With the MLB regular season in the books and the playoffs underway, I thought that I would get back to looking at MLB pay and performance. As we state in our book, The Wages of Wins, while there is a positive and statistically significant relationship between relative payroll and team performance (as measured by winning percent); the variation that is common between the two variables is not a lot. So what I will do here is measure both the relationship and the amount of common variation (using r-squared) for the MLB regular season over a few different time periods.
If you are interested in performing your own payroll and performance analysis, here is a step-by-step guide to analyzing payroll and performance.
First, the two variables are MLB regular season winning percent, which I grabbed from ESPN and MLB team payrolls which I got from USA Today's MLB team payroll page.
Second, as I have explained previously, I am using relative payroll because average payrolls have been increasing over time and average winning percent is constant over time. Hence if I use total payroll instead of relative payroll, I will find a weaker relationship since MLB total payrolls are increasing and MLB winning percent is constant. If I use relative payroll (a team's total payroll divided by that seasons average payroll) then I will be comparing two variables that are stationary to each other and get better results.
How much in common is the variation in relative payroll and the variation in winning percent by season?
2014: relative payroll is statistically insignificant.
Over different time periods we see that the explanatory power of relative payroll on team winning percent has been declining since 1995.