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How much surplus value to MLB teams need to compete?

Surplus value is a buzzword right now and it is very important to a lot of teams but not equally valuable to all of them. I want to figure out a way to define what teams need surplus value to compete and how much the most desperate teams need.

I'm not really sure where to start with this, so I started compiling information. I used the data available via Forbes for team values.

Using the value given there, subtracting the debt that each team has (by multiplying the debt/value %) and multiplying it by a conservative factor of .35, I had what each team should use as a max payroll. This isn't based on anything scientific and not factoring revenue at all. I am just thinking about this as if I were an owner and how much I'd want to leverage the equity of my (already leveraged) asset.

The Yankees are obviously the leader here with a ridiculous $866 million dollar suggested cap. The Astros have the lowest at $94.6 million and the average is $235 million and mean of $179. In reality, the average payroll was about $113 million in 2014 so this obviously isn't what teams use to figure out their cap. It doesn't make sense to use value to justify operating payroll if you're revenue is considerably less.

Or does it?

The Astros lost 15% of their value last season and are 26th most valuable franchise. It is an area that is a huge market and has the financial numbers similar to a small market. That is a nearly $80 million dollar loss. All because of losing teams. The Pittsburgh Pirates made a good run last year and another one this year. Their value went up 19% or $109 million dollars. Think about that. They increased the value of their asset by 165% of their entire payroll and Pittsburgh doesn't have the growth potential of an area like Houston.

Revenue is what pays the bills from year to year but when Pittsburgh's revenue was $204 million and their asset value increased $109 million, it gives incentive to push towards a reasonable maximum using the asset value to continue to improve it's value, especially when investing in the product gives you that kind of return. There is a point of diminishing return on this, as it wouldn't work nearly as well for the Yankees but it has worked well for the Dodgers, Cubs and Cardinals as they improve and have more success. I could analyze this more why they grow and where they can but that isn't my goal here.

Sorry, I'm writing this as I'm doing the work so it's a little meandering.

Looking at payrolls over the last four years, it seems as though teams spend at a much lower rate that this, actually .21 is a very close number. The Nationals and Tigers are outliers here. The Nats due to debt and the Tigers due to, well, spending a shit ton.

Based on this, the Yankees in theory could have a payroll of $520 million dollars while the meager Rays could only spend $73.3 and bump it up to $83.51 if they want to make a run at the playoffs.

I know these aren't tried and true numbers, just a benchmark. I like to create benchmarks to use when thinking about baseball because it helps put everything in perspective. I know this isn't rigourously tested but this is how I do much of my work, I just rarely document what I'm doing, I just do it.

Here are the final results:

Numbers are in Millions of dollars

Team Payroll 2014 Payroll Differential Average/Win to be .500 for 90 Wins For 100 Wins
Yankees $520 $306 $15.61 $12.29 $9.94
Dodgers $336 $94 $10.09 $7.94 $6.42
Red Sox $315 $158 $9.46 $7.45 $6.02
Cubs $164 $91 $4.92 $3.87 $3.13
Giants $191 $44 $5.74 $4.52 $3.65
Phillies $184 $4 $5.53 $4.36 $3.52
Rangers $139 $4 $4.16 $3.28 $2.65
Cardinals $112 $4 $3.36 $2.65 $2.14
Mets $94 $13 $2.83 $2.22 $1.80
Angels $156 $19 $4.69 $3.69 $2.99
Braves $153 $42 $4.60 $3.62 $2.93
Mariners $146 $57 $4.39 $3.45 $2.79
Nationals $75 -$60 $2.25 $1.77 $1.43
White Sox $144 $55 $4.34 $3.42 $2.76
Tigers $106 -$56 $3.17 $2.50 $2.02
Orioles $99 $3 $2.97 $2.34 $1.89
Padres $89 -$1 $2.68 $2.11 $1.70
blue jays $128 -$2 $3.85 $3.03 $2.45
twins $80 -$5 $2.40 $1.89 $1.53
Reds $117 $5 $3.52 $2.77 $2.24
Diamondbacks $92 -$19 $2.77 $2.18 $1.76
Rockies $107 $10 $3.23 $2.54 $2.05
Pirates $101 $22 $3.03 $2.39 $1.93
Indians $102 $20 $3.06 $2.41 $1.95
Brewers $108 $4 $3.24 $2.55 $2.06
Astros $57 $12 $1.70 $1.34 $1.09
Marlins $59 $17 $1.77 $1.39 $1.12
A's $90 $11 $2.72 $2.14 $1.73
Royals $92 $0 $2.75 $2.17 $1.75
Rays $73 -$8 $2.20 $1.73 $1.40

Now none of this is groundbreaking but it may be useful as I look at farm systems and where teams are getting value and it adds to my knowledge base if nothing else.

or I could just use 46% of revenue and get much closer...dammit...


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