Last week I blogged about competitive balance in MLB. Now I want to turn to the relationship between MLB payroll and MLB performance. I have looked at this using USA Today MLB team payroll data in the past (2015 and 2016), but now I want to use data from spotrac.com for MLB. I find that the data from spotrac is excellent and probably more accurate than the USA Today MLB team payroll data. The data from spotrac starts in 2011, so I have a smaller time frame to work with, but I thought it would be good to see if the relationship between payroll and performance differs using a different set of MLB team payroll data. If you are interested in doing this type of analysis, here is a step-by-step guide to payroll and performance analysis.
So, after collecting and organizing the 2011 through 2017 MLB team payroll and team performance data, I ran the regression on team performance using relative payroll as the independent variable. I use a software package called Stata for the statistical analysis and found that relative payroll is positive and statistically significant with respect to MLB team performance, just like I have found in each previous time I have done this type of statistical analysis using data from USA Today. The coefficient on relative payroll is 0.06868, which means that a one unit increase in relative payroll will lead to a 0.06868 increase in team winning percent. In terms of wins, the regression results show that a one unit increase in relative payroll would result in just over 11 additional wins. In order to get those wins, a MLB team would have to increase team payroll by one unit of relative payroll, which is the same thing as average payroll. For the 2017 MLB season, that is an increase of $152,327,084 using data from spotrac. So those approximately 11 wins would cost about $13,690,875 per win. That is a rather costly amount to pay for each win.
Finally, the regression results show that while the relationship between MLB team performance and relative payroll is positive and statistically significant, the amount that relative payroll "explains" of MLB team performance is not that much. In this case, using data from spotrac, the explanatory power of the regression is rather weak, with an adjusted r-squared equal to 0.127. Another way of saying that is that relative payroll only "explains" 12.7% of MLB team performance. I will let you decide if you think that is good enough. But will state that there are other variables that explain a greater amount of MLB team performance than relative payroll.