The Trap of Overpaying

Yesterday, the Royals acquired Ervin Santana, agreeing to pick up his $13 million option (of which they’ll be paying $12 million) after acquiring him from the Angels, who would chosen to make him a free agent instead. The Angels made it pretty clear – to them, Santana wasn’t worth $12 million for 2013. They would rather allocate that money towards a bigger offer for Zack Greinke, and if that fails, they’ll likely attempt to replace Santana with another free agent.

In other words, the Angels have options. They’re a winning franchise in a major metropolitan city with nice weather, so attracting free agents isn’t a big challenge, so long as they’re offering something close to market value. The Angels can afford to take calculated risks with players, knowing that their pool of potential replacements is pretty large.

That doesn’t describe the Royals at all. They’ve lost 90+ games in eight of the last nine years, and haven’t had a winning season since 2003. They haven’t had back-to-back winning seasons since 1988-1989. A good chunk of the players currently active in MLB weren’t alive the last time the Royals made the playoffs (1985). They play in middle America, and Kansas City isn’t known as a melting pot of society. If the Angels and Royals make a player the same offer, odds are pretty good that most players would choose to the Angels. So, any time a mid-to-small market team with a track record of losing signs a free agent, you always hear that “they had to overpay” in order to get that player.

And while it’s a true statement, it doesn’t mean that these teams should actually do it.

In general, these franchises that have trouble attracting free agents have below average payrolls, because the revenues they generate from their television contracts aren’t as large as major urban teams can command, and their history of losing has suppressed attendance and stunted the growth of the fan base. Last year, these franchises ran out payrolls between $55 million (San Diego) and $81 million (Baltimore). The new television money that kicks in starting next year will likely push the bottom end of the payroll threshold up, but that would only serve to push the scale to somewhere around $60-$90 million at the low end.

Let’s just take $75 million as an estimated payroll for these kinds of teams. At that payroll target, overspending in order to land a free agent doesn’t make sense in almost every scenario.

In order to be a legitimate contender, a team needs something like +40 WAR, and really, you want to be closer to +50. The Orioles and A’s both had +41 WAR last year, the lowest totals for any of the 10 teams that qualified for the postseason. On a $75 million budget, that means you need to be paying an aggregate of less than $2 million per win.

The market price for wins in free agency is somewhere $5 million, and probably headed up towards closer to $6 million this winter. That’s what teams with bigger payrolls or clubs who are looking for one player to put them over the top are going to be paying. So, if you’re Kansas City or Pittsburgh or Cleveland, and you’re trying to lure a player to your town, you’re probably going to have to outbid a winning coastal team, and come in closer to $7 or $8 million per win.

But, unfortunately, the math doesn’t work very well if you start adding in guys who cost that much. Say, for instance, a team in this situation wants to buy five wins in free agency – that’s probably going to cost them in excess of $30-$35 million once they put out offers strong enough to win the bidding. That leaves somewhere between $40-$45 million for the rest of the roster, and a deficit of at least 35 wins, and probably more like 40 if you want to avoid the play-in game.

In other words, a couple of “necessary overpays” in free agency leaves you needing to build out the rest of your roster at something around $1 million per win. And I don’t care how good your farm system is, that’s pretty close to impossible. You’d have to have practically an entire roster of 0-3 service time players, with only a few arbitration eligible guys sprinkled in, and it’s just not that common for guys to be elite players in their first couple of years in the big leagues.

Let’s just look at the Rays, for instance. They’re the poster child for recent success due to a strong farm system. Last year, they racked up +49 WAR on a payroll of $64 million, so they’re the blueprint for success right now. Their internally developed core players — David Price, James Shields, Matt Moore, Jeremy Hellickson, Alex Cobb, Jake McGee, and Wade Davis on the pitching side, and Evan Longoria, B.J. Upton, Ben Zobrist, Desmond Jennings, and Matt Joyce among their everyday players — combined for +33 WAR at a cost of $33 million.

You really can’t do any better than that. That’s multiple top five picks panning out exceptionally well, getting Evan Longoria to sign the most team friendly contract in baseball history, and hitting a home run on some late picks or steals from other organization who turn into useful contributors before they hit arbitration. The absolute best internal core anyone has developed in recent history still comes out to $1 million per win, simply because good players require raises.

With that group and a $75 million payroll, you’d have $42 million to spend and still need eight wins at the bare minimum to put yourself in playoff contention. Even if we bump that budget up by another $10 million, you’d have to buy at least eight wins for $52 million, which is $6.5 million per win. That puts you on the bubble, making you the Orioles or the A’s. If you want to get closer to the rest of the playoff contender, you need something more like 12 more wins. Even with an $85 million payroll, that means you have to get those wins at an average cost of $4.3 million each. And that’s if you have the Rays core in place, which no one besides the Rays actually have, and even they won’t have it for much longer.

The idea that a team “has to overspend” to sign free agents because of their market is based in some truth, but there’s a logical leap required — that a team in this position has to sign market value free agents to begin with — that isn’t true. That thought process is a trap. If you’re dead set on signing free agents without accounting for how you’re going to build a winner around those free agents with the money you have left after you sign them, you’re pushing your organization further away from winning, even as you marginally improve the roster at the same time.

The market price for wins at the high end of the free agent market is set by teams who don’t have these constrictions, or who are at a spot on the curve where the return on each additional win is very high. For a team that isn’t yet on the bubble of playoff contention, and who doesn’t have the payroll flexibility to be able to afford market price wins, overpaying for a free agent is more harmful than it is helpful.

The choice isn’t overpay or do nothing, as it is often framed in this debate. There are values to be had in free agency, and there are values to be had in trades. A team can win with this kind of payroll. They just can’t do it if they’re constantly committing large chunks of that payroll to players who are only going to return a couple of marginal wins. Overpaying a free agent is a choice, not a requirement. And for teams in this payroll range, it’s usually a bad choice.

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Dave is the Managing Editor of FanGraphs.

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