Getting Value Up Front

This morning’s poll results on “How Much Is Too Much For Albert Pujols” make it a clear that a lot of you are out and out against long term contracts that will end with a player being drastically overpaid and underproductive at the end of the deal. More than 1/3 of our readers said they would not give Pujols a 10 year deal at any price, even when presented with an option as low as $150 million.

While I understand the desire to not guarantee big money to a 41-year-old first baseman, that kind of risk aversion is simply too extreme. Put simply, you can’t look at the expected return on investment in only the latter part of a long term contract and determine that it’s a bad deal if the player is not earning his keep at the end of the deal.

Because of the time value of money, Major League teams structure long term contracts in a way that makes most of these contracts winners at the front end and losers at the back end. This is by design, and is true of even the best contracts for the best players – in fact, if a team is getting positive ROI on the final year or two of a free agent contract, the player likely exceeded expectations to a tremendous degree.

Let’s use the rumored 10 year, $220 million offer to Albert Pujols as an example. Here is a year by year breakdown of salaries and value, based on how these things are often structured.

Year Salary $/WAR Inflation Exp WAR Req WAR Value Diff
2012 $17.50 5.0 5% 6.2 3.5 2.67
2013 $18.50 5.3 5% 5.7 3.5 2.15
2014 $19.50 5.5 5% 5.2 3.5 1.63
2015 $20.50 5.8 5% 4.7 3.5 1.13
2016 $21.50 6.1 5% 4.0 3.5 0.43
2017 $22.50 6.4 5% 3.3 3.5 (0.26)
2018 $23.50 6.7 5% 2.6 3.5 (0.94)
2019 $24.50 7.0 5% 1.9 3.5 (1.61)
2020 $25.50 7.4 5% 1.2 3.5 (2.28)
2021 $26.50 7.8 5% 0.5 3.4 (2.95)
Total $220.00     35.0 35.0  

Using the $5 million per win/5% inflation assumptions, $220 million over 10 years essentially requires Albert Pujols to be worth 35 wins over the life of the deal in order to make it a fair contract. I set the expected WAR to match that exactly so that we could have an example of what Pujols would need to be in order to justify the dollars exactly.

As the table shows, Pujols begins to return negative value beginning in year six, and is a below average player for the last three years of the deal. The end of this contract is clearly an albatross. However, even with the expected overpay at the end of the contract, this is still a scenario where the contract works out, because the deal is setup to provide enough value at the front of the contract to make up for the expected negative return at the end.

You have to analyze a deal by the total value it will return and not simply focus on the latter years of a long term deal. Those final years will almost always be bad for the organization handing out the contract, but the idea is to get enough value up front to make it worth giving up those years on the back end.

Don’t judge contracts by how they are viewed at the tail end of the deal – judge them by what a team gets in totality.



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Dave is the Managing Editor of FanGraphs.



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Mike
Guest
Mike

All this means is over 30% of fangraphs readers do not understand simple concepts like inflation

balagast
Member
balagast

Agreed. When looking at the total number value of a contract, it would be a lot more accurate to use the Net Present Value.

Bob
Guest
Bob

For NPV – and my memory is hazy on this – wouldn’t you also have to take into consideration some estimate of the non-WAR contributions of Pujols (e.g., butts in the seats, jersey sales, etc.)?

SC2GG
Guest

Luckily, due to the way that this statistic is derived, 130% of Fangraphs readers will understand this concept by the time the deal is complete.

Flex0us
Guest
Flex0us

What should be the Presen Value? 135 millions accounting for the 5% inflation rate?

James
Guest
James

Not at all… an honest answer to the question. I wouldn’t give him 10 years.

Contract Crowdsourcing style is a better way to poll. I think 6/$150m is fair and reasonable. 10/$150m is a ridiculous answer because (1) he’d never accept it and (2) I don’t want those last 4 years of headache/PR mess. I have a hard time believing he’d take an AAV less than A-Rod.

BoSoxFan
Guest
BoSoxFan

so you see him getting less than Carl Crawford

Doug Lampert
Guest
Doug Lampert

What PR mess?! You release him if he’s bad enough to be a problem. Deferring money is GOOD. It’s a gain right there. If you will pay $150/6 then saying you won’t pay $150/10 is saying “I really really like throwing away millions of dollars pointlessly.”

Joe
Guest
Joe

You are assuming that the Marlins on not working on a relatively fixed budget payroll..

In all likelihood the difference between 6/150 and 10/150 is the marlins spending on other players (and not ‘saving’ money). Like most teams they are probably working toward a specific overall # so stretching out the money to one player just shifts it eslewhere…. The longer contract means 10 extra mil to spend on players in the first 6 years and 15mil less in the last 4 years.

The only REAL NPV gains is if team is banking those saving and are adjusting their team level salary targets. Your assertion that “I really like throwing money away” is an academic argument that is often misused as it doesn’t factor in the reality of how teams operate.

Doug Lampert
Guest
Doug Lampert

The owner’s assets aren’t that limited and he does in fact bank large amounts of money. You are in fact throwing away millions of the owners dollars as GM if you sign for six rather than twn. That’s not seriously debatable.

Yirmiyahu
Member
Yirmiyahu

James, that’s still completely illogical. If you think he’s worth $150M/6, but you don’t want his services for the last 4 years, you can still just release him after year 6.

Or, better yet, if he was still a useful player in those last years, you could trade him (along with most of the money he’s owed) for a prospect.

Seideberg
Guest
Seideberg

Please show me the precedent of when this has ever happened. Just like the Yankees have been stuck with A-Rod, AJ, and all the other shitty long-term contracts they signed over the past decade, the Marlins, or whoever signs Pujols a 10-year deal will be stuck with him at the end. Former star players do not gracefully take being reduced to part-time status (see: Posada, Jorge), can not easily be dropped in the batting order (see: Jeter, Derek), and certainly will not allow you to mess around with them too much with regards to coaching (see: Giambi, Jason). To say that some team could just take the first six years of Pujols, and then simply release him, thus earning the value of his contract, and not being stuck with a “anything else is just free money” on their roster for a couple years, is laughable. Roster spots are finite, and former star players are not simply released, nor traded along with the value of their whole remaining contract for a prospect.

Jason Hanselman
Guest

Uhh Seideberg, A-Rod was traded in the last couple of years of a 10 year contract.

Seideberg
Guest
Seideberg

Uh, Jason, A-Rod was traded before his age 28 season. Pujols, with 4 years left in a 10-year contract, would be traded before his age 38 season. Slight difference there. Also, he had 7 years left on his contract.

Jason Hanselman
Guest

You asked for players that were traded after signing a 10-year contract. If you don’t like irrefutable evidence perhaps you should get off this blog and go back to one that will coddle your childish self esteem.

Tom
Guest
Tom

Jason -You didn’t read his comment (or apparently the one he responded to), made a mistake and then jumped on him and insulted him when he pointed out your mistake I suggest you look over the comment he responded to and re-read his original comment.

He said show him a precedent…. in response to the claim above that he could always be traded in those **last years** You mistakenly used ARod as an example of a player being traded at the end and when your mistake was pointed out you decided to reframe his comment to mean any player at any time, rather than own your mistake (or take the time to read the comments properly?)

The other minor detail worth considering…. Pujols will have 5-10 rights halfway through any 10 year contract (or if it’s the Cards, he already has it)… In all likelihood the team that signs him has him to the bitter end. So even if there is no no-trade clause the team may still have limited options.

The only childish response was yours… when you suggest he get off the blog and go to one that will coddle his self esteem. The only self esteem issues I see is the person who made a mistake and when it was pointed out to him decided to resort to a personal attack rather than taking the time to re-read the comments (when you might have found the error of your ways)

Jason Hanselman
Guest

A-Rod had an opt out after seven years that was always assumed would be used. He was traded after five years. Sure, it may be re-positioning the argument, but the guy ranted how this has never happened when there have only been a handful of 10-year deals and one of them featured a guy traded in the middle of it.

I did read his comment and I thought it was written by a dumb animal who should be talked down to at every opportunity.

Tom
Guest
Tom

And for the second time now you are WRONG about ARod…. I mean are you trying to fool people or can you just not look the info up properly?

He was signed by the Rangers to the 10 year deal prior to the 2001 season and dealt to the Yankees prior to 2004…. this is THREE years into the contract… not the end, not 5, but 3… this is not the MIDDLE of the contract…. why do you continue to try to misinform and mischaracterize this?

Stop trying to win the argument, look up the actual information and take the time to listen and stop insulting people.

The only person that appears to need to visit a blog that will coddle his self esteem is the one that keeps throwing out insults instead of owning up to his mistakes. It would be nice to have a civil discussion without people resorting to terms like childish and dumb animal when they have their mistakes pointed out to them.

And now get the last word in, please insult me for pointing out your continued mistake with ARod and move on…

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