 2nd in NL to atlanta for next few years after.