Long-term contracts

Keith Law recently published a blog entry about Scott Linebrink‘s new four-year contract with the White Sox (ESPN Insider subscription required). Keith generally lamented the use of multi-year deals (three years or more) for relievers, and posted an impressive (my word) list of recent similar deals that have already turned into disasters (Keith’s word), such as Scott Schoeneweis‘ and Danys Baez‘s.

It’s a point well-taken; long-term contracts can be risky and long-term contracts with relievers can be particularly risky. But I’m always a little suspicious of the “list approach” because it sometimes reveals more about the author’s bias rather than a real trend. My own bias is the same as Keith’s, but maybe we can take a more systematic look at long-term deals in baseball. Let’s give it a shot.

Last year, major league teams paid about $2 billion to free agents, under contracts of varying lengths. Here’s a table of 2007 salary paid by contract length, a total of 397 deals by my count:

   Years  Contracts            Salary
     1        177           $369,310,000
     2         73           $259,885,000
     3         66           $463,558,334
     4         36           $347,150,000
     5         22           $230,850,000
     6         10           $124,750,000
     7          5            $68,821,429
     8          4            $57,000,000
     9          2            $29,100,000
    10          2            $50,000,000
  Total       397         $2,000,424,762

There were far more deals of one year than any other length, but the most money paid last year was to free agents with three-year contracts ($463 million). That’s because the best players have it both ways. They are paid more per year and they also receive longer term deals. To prove the point, here is a table of average salary paid last year, separated by length of contract:

  Years    Contracts    Average Sal
     1        177       $2,086,497
     2         73       $3,560,068
     3         66       $7,023,611
     4         36       $9,643,056
     5         22      $10,493,182
     6         10      $12,475,000
     7          5      $13,764,286
     8          4      $14,250,000
     9          2      $14,550,000
    10          2      $25,000,000
  Total       397       $5,038,853

It’s pretty straightforward. As contract length increases, salary goes up. Players with one-year deals were “only” paid an average of $2 million last year, but the two players with 10-year deals received an average of $25 million.

The ten-year players played on the left side of the Yankees’ infield, although A-Rod infamously put an end to his contract. Still, he and Derek Jeter were paid a lot of money last year, money that was actually well-spent by the Yankees. In fact, long-term contracts generally turned out to be good deals for major league clubs in 2007. As proof, here is a list of the 2007 Net Win Shares Value of contracts, grouped by contract length:

   Years  Contracts   Net Win Shares Value
     1        177          -$3,158,367
     2         73         -$61,740,794
     3         66         -$55,111,222
     4         36          $33,375,138
     5         22          $48,409,662
     6         10              $32,916
     7          5          $16,727,505
     8          4         -$13,131,527
     9          2            -$930,585
    10          2           $8,307,381
  Total       397         -$27,219,894

Those of you paying extremely close attention might have noticed that the Net Win Shares Value of this group is negative in total, when it should theoretically be zero. That’s because I added some contracts of players who didn’t play at all in 2007, such as Mike Hampton, Corey Koskie and Kris Benson. Their total lack of production pulled the total Net WS Value down to a negative $27 million.

Anyway, there is a point here: As a group, players with contracts of four years or longer were positive value contributors last year. Players with shorter deals were actually negative in total. You may not have expected that result, but 2007 was a pretty good year for players with long-term deals. What’s more, the same general pattern held in 2006, though the cutoff wasn’t as clean (players with two-year deals were positive while those with four-year deals were negative). In general, long-term deals have been good values for ballclubs lately.

As you can imagine, there’s a lot of info seething beneath the surface, so let’s talk about some specific very wealthy players in a little more detail.

The two players who played under nine-year deals were Todd Helton, whose contract expires in 2012, and Ken Griffey Jr., whose contract is over in two years, although both players have option years at the end of their terms. Helton had a somewhat positive value last year, but Griffey’s was negative, making the total negative overall.

The four players with eight-year contracts were Alfonso Soriano (in the first year of his contract), Manny Ramirez, Scott Rolen and Hampton. Soriano was a very positive value for the Cubbies last year, but the other three players were negative contributors—particularly Hampton (his negative $8.3 million would have been the seventh-worst in the majors if I had included him in my original analysis), so the overall group had a negative value of $13 million.

As a group, players with seven-year contracts contributed very positively last year ($16 million). These included big contributions from Albert Pujols and Carlos Beltran; negative contributions from Jason Giambi and Barry Zito; and, believe it or not, a huge contribution from C.C. Sabathia. Yeah, Sabathia. The chunky Cleveland southpaw originally signed a four-year deal with an option year starting in 2002, after his rookie year. The Indians picked up his 2006 option and also added two more years that will expire after 2008.

So Sabathia’s deal was really a four-year deal with an option year and a two-year extension. Seven years overall, and I included him in this analysis because he would have been a free agent this past year had he not agreed to the extension. He was a huge value to the Indians, with an $11 million Net Win Shares Value.

In fact, starting pitchers tended to follow the same pattern as players in total: those who played under long-term contracts were generally more “valuable” (remember, we’re talking monetary value here) than those with shorter deals. Here is the Net Win Shares Value breakout for starting pitchers only:

   Years  Contracts   Net Win Shares Value
     1         31         -$29,779,624
     2         16         -$21,814,040
     3         21         -$28,549,175
     4         14          $16,384,918
     5          6          -$2,453,201
     6          1           $3,213,010
     7          2           $9,588,913
     8          1          -$8,277,278
  Total        92         -$61,686,477

Hampton was the eight-year deal, and Zito and Sabathia were the seven-year contracts. The one pitcher in the six-year group was the Red Sox’s Daisuke Matsuzaka, who was obviously in the first year of his contract. Not every Japanese import earned his salary, however.

New York’s Kei Igawa signed a five-year contract last offseason, but accrued a negative value of -$2.8 million. Other negative contributors in the five-year group were Chris Carpenter and Kevin Millwood, but they were almost completely offset by stars Roy Halladay, Gil Meche (!) and A.J. Burnett. Burnett can opt out of his contract after next year and he’s very likely to do so if he matches his 2007 production.

The Incompleat Starting Pitcher
The end of the nine-inning start and how we got here.

The four-year group really sizzled last year. Top values were Brad Penny, Tim Hudson and Ted Lilly, all over $6 million contributors, and there were seven more pitchers between $0 and $6 million, while the only big negative contributors were Bartolo Colon (who was really bad, at -$9.9 million), Pedro Martinez and Carl Pavano.

But let me be clear about something: I’m not advocating long-term contracts for pitchers. Hampton’s deal has been a disaster, and only the unique circumstances involved with the seven-year contracts (Sabathia is a young stud; Zito was in the first year of his contract, when he was paid much less than he will be in future years) made those deals work. In fact, these results suggest a natural guideline: the longest contract you should give a free agent pitcher is five years, and those should be saved for the young studs (and his initials are Johan Santana).

Still, the pattern of longer contracts being the best deals held across virtually all positions last year. The worst values were in the shorter contracts (one, two and three years), while the highest Net Win Shares Values accrued in the contracts of longer length (four years or more). Of course, there were good deals and bad deals in all categories—we’re just picking out general trends among last year’s performances.

You may be a bit surprised by these findings, but the pattern makes economic sense. Players (and just about everyone everywhere) give up salary for long-term security. That’s not only human nature, but research has found that there is a negative correlation between baseball salaries and contract length, when performance is also factored in. In other words, when an individual player’s contract length goes up, his salary goes down. There’s the contradiction: As a group, player salaries go up as contract length goes up, but for individual players, salary gets negotiated down as the length of a proposed contract goes up.

You may have noticed another trend: Among longer-term deals (of five years or more), the deals that are further along in their terms (those that were signed a longer time ago) are generally less valuable for ballclubs. For example, Todd Helton was more valuable than Ken Griffey Jr. in the nine-year group. In the eight-year group, Alfonso Soriano was in the first year of his contract, and much more valuable than Ramirez, Rolen and Hampton, who were in the last years of their deals. As a general rule, long-term deals are good for the club in the early years, and good for the player toward the end.

Let’s get back to the original point of the article (if there ever was one!). How valuable were relief pitchers last year, under varying contract lengths? Well, first of all, pitchers are different. Not just different in a Nuke LaLoosh kind of way, but different because they age differently than position players.

In this year’s Hardball Times Annual, David Gassko has a great graphic showing that the performance of batters tends to increase until they reach the ages of 27 to 29, then gradually decrease. This is the typical aging pattern known to sabermetricians everywhere. Pitchers, on the other hand, are at their best before the age of 28, after which they gradually decline. And there is no clearly defined peak in the early years—pitchers in their early 20s may have their best years at the age of 22 or 28—the results are rather random.

Obviously, wear and tear on a pitcher’s arm is the issue here, but there’s also an implication for the distribution of major league pitching talent (and pitching contracts). Since players have to pitch six years in the majors before becoming a free agent, the most production in any given year tends to come from pitchers who aren’t yet free agents.

Let me cite some specific numbers. In 2005, free agent position players (non-pitchers) contributed 54% of all position players’ WSAB. Position players who had played less than six years (arbitration-eligible or not) accounted for the other 46%. The free-agent figure decreased to 50% in 2006 and 43% in 2007, a sign of the enormous youth movement in baseball these days.

Among pitchers, free agents accounted for only 34% of pitching WSAB in 2005, twenty points lower than that of free agent position players. That percentage actually rose to 35% in 2006 and declined to 32% in 2007—not much change from year to year. Here are the results in a table:

          Position  Pitchers   Diff
    2005     54%     34%      -20%
    2006     50%     35%      -15%
    2007     43%     32%      -11%

The consistent result is that free agent pitchers, as a group, don’t provide as much production as free agent position players. As a rule, teams that turn to the free agent market for pitching help find that the market isn’t as robust as the market for everyday players.

The point: The law of supply and demand has the perverse effect of driving up the salaries of free agent pitchers and making free agent pitching contracts less valuable than the contracts for free agent position players. The proof: In the Net Win Shares Value article, I found that starting pitchers had the worst total Net Win Shares Value, while relievers had the worst average Net Win Shares Value. Starters used to be the worst values, but demand for relievers has risen so much that their contracts are now the worst values.

With that in mind, let’s look at the Net Win Shares Value of relievers only, broken into groups of different contract lengths:

   Years  Contracts    Sum of Net WS Val     Average
     1         59           $3,683,410       $62,431
     2         22            -$758,941      -$34,497
     3         12         -$16,414,954   -$1,367,913
     4          2             $745,055      $372,528
     5          1          -$4,760,281   -$4,760,281
  Total        96         -$17,505,710     -$182,351

Keith Law is right. Relievers broke the general pattern last year; the most valuable relievers were those with one-year deals. In fact, were it not for the four-year deals (Billy Wagner and Justin Speier), there would have been a consistent downward trend in average Net Win Shares Value from short- to long-term contracts.

As bullpen usage has grown from year to year, bullpen success has become a more important contributor to team success. But bullpen success if fleeting and enigmatic. To make the point statistically, I looked at the runs allowed per nine innings for all pitchers who started at least 15 games in both 2006 and 2007 (96 in all), and found a correlation between the two of .38. Then I looked at the same stat for all pitchers who relieved in at least 30 games both years (113) and found a correlation of .20. Bullpen performance is going to vary a lot, even if the underlying skill of the pitcher doesn’t change.

So teams are in a trap. Because of evolving game strategies, they’ve become more dependent on something that is inherently inconsistent. When they fail, the tendency is to panic by signing relievers to relatively rich, long-term deals. As more money flows into the game, the situation intensifies. Teams without young arms pay more and more (in dollars and length) for more questionable talent.

Last year, Kenny Williams took a rational approach to his bullpen. He built around closer Bobby Jenks by signing up some power arms like Mike MacDougal and Matt Thornton to relatively inexpensive three-year contracts and brought some other viable candidates into camp (Andy Sisco, Nick Masset, etc.), hoping to catch lightning in a bottle. It didn’t pan out, and Williams is now showing signs of panic by signing relievers like Linebrink to four-year deals.

That’s too bad. GM’s who try to buy consistent bullpen excellence in the free agent market are setting themselves up for disappointment.

References & Resources
There is one methodological error in my data. If players played for more than one team, their contracts were counted more than once. For instance, Armando Benitez pitched for two different teams last year, so he appears twice in the in the “twelve” three-year contracts given to relievers. Without the double counting, there were actually only eleven three-year reliever contracts.

However, dollar figures were prorated between teams, so the total salaries and Net Win Shares Value figures are correct (at least according to my base data).

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