Accepting Dead Money in Free Agent Contracts

Robinson Cano just turned 31, and the FanGraphs crowd expects him to sign an eight year contract this winter that will take him through 2021, his age-38 season. It’s not out of the realm of possibility that he lands a nine or ten year deal, as Prince Fielder and Albert Pujols did a couple of years ago, and ends up getting signed through age-40. And it’s not a controversial statement to say that Robinson Cano is unlikely to still be a highly productive player at that point in his career.

Any team that signs Cano this winter is going to be be guaranteeing him in the range of $25 million per year for years in which Cano should reasonably be projected as a below average player, and maybe even a guy who shouldn’t be starting for a big league team. The negotiations for his services are essentially going to center around how many years a team is willing to guarantee Cano a significant paycheck while expecting almost nothing in return. The team that eventually gets to sign him will be the team that gives him the most “dead money” years.

This is what free agency for elite players has evolved into. Instead of negotiating on annual salary, the market has evolved to negotiate on years. Let’s look at some data, so you don’t have to take my word for it.

Here is some data of MLB salaries over the last decade, thanks to ESPN and Baseball-Reference. The three columns represent the average salary of the five highest paid players in each year, the MLB average salary for all players in that season, and the league minimum for that year. At the bottom, I have listed the total percentage increase for each.

Year Top 5 Average MLB Average MLB Minimum
2004 $20,160,000 $2,372,189 $300,000
2005 $21,720,000 $2,313,535 $300,000
2006 $20,208,000 $2,476,589 $316,000
2007 $20,430,600 $2,699,292 $327,000
2008 $22,116,200 $2,824,751 $380,000
2009 $23,664,600 $2,925,679 $390,000
2010 $24,131,000 $2,996,106 $400,000
2011 $25,719,600 $3,014,572 $400,000
2012 $24,400,000 $3,095,183 $414,000
2013 $24,900,000 $3,213,479 $480,000
Increase 24% 35% 60%

Total salaries have risen by a total of 35% over the last 10 years, but it has not been a 35% increase in salary for each player. Instead, what we’ve seen is a dramatic rise in the minimum wage relative to the highest paid players in the game. 10 years ago, the most expensive players made about 70 times the league minimum, and then it shifted to around 60 times the minimum from 2007-2012; last year, it was just 52 times the minimum. While income inequality is a big topic among U.S. economists, baseball is actually seeing a reversal of the national trend, at least in terms of annual paychecks.

Weep not for the super rich, however; they are still getting their money. Since this table only shows annual salary, it doesn’t reflect the length of the commitment that Major League teams are making to premium players. Essentially, the top players have traded in part of the overall salary increase for extended long term security. The best players in the game are choosing years over dollars.

In 2001, both Derek Jeter and Alex Rodriguez got 10 year contracts, and then in 2003, Todd Helton got a nine year deal. Contracts of this length aren’t completely unprecedented, but they used to be exceedingly rare. They are becoming far more common in this day and age. We’ve already mentioned Pujols and Fielder, but the list of players currently under contracts of at least nine years also includes Alex Rodriguez, Joey Votto, Buster Posey, Troy Tulowitzki, Evan Longoria, Ryan Braun, and Elvis Andrus. Not all of these deals were announced as nine year contracts, but if you give a player a seven year deal that starts in two years, I think it’s fair to consider that a nine year commitment, since the contract ends nine years from when it was signed.

Reports have suggested that Clayton Kershaw is likely to join that mix this off-season, becoming the first pitcher to sign a deal for more than seven guaranteed years since the Mike Hampton disaster contract of 2001. And we’ll probably have another set of extremely long term extensions for non-free agents next spring, as we saw last year with Posey, Andrus, Felix Hernandez, and Justin Verlander this year.

There is something to note about these long term extensions, however: they’re essentially all being priced at something close to or below $25 million per year, the lower market rate — relative to the league minimum — than we’d expect based on total salary inflation across the sport. Pujols got $24 million per year for 10 years, ending in 2021. Fielder got $24 million per year for nine years, ending in 2020. Votto got $22.5 million per year for 10 years — two years away from free agency, so a 12 year commitment when it was signed — ending in 2023. Posey gets to $21.4 million in 2021. Longoria tops out at $19.5 million when his deal expires in 2022.

Essentially, the new breed of superstar contract is telling premium players that they can lock in nearly a decade’s worth of guaranteed dollars if they take today’s price for the entire term, or in some cases, something a little less than today’s price depending on how much of a home town discount they’re giving up. While baseball salaries have been inflating at a rate of 3.5% per year on average for the last decade, the superstar contracts are generally not giving them raises that will keep up with salary inflation; the inflation that teams and players are accepting is in guaranteed years.

Essentially, teams are accepting that they’re going to have dead money on the books in the distant future in exchange for relatively lower salaries for elite players in the short term. Rather than escalate the top salary to $30 million per year, the market has simply shifted those extra wages to the back end of the contract in the form of an additional guaranteed year.

Let’s look at two hypothetical long term contracts for Robinson Cano, for instance, noting his expected production and salary in each season. We’ll apply a standard aging curve of about a half win per season decline until age 33, and then a 0.7 win per season decline after that. Here’s what a standard nine year, $225 million contract for Cano might look like:

Year Salary Projected WAR $/WAR
2014 $22,000,000 6.0 $3,666,667
2015 $24,000,000 5.5 $4,363,636
2016 $25,000,000 5.0 $5,000,000
2017 $25,000,000 4.3 $5,813,953
2018 $25,000,000 3.6 $6,944,444
2019 $25,000,000 2.9 $8,620,690
2020 $25,000,000 2.2 $11,363,636
2021 $26,000,000 1.5 $17,333,333
2022 $28,000,000 0.8 $35,000,000
Total $225,000,000 31.8 $7,075,472

The last three years of that deal look pretty awful. In those seasons, Cano would be paid nearly $80 million and return a whopping +4.5 WAR. After the end of year five even, that looks like a contract you’d want to void, if such a thing was possible in MLB.

Now, here’s a five year deal at the same price level that avoids those last four seasons.

Year Salary Projected WAR $/WAR
2014 $33,000,000 6.0 $5,500,000
2015 $34,000,000 5.5 $6,181,818
2016 $35,000,000 5.0 $7,000,000
2017 $35,000,000 4.3 $8,139,535
2018 $36,000,000 3.6 $10,000,000
Total $173,000,000 24.4 $7,090,164

In terms of price, $225 million for nine years is basically the equivalent of $173 million over five years, or an average of about $35 million per year. That is probably something close to the salary that it would take to get Cano to forego a very long term contract that carried him into his unproductive years, if Cano was primarily interested in maximizing his total earnings over the next decade.

Whenever a player signs one of these mega contracts, a significant part of the reaction is that the deal is crazy because of how overpaid the player is going to be at the end of the deal. That is usually a true statement, but it is far too narrow of a way of viewing contracts. If teams were primarily interested in avoiding having dead money on the books, then the average salary of the highest paid players in the game would be something like $10 million per year higher than it is now.

That is not the choice that teams and players have made. Both sides have agreed that they would rather transfer those up-front costs to the back end of the deal, giving the player security of knowing where he’ll spend most of the rest of his career, while deferring a portion of the cost of carrying a star player to nearly a decade from now. And in reality, this is not much different than simply trading some prospects to acquire a veteran to help get your team into the postseason.

When you trade young players with multiple years of team control at reduced prices for a player with just one or two years left before they hit free agency, you are essentially buying a player that you couldn’t otherwise afford by borrowing money from your future. It is not as clearly a financial transaction as a contract, but removing cost controlled players from your organization creates holes that have to be filled by spending money in the future, often at market prices.

Any team who trades for David Price this winter is going to be giving up players who project to have significant value from 2016-2020ish, and in acquiring Price, they’ll be getting zero expected production from him in those years, barring a very expensive contract extension before he reaches free agency. Even with an extension, the cost of buying out free agency is going to be so high that they’ll be receiving little surplus value in those years. Meanwhile, the prospects they’ve traded away will have to be replaced with future spending. Acquiring Price for prospects is, at the end of the day, not that different from signing a a player to a six or seven year contract when you only expect him to perform for two of those six or seven years.

Yet this kind of borrowing from the future is widely accepted as a roster building technique. Trading prospects for veterans is what contending teams do, and is considered part of the value of having a strong farm system in the first place. Making the same kind of decision, only substituting in future cash instead of future cost controlled players, often leads to derision and scorn.

There absolutely are bad long term contracts that leave organizations without the financial flexibility needed to put contending teams on the field, just as there are bad prospects-for-veterans trades that remove future stars from a team’s organization without giving enough short term reward to justify the move. I would suggest, however, that we view both types of moves as the same decision, and not immediately reject the value of deferring a premium free agent’s cost into years 7-10 simply because the contract is going to end poorly. It’s going to end poorly because, when these deals are done right, they provide a huge amount of value at the beginning of the contract, far and above what a player is actually worth based on his production.

Declaring that any contract a bad contract if it ends with multiple years of low performance-to-salary ratios is simply incomplete analysis. Long term deals have to be viewed as an exchange, where the player concedes that he will take far less in salary than he is worth in exchange for a guaranteed paycheck when he might otherwise not be able to get one.

Don’t want to give Robinson Cano a nine year deal? That’s fine, and perhaps even rational. If you want that kind of player on your team, though, then you should be prepared to offer him $35 million per year on a shorter term deal. Because, without the dead money at the end, that’s closer to his actual value than the $25 million he’s likely going to ask for.



Print This Post



Dave is the Managing Editor of FanGraphs.


Sort by:   newest | oldest | most voted
mettle
Guest
mettle
2 years 8 months ago

Very interesting analysis.

Could the reason for this be either?

1) players don’t fully appreciate the dollar-cost of time ($1m now is worth more than $1m in 10 year)
2) insurance policies against injury are structured so as to somehow favor this type of deal

I’m leaning towards #1 because even you excluded that from your calculation.

robby
Guest
robby
2 years 8 months ago

For these high-end players with agents and i’m sure management ‘teams’, etc, I’m sure the people negotiating know about inflation. It’s not like a 18 year old going in negotiating by himself

Bobby
Guest
Bobby
2 years 8 months ago

I think it’s beneficial for the players, as long as they have a moderate risk profile.

Take Cano, age 31, for instance. Let’s say he has a choice between signing one of the two contracts you drew out above, for the dollar amounts you chose. That would mean Cano would need to expect to make at least $52,000,000 a year for four years, or $13,000,000 a year, for the shorter contract to make sense. He’s obviously not going to get all of that money at once (a four year contract for an age-38 second baseman, if he doesn’t switch positions?). He will likely earn one- and two-year contracts for which the value will fluctuate based on year-to-year performance and injury risk.

Inflation, both within the sport and the macro economy, may alter the break-even amount. But unless Cano believes he will be able to command 1.5-2.5 win money each year for his age 38-41 seasons, he’s better off taking the 9 year deal.

Also, of course, Cano could ask for an even higher AAV and the short term contract would be worth it, but is it incorrect to assume most teams have some sort of yearly payroll budget? As stated to in the argument, better for the GMs giving out the contracts to spread that money out.

TanGeng
Guest
2 years 8 months ago

If you look at Dave’s ExWAR table 1.5-2.5 WAR per year is exactly what Cano is expected to produce during his 38-41 seasons.

O'Jones
Guest
O'Jones
2 years 8 months ago

in this hypothetical, the contract with the deferred salary nets him an extra 50 million, is that factored in to cover the difference due to inflation?

TKDC
Guest
TKDC
2 years 8 months ago

He would also be able to potentially sign another contract for those years.

Plucky
Guest
Plucky
2 years 8 months ago

An important principle in economics is the desire to smooth income and consumption over time, which is what’s going on here. A player who is rationally managing his personal finances in a front-loaded contract will be saving rather than spending that extra money, and given the drop-off in earnings potential after retirement, he would be investing that money very, very conservatively. What the long/flat-rate contract structure does is build that end result in automatically. And if you’re about to argue that he’s forgoing interest in that regard, do note that the average assumed rate ($7m/WAR) in this hypothetical contract is substantially above the generally assumed standard of $5.5m/WAR. What he’s forgoing in interest he’s getting back in a higher rate

Zen Madman
Guest
2 years 8 months ago

I don’t think $5.5M/WAR is a good assumption anymore.

Iron
Guest
Iron
2 years 8 months ago

New TV money has increased the number and will presumably do so even more by the end of this hypothetical contract.

DD
Guest
DD
2 years 8 months ago

The key is getting that surplus production in the first few years. If that doesn’t happen because of injury, or you overvalue the player’s productivity, you won’t have such a surplus to offset the overpayment in the tail end. Look at the Pujols deal – if he was still a 7-8 WAR player thru 2014 or so, would this deal be such a problem?

Anon21
Member
Anon21
2 years 8 months ago

That seems to apply equally to a shorter-term contract with a higher per-year salary. Maybe even more so—$25 million of the Angels’ payroll in 2020 may be more of an annoyance than a millstone, but $35 or $40 million of dead money in 2012 could have been a disaster—if not for all the other disasters that sank their contention hopes in any event.

DD
Guest
DD
2 years 8 months ago

Would you rather get 3 WAR for 35 mil or .3 WAR for $25 mil?

DD
Guest
DD
2 years 8 months ago

Strike my above comment, must account for time value of money in here too.

snapper
Guest
snapper
2 years 8 months ago

I don’t think we can overlook the fact that the front-office personnel signing the deal usually won’t be around in 5+ years to experience the pain of the dead money.

Giving the job security of a typical GM, those dead money years simply won’t be your problem unless you win now. And, you have a much better chance of winning now by deferring costs.

So, from the GM’s perspective it “heads I win” (star FA and extra $ help me make the playoffs and get a fat contract extension) and “tails the next GM loses” (the team doesn’t win, the GM is fired, and the next GM is financially hamstrung.

TanGeng
Guest
2 years 8 months ago

I think there might be some room for more accounting rigour.

With deferred payments there would be discounted present value for the number of years payment is deferred.
With each years, it would be adjusted for total inflation. (3.5%)

By just adding the inflation adjustment (assuming no deferred), the 5 year contract already looks much more expensive than the 9 year contract. (7% more)

snapper
Guest
snapper
2 years 8 months ago

You should also use a much higher discount rate. No corporation has a cost of capital of 3%. The teams are likely discounting at more like 7 or 8%.

TanGeng
Guest
2 years 8 months ago

I’m using different Discount Rates for Deferred Payments and the Annual Salary.

For the Deferred Payments would be at ~8% (prime + 1%).
For annual salary, it’s being discounted at ~3.5%, the prevailing inflation rate.

Interesting enough, it’s possible to think of the high salary of Dead Years as Deferred Payment for the Productive Years. If it is thought of that way, it might be more reasonable to discount some of the dead years at 8% rather than the much smaller 3.5%. #accountingtricks

TanGeng
Guest
2 years 8 months ago

Tried some new math to attack the idea of Salary as Deferred Payment.

Premise:

Use Inflation 3.5%
Use Deferred Discount Rate 8%

Pay a fixed Present Dollar Value per expected WAR over the lifetime of contract (fixed PV/exWAR)
Nominal Dollar Value per expected WAR (NDV/exWAR) increases at 3.5% per year over the lifetime of contract.

For each year a player produces an exNDV : (NDV/exWAR) x (exWAR)

If Salary is greater than exNDV, then the excess salary is considered deferred payment.
If Salary is less than exNDV, then the short fall is Present Value of deferred payment.
Deferred payment is discounted at the Deferred Discount Rate.

Given a contract and salary pay schedule and expected WAR, find the PV/exWAR that balances out.

Using this method, 9 year contract comes out to 5.875 million/exWAR and the 5 year contract comes out to 6.55 million/exWAR. The difference is now 11%.

Basil Ganglia
Guest
Basil Ganglia
2 years 8 months ago

What they select as a discount rate depends on the opportunity cost of what doesn’t get funded if a particular proposal gets green=lighted. Most of the projects I do for industrial clients generally need to show around 15% return in a first pass analysis to justify allocating effort to refine the estimates. And 15% doesn’t get funded unless there is almost no project risk.

TanGeng
Guest
2 years 8 months ago

“Return on Investment” estimates are calculations that factor into business-specific decisions. This is more akin to the decision to sign the player and how many meaningfully productive years of the player to sign for. It does not play into how money gets shuffled around to pay for it.

If the idea of Dead Money Years is shuffling money to pay for the Productive Years of a player’s career, and the club has already decided to buy all or nearly all of the player’s productive years, then there is no “project risk” or “return-on-investment” considerations left to be made.

Gabriel
Guest
Gabriel
2 years 8 months ago

Good article. I’d add that with this analysis, it makes perfect sense that over time, these contracts become untradeable, because the years with surplus value are the early years, while the later years are losers in most cases.

Just because a contract is untradeable in later years does not mean it was a bad investment, it just means that the profitable part of the investment has already been used up. Of course, if there wasn’t profit in the first place, like with Barry Zito, then the contract is an all around loser.

Jason
Guest
Jason
2 years 8 months ago

Spreading the money out over more years also reduces the amount of money a player will lose if they are suspended for PEDs.

RSquared
Guest
2 years 8 months ago

Will the next CBA contain amnesty or stretch provisions like the NBA or does the disparity between the big boys and the Rays/A’s of MLB prevent opening CBT payroll room in later years of a contract as an advantage for only large revenue teams?

jtmorgan
Guest
jtmorgan
2 years 8 months ago

Since the CBT is just a tax of payroll I don’t think there is a need. You can always make a trade with money that works similar to an amnesty just that you don’t get any Luxury Tax savings other than what you’re able to get somebody else to pay.

With no hard cap there is no need for a system like this.

Evan
Guest
Evan
2 years 8 months ago

I wonder if there is a level at which annual salary becomes a detriment to a the marketability value for a player (both for the team and in terms of product endorsements). That is to say, is there a salary level that becomes a negative stigma for a player even if he performs up to expected levels on the field?

The David Wright contract tapers a bit for the last two years. At the time he signed it was reported that this was done, in part, to prevent him from having high profile dead years at the end of the contract that might result in negative reactions toward him from the fans.

Joel
Guest
Joel
2 years 8 months ago

Isn’t a large part of this due to the luxury tax? It penalizes year-to-year variation, does it not?

Mark
Guest
Mark
2 years 8 months ago

No. They use AAV for luxury tax purposes.

jim
Guest
jim
2 years 8 months ago

i wonder how long into the next CBA it will be before people get this one

rustydude
Member
rustydude
2 years 8 months ago

How long of an extension would Mike Trout have to sign in order to have to worry about dead money? 15 yrs?

Jonah Pemstein
Member
Member
2 years 8 months ago

What is more likely:

a) Teams offer Pujolsian contracts because they need the player for the next couple years and are willing to sacrifice financial flexibility down the road to do so, or
b) They honestly think that a player making $25 million at age 38 will earn his salary

I’m leaning towards A, because I don’t think any GM’s are that stupid, and there’s a strong likelihood that it won’t be their team to manage in 8, 9, 10 years anyways.

jtmorgan
Guest
jtmorgan
2 years 8 months ago

But they also do it thinking they’ll get more than the $25MM production in the first few years when they really need it making up for it in the backend and have to pay less in today’s dollar value.

Doesn’t always work as in the Pujols contract so far.

Nyyfaninlaaland
Guest
Nyyfaninlaaland
2 years 8 months ago

Another factor is that a straight equation of WAR to annual salary isn’t by any means the only calculation being made on the business side in these contracts.

There can be a significant revenue driving impact to these deals in terms of potential attendance, merchandise (if significant beyond Central Fund sharing), etc. These are equally important considerations in these deals even if they don’t fit into a solely sabermetric view of player value.

And the Yankees are a team that is branded with a heavy relationship to their “number on the wall” guys. Cano may be it for them in a year or 3, assuming he stays.

Also, looking at A-Rods contract beyond the AAV view, the cash outlay declines (perhaps designed to offset the HR Bonuses in his deal) in absolute terms over the length. Possible NY does the same to some extent with Cano.

pft
Guest
pft
2 years 8 months ago

This article is right on.

Teams and players are both willing to accept discounted AAV in return for longer deals. Teams do this because of luxury tax implications and because of the surplus dollars they have from younger players like Trout. Players make out just as well as if they accepted shorter term deals at higher AAV since inflation is minimal and their agents have accounted for it.

Assuming a 10 year deal at 25 million AAV has a 25-30% long term discount, the present day AAV in year 1 is 30-35 million.

Salary inflation is the owners best friend in these deals at the back end. Players are more concerned with the cost of living, given they are signing whats likely to be their last big contract. Salary inflation makes a bad deal in the latter years not so bad when those latter years arrive.

In the end, teams generally look at salary/revenue dollar, so long as its under 50% and they are still competitive they don’t mind a certain amount of dead weight.

The biggest problem with long deals is that many of these long term deals to Crawford, Agon, Pujols, Fielder, etc are looking bad in year 1 or year 2. I cant help but wonder if some players just stop with the PED’s at this point and/or slack off in the gym and morph into lesser players.

Nivra
Guest
Nivra
2 years 8 months ago

Another factor only tangentially mentioned is salary inflation. With the enormous influx of money coming in from the national TV contract, plus the plethora of re-negotiated local cable deals, baseball is experience an immense boost in revenues that are also driving up salaries much faster than at previous levels.

By delaying salary costs 9-10 years down the road, teams are in essence pushing expenses into higher revenue years shifting the impact of a player’s salary into a lower percent of total revenue. $10M from a $1bn franchise value in 2011 is a lot less than $10M from a $3bn franchise value in 2021.

Dane
Guest
Dane
2 years 8 months ago

Wouldn’t it make the most sense (to both Cano and the team that pursues him) to present a non-guaranteed contract structured like this:

Age 31 $32mm
Age 32 $33mm
Age 33 $38mm
Age 34 $36mm team option – $15mm buyout
Age 35 $32mm team option – $10mm buyout
Age 36 $27mm team option – $7mm buyout
Age 37 $20mm player option – $5mm guaranteed walk value
Age 38 $18mm player option – $3mm guaranteed walk value

Total potential contract: $226mm/8 yrs
Minimum guaranteed contract: $118mm/3 yrs
Minimum team control cost: $198mm/6 yrs

This type of contract could be structured, obviously, in performance bonuses to control what counts against the luxury cap, but it doesn’t make much sense to pay a player like Cano $35mm a year for three or four seasons, nor does it make sense to pay a player like Cano $20mm a year for three or four seasons on the back to save $8mm a year on the front.

These numbers could obviously be adjusted to the individual, but the structure itself seems reasonable. The team is protected against a drop in productivity or injury during the player’s prime, and the player has a safety net, in case his prime ends later than age 36.

This also relates to the situation of a player like Mike Trout. Fans complained that Trout only made $510k this past year. Given that the average pre-arbitration salary is about three percent of a player’s free agency value, the assumption that Trout was underpaid (even for his pre-arbitration status) is accurate, since most assume a player of Trout’s ability would earn $25-$30mm+ per season. Even if we consider a salary of $20mm a season (low end of the scale, assuming very short contract of two years pre-prime), that would have implied a salary of $700k for 2013.

With the 2014 salary to be determined, it’s reasonable that the Angels will essentially pay Trout the minimum that they can. It’s clear that they view it as a cash flow business and not an asset valuation. Assuming Trout is an honest man of his word, it would behoove the Angels to offer Trout 5-8% of his expected free agency value in his final pre-arbitration year.

However, such an assumption would be foolish, at best, since Trout would be a fool to accept $1.5mm-$2mm in his final pre-arbitration contract to forego a $270mm+ 8 yr contract in his first season of free agency eligibility.

mad_J
Guest
mad_J
2 years 8 months ago

In your example the minimum guaranteed contract would be $143 million for 3 years since you have to buy out all of the remaining years and not just the 4th year.

hk
Guest
hk
2 years 8 months ago

No, in his example only the first 3 years are guaranteed with the buyout before year 4 terminating the deal.

hk
Guest
hk
2 years 8 months ago

If the alternative is $25M per year for 9 years, why would Cano risk “only” receiving $118M if he were to suffer a career ending injury in the first 3 years?

RC
Guest
RC
2 years 7 months ago

For the opportunity to make more overall money if he doesn’t get hurt.

Its a tradeoff. Some players go one way, some go the other.

Lanidrac
Guest
Lanidrac
2 years 7 months ago

What do you mean more overall money? He was projected to get around that much (and as it turned out even more) in guaranteed money, anyway.

LordAwesome69
Member
LordAwesome69
2 years 8 months ago

Hi Dave,

Very interesting article, but you did something that is a pretty big pet peeve of mine that I feel the need to point out. If your table where you are prognosticating Cano’s future value, you committed the cardinal sin of reporting the meaningless statistic of $ per WAR.

You cannot ever have WAR in the denominator – since a WAR of 0 is possible, that makes it an interval scale, not a ratio scale since it doesn’t have a true zero point; that means you can’t divide by it, only add or subtract. For example, is Cano were making $20M in a year in which he got 0 WAR, would he be getting $infinity per WAR? Since his salary is finite, clearly not. If he had -2 WAR would he be paying the Yankees $40M?

Also, please never say something like someone with a WAR of 6 is “twice as high as” someone with a WAR of 3 (not that you did, just complaining further along these lines). How much higher is someone with a war of 1 than someone with a WAR of -1, negative oneth’s as high? What about WAR of 0 compared to -2, negative infinitieths as high? You get the idea. All you can say is that someone has 3 more WAR, adding and subtracting is fine, but you can’t do ratios.

In summary, never, ever put WAR in the denominator of anything.

Simon
Guest
Simon
2 years 8 months ago

Except that, in practical terms, it works fine given that nobody intends to sign players that put up negative WAR, and those predicted to put up around zero WAR can generally be acquired for very little money.

Lanidrac
Guest
Lanidrac
2 years 7 months ago

Except that some of these players could very well be posting zero or negative WAR by the end of their contracts. Even if they’re released, the team will still be paying them for essentially zero WAR.

Pedantic Guy
Guest
Pedantic Guy
2 years 8 months ago

In summaryyyyyy

coldseat
Guest
coldseat
2 years 8 months ago

Great article. Thanks for putting meat on a pretty obvious and simple concept.

Hank
Guest
Hank
2 years 8 months ago

I think the time value of money argument is being misapplied here (from the team perspective).

The only way it would be significant is if a team wasn’t operating on a yearly budget. Backloading a contract is not about paying out more money in 2014 dollars down the line, it’s about having money available for other players in the short term or trying to work around some existing dead money contracts.

It’s a nice economic principle in theory, but I think most teams operate toward a yearly payroll so from a team perspective it is just about where the 100mil payroll goes in 2014 and where the 120mil payroll goes in 2018 (or whatever the payroll targets are). Making flat vs escalating contracts is mostly about payroll flexibility and opportunity value as opposed to raw economic gains or ROI.

Barry Krissoff
Guest
Barry Krissoff
2 years 8 months ago

Table 2. Share of Baseball Salaries by Quintile, 1987 to 2012
(in percent)

1987 1997 2007 2012
Bottom
20% 3.0 2.5 2.6 2.8
2nd 20% 5.0 3.0 2.8 3.0
3rd 20% 12.7 5.8 7.3 7.1
4th 20% 27.4 19.7 23.1 21.2
Top 20% 52.0 69.1 64.1 65.9

Top 5% 19.0 26.8 24.5 27.1
Top 1% 4.5 6.6 6.0 7.2
Top 40% 79.4 88.7 87.3 87.1

Sources: Sean Latham’s Database, 1987, 1997, and 2007, http://www.seanlahman.com/baseball-archive/statistics/; Baseball Prospectus, Cots Baseball Contracts, 2012 http://www.baseballprospectus.com/compensation/cots/.

Jeffrey
Guest
Jeffrey
2 years 8 months ago

I think the effect of the luxury tax is being under-estimated. For the Cano example, the Yankees may have further immediate benefit from having 25 M rather than 35M counting to their annual salary and tax bill. Also, teams will likely believe they can “dump” the contract at the backend with a % of the contract value included to the buying team based on the player’s then current value, further improving the value to the team of longer contracts with flat salary structure.

Youthful Enthusiast
Guest
Youthful Enthusiast
2 years 8 months ago

Could the big money short term deal be some kind of a market inefficiency? I don’t think spending more money could ever be more efficient, but if the trend is going one way, couldn’t someone cash in by going the other way. The only problem I can see is that the results wouldn’t be realized until after the contract is over and you don’t have a ton of dead money. Then again you’ll have $35MM coming off the books and can quickly snap up the next mega star without having any dead money.

Thinking about this further, it might make sense for a team to set aside $30-40MM to a “mega-star” player. That’s a lot of money, but it guarantees that you always have someone in their prime and never any dead money on the books. When the contract ends, you’re ready to grab the next star and won’t be hampered by dead money like the other teams.

Would this make any sense?

Lanidrac
Guest
Lanidrac
2 years 7 months ago

That would result in cycles of a few years of strong contention followed by a few years of strained payroll before the cycle repeats. I’d rather have my team more capable of sustained success.

eric jensen
Guest
eric jensen
2 years 8 months ago

Dave,
Great article. But starting the the paragraph on David Price, this article starts to meander. Wait what does trading prospects for a SP have to do with the value of Cano? My reply here is to point out, this should have just been 2 posts altogether.

I did enjoy the part about declining superstar contract per year inflation, in exchange for dead years at the end of the contract. I myself wonder if the age of the mega FA contract is dead, or in line for deflationary period. Superstars get Longoria’d or Mauer’d out of all their prime years before hitting FA. The next contract threshold pushers I expect to be Trout or Harper, who will probably still get 100++ mil and 7-8 year commitments now even before hitting FA right around 30.

Lanidrac
Guest
Lanidrac
2 years 7 months ago

While you have a point that these contracts are another way of “mortgaging the future” to win now, I still think they’re a worse idea than trading prospects for veterans. With the latter, you’re giving up a commodity that can be much more easily replaced with either other prospects or shorter free agent deals (while the traded prospects may not even pan out in the first place) for more predictable present production than even the first few years of these long-term contracts, while these mega-deals will almost certainly be huge chunks of dead weight eating up the payroll by the end of the deal.

That said, I’m glad my Cardinals have been smart enough to buck the trend with their much more reasonable extensions for Holliday, Molina, and Wainwright while giving up on Pujols rather than trying to match what the Angels threw at him.

wpDiscuz