Teams Saved $500 Million by Locking Up Players Early

There is an inherent risk/reward dynamic for both team and player when it comes to locking up young players to guaranteed contracts past their arbitration years. Without a guaranteed contract, teams can go year to year with players through the arbitration process and, in the event of player injury or decline in performance, the team can drop the player without consequence. However, once that same player reaches six years of service time, he is free to choose any team he prefers, often at an expensive price.

For the player, going year to year naturally exposes him to a possible loss in future compensation due to the risk of injury or a decline in performance. That said, by going year to year, the player essentially bets on himself during the arbitration process and reaches free agency at the earliest possible time — and with the benefit of a potentially large payday.

Where these two interests meet, teams and players reach agreements early in careers to buy out the player’s remaining arbitration years and some years of free agency. A team’s ability to absorb risk in handing out contracts is much greater than the player’s risk in turning the contract down, and the savings are generally much greater for the team.

From the winter of 2008 through the summer of 2011, teams and players agreed to 53 contracts both (a) at a point before the player in question had recorded four years of service time and (b) in which the contract featured no guaranteed money beyond 2016. Among those players, there are some bargains and some duds. By examining only the free-agent years for which clubs paid ahead of time, we can calculate rough approximation of how much money teams saved or lost by locking up players early in their careers.

While there are some players who might have been non-tendered during the arbitration process — therefore costing teams a bit more money than they would have going year to year — there are also players who would have earned considerably more during the arbitration process than their contracts provided. When teams sign players to these type of contracts, the major win for the team comes in free agent seasons, and the major concession by the players are those same years. As a result, the analysis below will focus on those years.

To determine how much money was saved or lost by the teams during the free agent years, we will look at the salary for the player during those years and compare it to the production the player provided. Multiplying WAR by the cost of a win (using $8 million for 2016 and $250,000 less for each year prior), we can estimate a player’s value during those years. For players still under contract in the coming season, FanGraphs Depth Chart projections allow us to supply a likely WAR figure for the 2016 campaign. Players who signed another extension before the current extension was over are still included to show the value they would have had — as well as the fact that that value should have been taken into account when the new contract was signed.

First, we will take a look at the neutral contracts, where the money saved or lost was $10 million or less. Roughly half of the contracts (27/53) fall into this category. The chart below shows each player, the money they were paid, their value and the surplus or deficit. Players who have another option after this year were highlighted in blue. Date of Extension from MLB Trade Rumors.

Neutral Contract Extensions, 2008-2011
Player Date of Extension FA $ Paid (in M) FA $ Value (in M) Surplus/Deficit (in M)
Ryan Braun 5/15/2008 $30.5 $38.9 $8.4
Curtis Granderson 2/4/2008 $23.0 $30.5 $7.5
Jaime Garcia 7/13/2011 $11.5 $16.8 $5.3
Carlos Ruiz 1/24/2010 $5.0 $10.2 $5.2
Wade Davis 3/31/2011 $8.0 $11.2 $3.2
Denard Span 3/13/2010 $9.0 $10.9 $1.9
Ian Snell 3/16/2008 $0.0 $0.0 $0.0
Aaron Hill 4/4/2008 $0.0 $0.0 $0.0
Ubaldo Jimenez 1/27/2009 $0.0 $0.0 $0.0
Scott Baker 3/7/2009 $0.0 $0.0 $0.0
Nick Blackburn 3/7/2010 $0.0 $0.0 $0.0
Manuel Corpas 2/28/2008 $0.2 $0.0 -$0.2
Brad Hawpe 3/4/2008 $0.5 $0.0 -$0.5
Ryan Doumit 12/28/2008 $0.5 $0.0 -$0.5
Ricky Romero 8/14/2010 $0.6 $0.0 -$0.6
Paul Maholm 1/30/2009 $0.8 $0.0 -$0.8
Nate McLouth 2/17/2009 $1.2 $0.0 -$1.2
Chris Young 4/8/2008 $1.5 $0.0 -$1.5
Brett Anderson 4/16/2010 $1.5 $0.0 -$1.5
Chris Iannetta 1/5/2010 $5.5 $3.9 -$1.6
Scott Kazmir 5/14/2008 $2.5 $0.0 -$2.5
Kurt Suzuki 7/23/2010 $7.0 $4.4 -$2.6
Franklin Gutierrez 1/8/2010 $7.5 $4.4 -$3.1
Joakim Soria 5/17/2008 $7.0 $3.1 -$3.9
Jose Tabata 8/19/2011 $4.5 $0.0 -$4.5
Gavin Floyd 3/22/2009 $9.5 $1.5 -$8.1
Roberto Hernandez 4/10/2008 $7.0 -$2.1 -$9.1
TOTAL $144.3 $133.7 -$10.6
AVERAGE $5.3 $5.0 -$0.4

Ryan Braun would have been a free agent after last season if not for his five-year extension that starts this season. Jaime Garcia and Wade Davis will have the opportunity to make their deals look even better by outperforming projections this season, and potentially providing value in 2017, as well. Several players, like Davis and McLouth and Span, had trade value due to their contracts, benefiting the team. Some of the zero-zero deals occurred because teams had options on final years of arbitration that were not exercised or because there was no buyout for a free-agent option year. Much of the small negative numbers are due to buyouts on options that were not exercised. Ubaldo Jimenez had his free agent option year voided when he was traded. For the most part, these are deals that would not be considered wins for the team and might be considered wins for the player given the guaranteed dollars they received without the team receiving the hoped-for benefit.

Before getting to the bargains, take a look at the bad deals for the team, where the deficit is greater than $10 million.

Player Friendly Contract Extensions, 2008-2011
Player Date of Extension FA $ Paid (in M) FA $ Value (in M) Surplus/Deficit (in M)
Trevor Cahill 4/11/2011 $12.3 $0.8 -$11.5
Billy Butler 1/22/2011 $9.0 -$4.5 -$13.5
Alex Rios 4/4/2008 $54.0 $39.7 -$14.3
Alexei Ramirez 1/31/2011 $11.0 -$3.9 -$14.9
Jay Bruce 12/9/2010 $24.5 $8.8 -$15.7
Nick Markakis 1/21/2009 $44.0 $27.8 -$16.2
Ervin Santana 2/14/2009 $24.2 $7.5 -$16.7
Justin Morneau 1/25/2008 $42.0 $0.4 -$41.6
TOTAL $221.0 $76.6 -$144.4
AVERAGE $27.6 $9.6 -$18.1

There are a decent amount of slugging players whose lack of slugging and declining defense hurt their value. It is doubtful the Royals would take back the Billy Butler signing, and Justin Morneau’s contract did not work out due to unfortunate injury problems. If Alexei Ramirez had been even slightly above replacement last season, he would not have made this list. The Rios contract was likely a mistake when it happened. Bruce’s contract might still provide some value, either in the form of recovered performance over the next two seasons, or in extracting some trade value from the other team. Carlos Gonzalez, who did not make this list due to guaranteed money owed in 2017 is in a similar, although slightly better, situation than Bruce with the Cincinnati Reds.

Finally, we come to the team-friendly contracts, those cases in which a team received surplus value and players gave up some free agency money in exchange for security.

Team Friendly Contract Extensions, 2008-2011
Player Date of Extension FA $ Paid (in M) FA $ Value (in M) Surplus/Deficit (in M)
Robinson Cano 2/1/2008 $29.0 $95.3 $66.3
Evan Longoria 4/18/2008 $30.6 $90.1 $59.5
Yadier Molina 1/20/2008 $12.3 $71.1 $58.9
Dustin Pedroia 12/3/2008 $31.0 $87.8 $56.8
Troy Tulowitzki 1/23/2008 $25.0 $77.4 $52.4
Johnny Cueto 1/20/2011 $20.0 $66.3 $46.3
Ben Zobrist 4/22/2010 $14.5 $57.5 $43.0
Jon Lester 3/15/2009 $24.6 $66.6 $42.0
Brandon Phillips 2/15/2008 $23.0 $60.3 $37.3
Hanley Ramirez 5/17/2008 $31.5 $61.7 $30.2
James Shields 1/23/2008 $23.8 $53.8 $30.1
Justin Upton 3/3/2010 $28.7 $57.9 $29.2
Dan Haren 8/5/2008 $29.1 $53.8 $24.7
Ian Kinsler 2/19/2008 $17.0 $39.9 $22.9
Ryan Zimmerman 4/20/2009 $26.0 $46.9 $20.9
Clay Buchholz 4/10/2011 $26.5 $46.4 $19.9
Adam Lind 4/3/2010 $22.5 $40.3 $17.8
Yovani Gallardo 4/8/2010 $24.2 $34.4 $10.2
TOTAL $439.2 $1,107.5 $668.3
AVERAGE $24.4 $61.5 $37.1

The Reds might not be winners with Jay Bruce, but the team came out way ahead on Johnny Cueto and Brandon Phillips. The Tampa Bay Rays signed three of the players above, and traded two of them before their contracts ended, while also extending Longoria. These players lost some of their free agent value by waiting on free agency, but it has not prevented them from signing another large deal. Many of these players have gone on to sign considerably bigger contracts, especially Robinson Cano, who was an absolute bargain for the New York Yankees, but is proving not to be the same with the Seattle Mariners. After signing the early extensions, the players in the group above have gone on to sign contracts totaling more than $1.5 billion.

When we combine the three groups together, they look like this:

Contract Extension Team Surplus Value, 2008-2011
FA $ Paid (in M) FA $ Value (in M) Surplus/Deficit (in M)
Player Friendly $221.0 $76.6 -$144.4
Neutral $144.3 $133.7 -$10.6
Team Friendly $439.2 $1,107.5 $668.3
TOTAL $804.5 $1,317.8 $513.3
AVERAGE/CONTRACT $15.2 $24.9 $9.7

Teams have extracted a net value of over $500 million in savings by locking young players up with extensions taking them into free agency. Despite team wins in only one-third of the contracts, the savings are so great and the risk to team is so low that the net benefit works out incredibly well for the team. Teams still must choose wisely when giving out these types of contracts, but when they pay off, the team makes out very well.



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Craig Edwards can be found on twitter @craigjedwards. His writing also appears regularly at VivaElBirdos.com where he is an Editor.


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jianadaren
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jianadaren
3 months 8 days ago

So this analysis assumes that the players/teams received no surplus value during the (pre)arb years?

TKDC
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TKDC
3 months 8 days ago

It seems like none of the players who had player friendly deals really benefited all that much from the security, except for maybe Trevor Cahill (he’s 28, we’ll see what he does going forward). Most of the other players on that list signed decent free agent contracts, even after under-performing. Alexei Ramirez, even though the contract was “player friendly” by your metric, was definitely hurt massively by not being able to enter free agency after his 2014 season. Kind of tough to call that “player friendly” when the deal cost him tens of millions of dollars.

TKDC
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Member
TKDC
3 months 8 days ago

I should clarify. Each of the players either signed for a good free agent deal or at least probably would have signed for a good free agent deal had they not sold so many free agent years away early.

LHPSU
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LHPSU
3 months 7 days ago

It’s a methodology problem. By setting the threshold at a delta of $10 million, the author essentially limited that group to players who had that leverage in the first place. Look at the “neutral” extensions, and you’ll start seeing players who would never have sniffed a free agent payday.

The deficit really should have been measured as a percentage of the contract, not as pure dollar value. If a $10M extension ended up with a $9M deficit, is that really a neutral extension?

Matt
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Matt
3 months 8 days ago

It might be useful to look into how much was also saved/spend in pre-FA years from these deals. For example, Romero is listed as a “neutral” signing, when it’s been anything but. Sure, his FA year hasn’t cost much, but his other years were bad.

I mean, sure, the team would have stuck through the first couple years, but it’s pretty obvious he would have been a non-tender the last few years of the deal, so he’s definitely got to have another 15-ish M wasted on that contract.

TKDC
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Member
TKDC
3 months 8 days ago

Yeah, giving up the right to non-tender someone is a really important part of valuation here.

SeattleBlue
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SeattleBlue
3 months 8 days ago

Teams Saved $500 Million by Locking Up Players Early

alternate headline:

Teams Break Even by Locking Up Ryan Howard, Other Players Early

Jetsy Extrano
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Jetsy Extrano
3 months 8 days ago

Seems like a big financial window there for an insurance company to come in the middle, offer the player more guaranteed money than this, and still pick up the remaining gains. Must be some reason this doesn’t happen.

Does the CBA preclude this?

Doug Lampert
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Doug Lampert
3 months 8 days ago

I believe a couple of players have insured themselves and then refused an extension.

But I strongly suspect that insurance companies are unwilling to cover non-injury related declines and that they don’t consider themselves qualified to make the call on what a player’s “true worth” is or want to have to negotiate baseball contracts with baseball teams as they would need to if they picked up all rights for the covered period.

Jetsy Extrano
Member
Jetsy Extrano
3 months 7 days ago

Here’s the next big money opportunity for the entrepreneurial baseball quant: start a hedge fund betting on this kind of pre-FA buyout.

Much bigger money than a salary in a team’s analytics department!

Joey Butts
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Joey Butts
3 months 7 days ago

Or maybe the MLBPA? They would definitely have an interest in keeping players from signing away their earning potential.

Jetsy Extrano
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Jetsy Extrano
3 months 7 days ago

That could make sense. I don’t know if have that kind of capital, they might need the players first to sign off on a ‘tax’ to build the fund to make the deals…

I wonder if Scott Boras has enough cash to play this game on any scale. Don’t take the team’s deal, I’ll guarantee you more, and negotiate above that with the teams.

There are definite issues around motivations and imperfect knowledge, I’ll admit.

Keyser Soze
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Keyser Soze
3 months 8 days ago

What about Bautista’s contract? Does that qualify as an extension for these purposes? If so I’d say his 5 year $65 million deal was a pretty good value for the Jays.

Keyser Soze
Member
Keyser Soze
3 months 8 days ago

Hmmm, never mind. Now that I look closer it seems he had just over four years of service time at the time he signed this extension.

delv213
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delv213
3 months 7 days ago

He had 5.165 years of service time when he signed that contract. He would’ve hit Free Agency after his 2011 season and got paid massively.

Paul22
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Paul22
3 months 7 days ago

I would think it more meaningful to know what the surplus/deficit was relative to no extension being offered. Obviously, that makes the calculation more complex.

I see no reason to estimate the $/WAR for prior years when one could use the $/WAR that was in use during that particular year. It has not been a linear growth over time.

I also think it would be useful to calculate what the average $/WAR for these extensions and compare them to FA $/WAR, or arb eligible players

I looked at the AAV of all extensions 3 yr or more (3+ million AAV) between 2012-2015 and looked at their performance in 2015 only (my time limited) and found the extension guys earned 5.8 million/WAR. The MLB average is 4 million/WAR which is probably close to what the average is for arb eligible players

Paul22
Member
Paul22
3 months 7 days ago

Despite my comments above it was still a pretty good article. I think the take home is extensions can work in a big way for the team in about 30% of the cases, not so good in about 15%, and are break even pretty much for more than half, although I suspect the break-evens favor the player. I also wonder if extensions can retard a players development. Some players may get distracted with that much financial security at an early age. Not all of them of course. Longoria despite being a big team win never really became the player we thought he would be

Baseball4ever
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Baseball4ever
3 months 7 days ago

“Teams Saved $500 Million by Locking Up Players Early”

Given recent articles on fangraphs – OH? you mean all they saved was Bryce Harper’s future salary? That’s it? That’s all you got? Pshaw, tsk, tsk. Gotta do better than that, what about Trout?

caudata
Member
caudata
3 months 7 days ago

You mean $500m transfered to other free agents? It’s not like the teams would have spent $500m extra had they not signed these players. The market bears what the budget supports, it’s not a command economy with price fixing by a central committee. In fact, the “savings” from these deals that were instead spent on other fa are likely inflating the $/war plug used in the article in the first place, exaggerating the “savings”.

That’s ignoring the problem with assuming $/war is a flat scale. Supply demand mocks the assumption. Find several 1 war players for every 2 war player, several 2 war for every 3 etc. 1 war player isn’t worth 8 if a 3 war is worth 24. You can’t just duct tape 3 1 war guys together.

LHPSU
Member
LHPSU
3 months 7 days ago

I think we need to acknowledge that each dollar flat out means more to the player than it does to the team, whether it came from free agency or extensions. That $4.5M is a third of Jose Tabata’s life earnings; the same money means zilch to an MLB team, even one like the Pirates.

TKDC
Member
Member
TKDC
3 months 7 days ago

Speaking of Tabata, he absolutely should not be on this list. 2016 (and 2017) are team-controlled years for him. His extension did not even cover all of his arbitration years.

However, going back to my original comment, I see now that I was looking at the wrong group in order to find guys that immensely benefited from signing an extension. Tabata really fits that bill.

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