Future payroll: the benefits of the Atlanta Braves’ contract extensions

With Austin Riley now locked up, where do the Atlanta Braves go from here?

The Atlanta Braves have a stated goal of bringing their team into the category of having a “Top 5” payroll, but beyond the question of what that means is the bigger question about how that will help the club going forward.

First, let’s identify those clubs already in the Top 5 tier for 2022, based on COTS site figures for 2022’s Opening Day:

• Dodgers:  $280.8 million
• Mets:  $264.4 million
• Yankees $245.9 million
• Phillies:  $228.7 million
• San Diego:  $211.2 million
• Boston:  $206.5 million

Yep – I can count… that’s six teams in our Top 5 list.  Stand by for a sec about that.

These are the actual payroll figures.  However, the numbers counting against each team’s Competitive Balance Tax level (the amount determining whether they are above the taxing threshold of $230 million) range from 3-17% higher than these.

It’s because of that calculation that we have six teams listed for this “Top 5”… the Boston Red Sox rank 6th in real payroll, but they are 4th against the luxury tax threshold since their CB tax level ($241.8m) surpasses that of San Diego’s ($230.3m) and the Phillies ($237.1m)… at least for now.

The Atlanta Braves, by the way, sat at $177.6 million (actual payroll) back at Opening Day, and are reckoned to be at $206.1 million for CB tax purposes.  Both figures rank 9th overall.

Regardless of whether you measure these numbers using actual payroll figures or fully-loaded CD Tax figures, one thing is clear:  all six of these teams are above the $230 million taxing threshold for 2022.

Thus we should now talk about the consequences of doing so.

You must pay the penalty!

The penalties for spending this much vary depending on how often a team repeats the violation:

• 1st time:  20% tax on the amount above the threshold.
• 2nd year in a row:  30%
• 3rd year in a row or more:  50%

Dropping below the barrier in any given year resets the counter to zero… along with eliminating any tax liability for that period.

Then there’s the so-called Steve Cohen rule, which penalizes not just the duration above the threshold, but the egregiousness of the crime in any given year:

• Exceeding the threshold by $20-40m:  12% tax surcharge
• $40-60m for 1 year:  42.5% surcharge
• $40-60m for additional years consecutively:  45% surcharge
• Beyond $60m above the threshold:  60% surcharge

In addition, any team at $40 million or more above the threshold will lose 10 positions in the next Rule 4 (1st-year player) draft.  That happened to the Dodgers this year; both they and the Mets are looking at the same penalty for the 2023 draft.

Still with me?  Good… we’re almost done with this necessary nonsense before we get to the main point.

A Narrow Loophole

There’s an exception to the draft pick penalty:  if a team is spending like mad and still ends up so bad that they will be drafting at one of the first 6 picks overall, the “move down” penalty will apply to their second-highest draft pick.

Frankly, I’d eliminate that clause to stop rewarding management malpractice, but we’ll move on.

So as a quick example, let’s say that the Mets end up with a final tally of $290 million against the luxury tax.  That means…

• They will be $60 million above the threshold
• They will be charged a 20% tax on that $60 million ($12 million)
• They will be charged a 42.5% surcharge on that $60 million ($25.5 million*)
• Their first-round draft pick next Summer will be moved down 10 positions… to around the front of the second round.

So for spending $290 million… they are actually spending $327.5 million… and if another dime is spent, that surcharge jumps to 60%*.

* NOTE:  it’s not clear from the text on MLB’s site whether that applies to the entire overage or just the amount above these 40 or 60 million dollar barriers.  Either way, the penalty is obviously intended to be painful.

One final word on the luxury tax primer:  the taxing thresholds are scheduled to rise over time:

• 2022: $230 million
• 2023: $233 million
• 2024: $237 million
• 2025: $241 million
• 2026: $244 million

Okay… that explains the ugly payroll math… let’s get back to the Braves.

Guessing the Braves’ Behavior

The reason I went through all of that is that by saying “we want to be a Top 5 payroll club”, the Atlanta Braves are effectively declaring “we will be at or above the luxury tax threshold”.

The Braves aren’t necessarily opposed – either morally or by team policy – to paying penalties for exceeding such barriers.

How do we know this?  In recent years, they have routinely exceeded their spending pool for draft bonuses in order to secure their selected players.

There is a 75% tax on the overages for doing so, but they have also limited the damage to 5% of their bonus pool monies.  For example, had they completely max’d out that 5% (and they pretty much did), their tax liability comes close to $400,000 (out of a total expenditure falling just short of $11 million).

The reason for stopping at this 5% mark involves the severity of the penalties for going higher, which includes the outright loss of future draft picks.

Thus there’s a point at which it makes good business sense to incur some levels of penalties, but it also makes sense to draw a “not to exceed” line to avoid others.

The Braves have embraced this concept, and it stands to reason that their thinking when it comes to the luxury tax threshold might be the same.

A Delicate (Competitive) Balance

That’s where a dance might be in play for payroll considerations near the taxing threshold level for a given year.  Being above the threshold one year is one thing (20% tax), but doing that year after year (30%, then 50% tax levels) could become debilitating.

While I could see the Braves flirting with the threshold as part of their pledge to be a Top 5 payroll team, I don’t see them bursting into the surcharge levels… that would be hard to justify from a business point of view.

Buying a free agent for $20 million is one thing.  Having to pay $32.5 million to get him (adding 20%, plus a 42.5% surcharge) to satisfy the MLB taxes is quite another.  No chance the Braves do that.

But that’s why the team-friendly contract extensions that the Braves have now lined up are so important.