Historical data indicates that teams with more money tend to win more ball games.

Given this correlation between salary and team winning percentage, the Salary Adjusted Winning Percentage calculations measures a team's performance relative to its expected level of success given a certain salary. In effect, higher salary teams must play with a handicap.

From the data shown in the top graph, a simple regression yields a formula for the expected winning pct. of a team based on its salary level. To correct for different years, the independent variable is salary as a percentage of the league mean, rather than an absolute number.

The graph includes both a linear function -- which generates a higher r-squared -- and a natural log, which I imagine is a more accurate model of hypothetical success as salary approaches infinity (as the Yankees seem to be on track to do -- see graph #2!) since it asymptotes, and even an infinite salary level will not produce more wins than games played.

Using these formulas, we can find the expected winning percentages of this year's clubs based on their salaries. With this number, the SAWP "corrects" the team's current record, using the following ratio:

(Actual Winning pct./Expected Winning pct.) = (Adjusted Winning pct./.500)

In other words, instead of assuming that the team would be performing at an average level if it had a .500 record, assume that it would be performing at an average level if it has exactly its expected winning percentage. Teams that are exceeding their expected winning percentages will have adjusted winning percentages greater than .500, and likewise, teams that have an actual winning percentage less than their expected winning percentage, which have an adjusted winning pct. that is less than .500.

This adjusted winning pct. is then applied to the total number of games played by the team to determine a salary-adjusted record and current standings.

Take, for example, the 2003 Yankees. True to form, their team salary of $151 million dollars far exceeded that of any other team. And by plugging this salary into the above formula, their expected winning percentage was .645. Their final records was 101-61, or .623. Though an impressive record in absolute terms, relative to their expected winning percentage, the Yankees actually performed worse that expected, and their Adjusting Winning Percentage was just .482 (.500 * .623/.645 -- see above ratio) good enough for a third place finish in the AL East behind Boston and Baltimore.