If you’re up-to-date with the news in Major League Baseball, you’ve surely heard the abbreviation “AAV” being thrown around. I recently heard this term for the first time and it didn’t quite make sense to me – even after doing a few minutes of research. So after I found the answer I wanted to write this article to share what I learned about what is “AAV” in baseball.
AAV, also known as Annual Average Value, is the average value of a player’s contract for one year. AAV is calculated by taking the total value of a player’s contract and dividing it by the total length of the player’s contract.
This means a player would have an AAV of $1 million if they signed a 10-year contract for $10 million. In this article, I’ll discuss everything you need to know about AAV. This includes how AAV is calculated, as well as penalties for exceeding the AAV threshold.
What Is “AAV” in Baseball?
In baseball, the abbreviation AAV means Average Annual Value. AAV refers to the player’s average annualized value over the course of their contract.
Note that this figure doesn’t reflect the total amount the player would earn annually, as they’re free to participate in endorsements, sponsorships, and earn bonuses for their performance.
How Is AAV in Baseball Calculated?
To calculate a player’s AAV, take the total value of the signed contract and divide it by the contract’s number of years.
The equation used for calculating AAV is as follows:
AAV = Total Contract Amount / Length of Contract
This means if a player signed a $100 million contract for five years, their AAV is $20 million.
AAV is Used to Impose a Luxury Tax on Teams
In baseball, the Competitive Balance Tax (CBT), also known as Luxury Tax, determines the maximum Average Annual Value (AAV) threshold one team can pay its players during the course of one year.
If the team’s total AAV goes beyond a certain amount, that team gets taxed.
The luxury tax was originally added to the Collective Bargaining Agreement (CBA) in 1997 to limit the Major League Baseball Association from spending their way into the playoffs.
In essence, the CBT puts a cap on a player’s AAV. It functions like a salary cap because it calculates the entire team’s AAV, but it doesn’t prevent teams from going over the set limit. If a team’s total AAV goes over that set limit, that team is simply taxed.
The Competitive Balance Tax Threshold Increases Over Time
According to the MLB, the following amounts have been set for the seasons of 2022 through 2026:
- 2022: $230 million
- 2023: $233 million
- 2024: $237 million
- 2025: $241 million
- 2026: $244 million
As you can see, the CBT limit increases between 1.2% to 1.7% per year. This was done purposely so no MLB team receives a significantly higher annual payroll in a certain year.
Though advantageous to most teams, the CBT rule doesn’t directly benefit baseball players. This is because the CBT incentivizes teams to pay as little as possible for players. If teams go over a certain amount, they are penalized with a tax.
With other sports, the salary cap is adjusted based on the revenues of the league. That’s not the case with MLB players. The CBT limit is adjusted yearly and is negotiated as part of the Collective Bargaining Agreement.
As such, MLB players could be losing millions, if not billions, of potential earnings.
The CBT limits a player’s earning potential by creating a strict environment where even the best of the best is paid a certain amount.
MLB Teams Get Taxed When Their Total AAV Exceeds the Limit
While MLB doesn’t have an official salary cap, the CBT charges teams a considerable amount of money for “breaking” the CBT maximum limit.
To find out if a team is over the limit, each team needs to calculate their team’s payrolls in terms of AAV.
As a simple example, if a team has 40 players and all 40 players have the exact same contract of $10 million over 10 years, each player’s AAV is $1 million. Since all 40 players have an AAV of $1 million, that team’s total AAV would be $40 million.
If a team’s AAV exceeds the tax threshold of that season, the team would be taxed on each dollar above the limit. And if the club ignores the policy and goes over the threshold year after year, the taxes and penalties become harsher.
In the first year, the CBT penalty is around 20% of every dollar spent. In the second year, it increases by 10%, totaling 30%. In the third year, it’s a staggering 50%.
According to the Collective Bargaining Agreement, MLB teams will be taxed at the rate in the table below for every dollar they spend over the maximum CBT amount:
|Amount Over||1st Time Offender||2nd Time Offender||3rd Time Offender|
|Below $20 million||20%||30%||50%|
|Over $40 million||62.5%||75%||95%|
For example, if a team’s CBT is $200 million and the club’s AAV is $220 million, that team is $20 million over the CBT limit. That means the 20% penalty for year one is $4 million, year two $6 million, and year three $10 million.
But it doesn’t end there; should the AAV exceed $20 million, the club is penalized with an additional surcharge of 12%. If it exceeds $40 million, the penalty is 42.5% for the first year and 45% for the year after that. If the AAV exceeds $60 million, the surcharge is 60%.
The collected tax money is used to assist smaller market clubs through revenue sharing and fund player benefits, so it doesn’t all go to waste. Still, it’s a considerable amount of money paid by one team. Furthermore, it isn’t uncommon for small market clubs to pocket the extra money instead of investing it in their teams.
MLB Teams Can Drop in the Rule 4 Draft if They Are Too Far Over the Allowed AAV Amount
According to the MLB, teams that are $40 million over the limit for the total amount of AAV allowed will have their Rule 4 Draft moved back by 10 picks.
The one exception to this rule is if the team falls within the top 6 spots of the Rule 4 Draft. If a team is $40 million over the allowed AAV limit and they have a top 6 pick in the Rule 4 Draft, their 2nd round pick will be moved back by 10 spots.
MLB Players That Have the Highest AAVs
I’ve seen some lucrative contracts in the baseball industry, but the figures seem to get higher and higher each year.
Center fielder Mike Trout, a ten-time MLB All-Star and eight-time Silver Slugger winner, has one of the highest AAVs in baseball history. He signed an 11-year contract in 2019 of $426.5 million, bringing his AAV to roughly $39 million a year.
Mike Trout’s contract was over 60% more than the second largest highest contract in the league at the time, which was Mookie Betts’s 12-year contract for $365 million.
Antony Rendon and Stephen Strasburg both had an average AAV of $35 million. The same is said for Mookie Betts.
Still, these figures don’t compare to the number one spot, Max Scherzer.
In 2021, Max Scherzer signed a contract of $130 million. This might seem “low” in comparison to Mike Trout’s $426.5 million, but the length of Max Scherzer’s contract is considerably shorter than Mike Trout’s at only three years.
This means that his AAV is a jaw-dropping $43.33 million—about 12% more than Mike Trout’s AAV!