The Incoherency of the MLB Incentive Regime

One of the main research themes which motivated me to undertake this project was to critically examine the principles underlying the rules about incentives in MLB contracts. As set out in the History section of this site, the current regulatory regime governing incentives in MLB contracts has been remarkably unchanged over the last century, giving rise to the question: Does it make sense in the modern era? As set out below, it appears that the incentive regime in the MLB, and the traditional rationales used to support this system, are divorced from the realities of how incentives are actually being used.

Why Allow Incentives?

There are two main parts to the MLB incentive regime. First, and perhaps somewhat overlooked, is that incentives are permitted in all player contracts. This could almost be taken for granted, but it would theoretically be possible for the teams and players to agree to ban incentives for all contracts or for some types of contracts. The continued prominence and use of incentives over time indicates that the teams and players recognize some value associated with incentives. Common reasons given to support the use of incentives are that incentives serve to motivate players to perform at a high-level during their contract, and that incentives can facilitate contract finalization when a team and player are slightly apart in terms of guaranteed money. As an example of the latter, agent Gavin Kahn was quoted by Kevin Baxter in a 2020 LA Times article as saying: “There are times where [incentives] could bridge the gap when you’re apart in terms of dollars… It’s a way to sweeten the deal for the player and to provide some additional value for them to sign.”

Why Restrict Certain Incentives?

The second aspect of the incentive regime are the restrictions on the form that incentives can take. The main restrictions are the prohibition on skills-based incentives (eg. wins, saves, home runs, hits, etc.) and incentives based on team standing (eg. winning a division, pennant or world series), but there are also other prohibitions like the prohibition on using marketing agreements to create incentives around major milestones (eg. home run records). The most common reasons used to support the restrictions on incentive are that:

Players and the MLBPA union prefer guaranteed money in contracts and don’t want incentives to eat into guaranteed money;
The restriction on skills-based incentives and incentives based on team-standing avoids incentives being based on events outside the immediate control of the player or team (eg. a pitcher can give up 0 runs in a game and not record a win, a player can hit the ball hard without recording a hit, a player can play very well over a season but the team may not finish high in the standings); and
Players and teams benefit from the skills-based restrictions because they prevent the possibility that a team or player will manipulate statistical goals to secure an advantage relating an incentive (eg. a team could sit a player once they neared a certain statistical achievement, players could somehow conspire together or otherwise artificially attempt to achieve statistical objectives).

With this context in mind, we can examine the ways that incentives are currently used in the MLB in order to determine whether the usage of incentives aligns with the rationales for allowing incentives generally and for restricting certain types of incentives.

Incentive Usage Varies Greatly

Starting with the reason for allowing incentives in general, the data shows that incentives are being used for a range of purposes, some with little connection to the traditional rationales for incentives.

Incentives in contracts for high-value, multi-year free agents, are used in a way that most closely resembles the traditional rationale for incentives. These contracts generally favour award incentives over performance incentives and reward the player for high finishes in major award voting. The quantum of the incentive payout is relatively minor in comparison to the guaranteed money under the contract. This usage aligns with the idea that incentives are a tool to motivate high performance over the term of a long-term guaranteed contract.

However, other incentive structures are not as clearly aligned with this rationale:

Pre-Arb/Arb-Eligible Extensions: Multi-year contracts for pre-arbitration and arbitration-eligible players use award, and occasionally performance, incentives as salary escalators, offering the player significant monetary upside if the player reaches these targets. Unlike for the high-value free agents, who have a lower monetary payout associated with reaching incentives, the incentives in these contracts appear very important to the overall setup of the contract. In these circumstances, the incentives appear to be compensation for a scenario in which the player reaches their compensation during the term of the contract. In this sense it also serves to compensate the player for giving up arbitration and free agency rights, as the player could potentially receive compensation greater than the guaranteed money in their extension through free agency or arbitration if they perform well during the early years of their career. This rationale is logical, as early career players would presumably already be motivated to perform well through their term of the contract, given that they would likely have an opportunity to receive another significant contract during their career through free agency.
One-Year Contracts: One-year contracts, particularly for players age 30 and older, show a different purpose for incentives. Many of these contracts contain incentive structures, predominantly through performance incentives based on usage, which offer the player the chance to significantly increase their one-year earnings. For example, in the 2025 and 2026 seasons, at least 37 players, or over one per team, received one-year contracts with incentives that could increase their compensation by greater than 25% of their guaranteed money. For these players, the incentive structure seems to reflect the uncertainty related to how these players will be used during the season, and serves as a mechanism through which the player can be appropriately compensated if they are used in a meaningful manner during the year of the contract. As such, the guaranteed money in these contracts appears to be more of a salary floor for the player with the incentive offering upside that the player can obtain if the season goes well for them. The traditional rationale for incentives, being to motivate good performance during the term of the contract, again does not seem applicable here, as the one-year term of the contract means the player would already be motivated to perform well in hopes of earning another contract after the season.
Position/Role Incentives: Certain contracts contain incentives which allow a player to earn additional money or rights (through player options) based on the position or role that they are used in during the contract. These incentive structures are used in the contracts for catchers (incentive tied to games played at catcher), pitchers who may be used in a relief or starting role (incentive tied to games started), or relief pitchers who may be used as closers (incentive tied to games finished). In these contracts, the basis for the incentive appears to be recognizing the premium value associated with playing at catcher relative to DH’ing, and the premium values associated with being used as a starter or closer relative to being used as a middle relief pitcher.
Injury/Health Incentives: Other contracts contain incentives tied to a player’s health during the term of the contract. These incentive structures either reward the player for remaining healthy during the term of the contract, or give the team additional rights (through conditional team option years) in the event that the player is injured during the term of the contract. They are most frequently found in contracts for players with significant injury histories. Here the rationale for the incentives appears to be downside protection for the teams in relation to their investment in the player. One could view these incentives as motivating the player to stay healthy during the term of the contract, but, unfortunately, health is largely outside of a player’s control, meaning the purpose of these incentives being to protect the team is a much more plausible rationale.

As can be seen from the above, the use of incentives shows much more complexity than simply motivating players to perform well during the term of their contract. Two specific trends are notable. First, many incentives are tied to incentives that are not within the control of the player. A player does not control how many times they are used, the role that they are used in, or their health, but incentives are used in relation to all three of these contingencies. Second, there is notable stratification between incentive purpose and types of players. Top-end free agents, pre-arb/arb-eligible players, players in the market for one-year contracts, relievers, and players with injury histories all face substantially different incentive models, all of which have little substantive similarity to each other. As such, it appears that while all of these structures can be called ‘incentives’, the considerations, particularly from a players’ interests standpoint, varies greatly between them.

Incentive Restrictions are Ineffective

Turning to the restrictions on incentives, there is a clear disconnect between the goals of these restrictions and how incentives are being used.

One reason underlying the restrictions on incentives is that the players and MLBPA Union prefer guaranteed money, instead of having variable compensation based on whether incentives are achieved. While this seems to be the case for top-end free agents, it is arguably not hold in other situations. As detailed above, significant portions of the possible compensation for players on one-year contracts is dependent on incentives. Certain contracts for pre-arbitration and arbitration-eligible players also show this, as, instead of guaranteed money, salary escalators based on incentives make up a significant portion of the player’s potential compensation.

Another major reason given in support of the restrictions arises from the issue that skills-based objectives, such as wins, hits, saves, rely on factors and contingencies outside of how the player performs. Put another way, the player’s performance does not dictate whether they will achieve the objective. This logic again does not apply to how are incentives are actually being used, as many incentive structures rely on variables outside the control of the player or both the team and the player. For example, incentives related to health are largely out of the control of the player and the team. Award incentives, which are based on where a player finishes in voting for certain awards, reflect a player’s contribution but are based on how third parties, outside the team or the player, view that player’s contributions relative to other players. In terms of incentives based on player usage, either in general or in a specific role, this is fully in the control of the team. If there are concerns that teams may manipulate a player’s playing time or role in order to prevent the player from achieving skills-based incentives, then these concerns should apply equally to incentives based on innings pitched, plate or pitching appearances, or games finished/games started.

Moreover, and perhaps more importantly, there is a logical inconsistency between banning skills-based incentives and allowing some types of incentives that are currently commonplace. This inconsistency is most notable for award incentives. Award incentives are skills-based incentives, they provide a player with potential additional compensation based on a player’s skill. However, due to the prohibition on statistical skills-based incentives, teams and players use an imprecise proxy, based on third-party voting, for skill-based performance. Using award incentives is similar in principle to using WAR as an incentive marker, as is done in the pre-arbitration bonus pool but would clearly be prohibited under the current incentive rules, as both attempt to assess and rank players based on their performance. Awards use human judgment for this analysis of skills-based performance, while WAR uses statistical models (albeit with human judgment built into the models).

The analysis above is not intended to be a criticism of how teams and players are using incentives. Rather, it is intended to highlight that the rules for incentives lack a coherent purpose or organizing principle and are disconnected from the realities of incentives in the modern MLB. They are a set of rules ripe for modernization in a manner that can benefit both teams and players.