Big, long deals

Cole Hamels signed a six-year deal with the Phillies for $144 million last month, forcing the Phillies to put a lot of eggs in one basket. The Phillies’ success over the next few years undoubtedly will be tied to the aging of a single southpaw hurler.

Is that really such a wise risk? It’s tough to say. If some of the rumors are true, chances are the man might be a pretty safe bet, but what about big, long deals in general? We all know that players are betrothed to their organizations for their first six major league seasons, but how wise is it for teams to offer the same long commitment to players?

Everyone remembers disastrous long-term deals like the ones dished out to Ken Griffey Jr., Mike Hampton, and Gary Matthews Jr., but few people realize just how productive Andruw Jones, Scott Rolen, and Alex Rodriguez were during their contracts.

However, when you put these big contracts together, you find that on average they are just about as good as other contracts. Adjusting older salaries upwards to their 2011 equivalent, the 24 deals that I looked at cost $6.59 million per WAR, just four percent more than the $6.35 million per WAR that all deals cost in 2011.

To do an unbiased analysis, I limited my scope to all deals ending at some point between 2007 and 2011 that bought out at least five years of free agency. For example, Jones’ six-year deal lasting from 2002 through 2007 was considered a five-year deal for $65 million (the share of his salary coming once he reached six years’ service time after 2002), while Albert Pujols’ deal that guaranteed seven years from 2004 through 2010 did not count, because he did not reach free agency until after 2006, when only four years were left.

If a deal had an option that was declined, I treated the buyout as part of the salary in the previous seasons. If an option was picked up, I treated the extra year and salary as part of the contract. However, contracts where the fifth year was an option year (such as David Ortiz’s deal from 2007 through 2010 with a 2011 option) were not included in the analysis.

To adjust for the growth in salaries, I used my estimates of dollars per WAR for 2000 to 2010 from this article and scaled the average annual salary upwards for each year to $6.35 million/WAR. (For example, the 2003 estimate of $4.0 million per WAR meant that any salary in 2003 would be multiplied by $6.35/$4.00). On top of that, I used adjustments for draft picks foregone as I have done in previous contract analyses.

The table below lists all of the deals in order of effective price per WAR. The best rate on any deal was on Jones’ contract with the Braves. He accumulated over six WAR per season while only making $13 million per season during the free agent portion of his contract. Even adjusting for inflation to current salary levels, the deal would have cost only about $19 million per season. Rolen’s deal was a steal. as well.

As we would expect based on some of my recent findings, infielders were overrepresented in the best contracts, while outfielders were quite common among the worst contracts. The worst deal (by rate) was Matthews, since he was the only player to actually produce negative WAR on a five-year deal. However, in terms of cost, the worst deals were those signed by Griffey and Hampton. Relative to current salaries, those contracts would cost over $20 million per season, while they each produced 1-2 WAR per season on average.

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Name Years Deal (excluding pre-FA years) Total Inflation-Adjusted Millions of $ Total fWAR Effective Price ($MM/fWAR adj. for draft picks)
Andruw Jones 2003-07 5/$65 $93.53 30.1 $3.11
Scott Rolen 2003-10 8/$90 $119.41 37.8 $3.52
Miguel Tejada 2004-09 6/$72 $94.41 25.3 $3.95
Lance Berkman 2006-10 5/$74.5 $90.06 22.1 $4.60
Carlos Beltran 2005-11 7/$119 $144.40 32.2 $4.70
Alex Rodriguez 2001-07 7/$171 $260.52 57.1 $4.72
Vladimir Guerrero 2004-08 6/$82 $107.82 22.1 $4.88
Adrian Beltre 2005-09 5/$64 $80.30 16.7 $5.00
Kevin Millwood 2006-10 5/$60 $72.16 15.1 $5.21
J.D. Drew 2007-11 5/$70 $79.90 13 $6.15
Aramis Ramirez 2007-11 5/$75 $85.75 16 $6.20
Derek Jeter 2002-10 9/$176 $242.90 43.5 $6.35
Juan Pierre 2007-11 5/$44 $49.49 7.5 $6.60
Magglio Ordonez 2005-09 6/$90 $112.51 16.8 $6.70
Paul Konerko 2006-10 5/$60 $72.16 11.5 $7.00
Todd Helton 2004-11 8/$130.9 $160.28 25.7 $7.64
Manny Ramirez 2001-08 8/$160 $236.04 34.2 $7.74
Jim Thome 2003-08 7/$95 $128.29 19.4 $7.98
Jason Giambi 2002-08 7/$120 $172.74 21.9 $9.01
Eric Chavez 2005-10 6/$66 $81.92 7.9 $20.38
Mike Hampton 2001-08 8/$121 $177.89 10.7 $26.40
Ken Griffey Jr. 2000-08 9/$116.5 $179.08 11.7 $31.76
B.J. Ryan 2006-10 5/$47 $56.12 3 $35.66
Gary Matthews Jr. 2007-11 5/$50 $56.51 -0.6

There were very good deals and very bad deals included in this analysis. For teams giving out large contracts, the best approach is not to avoid them altogether, but to pick out the right ones. Picking out the right ones is tricky, but the importance of information is crucial.

As I have discussed in the past many times, teams re-signing their own players (whom they know well) fare far better than teams who sign deals for “Other People’s Players.” As we can see, this is true for very long deals as well. The cost per WAR was 39 percent higher for Other People’s Players (OPP) than re-signed players (RSP).

Category N Total Adj. $MM Total fWAR Effective Price
RSP 7 $785.73 168.9 $5.22
OPP 17 “$2 168.47 “ 331.8 $7.27

Looking through the deals above, you might notice that it’s hard to find something comparable to Cole Hamels’ pact, since only three of the above contracts went to pitchers. Over the next few years, as we watch deals like CC Sabathia’s and Cliff Lee’s play out, we may have a better sense of the wisdom of long deals given to pitchers.

Another important factor to consider when signing long-term deals is that, by their very nature, they will look better during the early years than the latter years. I found that these 24 players averaged 4.1 WAR per season in the first half of their contracts and 2.5 WAR per season in the second half. When you look only at the first year and the last year, the difference is more extreme: 4.6 WAR in the first season and 2.3 WAR in the last season.

That information neither makes the deals look strong or weak, but it is important to remember that if you are not getting a lot of WAR per dollar on average in the first few years of a deal, you probably will be in trouble at the end of it. In fact, one third of these players provided less than 1.0 WAR during their last year while all players produced at least 1.0 WAR in their first year.

The point of this study is that it is unreasonable to sign a long contract with the expectation that you will have a player on top of his game the whole time. Instead, you should sign a player for as long as you expect him to merit a roster spot, and price accordingly. Make sure it’s a bargain at the beginning, since these contracts are effectively loans. The end of the contract is the repayment period for elite seasons banked at the beginning.

Overall, this analysis should dispel the myth that long-term contracts are usually bad. Instead, they are usually about average, but with a lot of risk in either direction. Having some risks with favorable outcomes is a prerequisite for a championship, while unfavorable outcomes can remove a team from contention for years at a time.

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Matt writes for FanGraphs and The Hardball Times, and models arbitration salaries for MLB Trade Rumors. Follow him on Twitter @Matt_Swa.
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That is generally reasonable economics to overpay for “OPP” since of course you also should be reducing the quality of a potential competitor.  For the player they might say “no hometown discount” but there is some cost of relocation they would want to be compensated for as well as risk of unknowns.

Matt Swartz
Matt Swartz

Well, you reduce the quality of a competitor if you re-sign your own player too. The player could play there. Also, the OPP premium is well in excess of the relocation costs. We’re talking abut tens of millions of premium versus at most tens of thousands of relocation expenses.