Another Extension Season Is Upon Us

Last winter, a whopping 33 contract extensions were signed between the end of the World Series and early April, nearly as many as the previous two offseasons combined. In all, over $2.2 billion in new money was guaranteed to these 33 players, with seven of those extensions crossing the nine figure mark. It was the largest total outlay for contract extensions in a single offseason in baseball history, beating the previous record set during the 2011-2012 offseason.

Perhaps the most interesting thing about the rash of extensions signed last year was the diversity of the types of players teams extended. Established stars like Mike Trout, Paul Goldschmidt, and Chris Sale all signed massive contracts befitting their status as legitimate stars. Then there were players like Nolan Arenado, Xander Bogaerts, and Jacob deGrom, all members of the most common group of players to sign extensions: young, established players on the verge of hitting free agency.

In recent seasons, we’ve seen more and more players sign long-term contracts before reaching arbitration, like Alex Bregman, Blake Snell, and German Márquez all did last year. The newest frontier for contract extensions moves even earlier on the arbitration timeline. Some teams are now extending their top prospects before or not long after they make their major league debuts — Eloy Jiménez, Ronald Acuña Jr., and Brandon Lowe all fell into that category last year.

This offseason, it looks like a similar flurry of contract extensions will be handed out, though it may pale in comparison to the record setting totals from last winter – a dearth of Trouts will do that. Seventeen players have already signed an extension this offseason, four more than had signed at this point last year. And there are likely more coming, as Jeff Passan indicated last week:

The long-term deals Freddy Peralta and Aaron Bummer signed this week are no anomalies. Teams across baseball are trying to lock up pre-arbitration players to multi-year contracts that buy out free agent years, per sources. There could be a rash of such deals in the coming weeks.

— Jeff Passan (@JeffPassan) February 26, 2020

The number of extensions handed out is similar to last year’s number, but the total guaranteed value of those signed this year is much lower. The total value of the 17 extensions signed this offseason is just under $400 million, a far cry from the billions signed last year and a little more than half the total of the 13 extensions signed through the end of February 2019:

While the trend appears to be more players signing long-term contracts, the value of those contracts is far less than those signed in years past. Perhaps that’s related to the type of players signing extensions this offseason. The only established veterans who have signed an extension this year are Aroldis Chapman and José Abreu, and both signed their contracts very early in the offseason. The average service time of the 15 players who have signed an extension since those two veterans is under three years. The average service time for the 33 players who signed a contract extension last winter was just under four years:

Outside of the odd outlier in 2015, teams have been steadily signing players earlier and earlier in their careers over the last decade. This offseason continues that trend, with the Mariners joining the short list of teams that have signed a prospect with no major league experience to a long-term contract by extending Evan White. As teams look to balance developing talent from within their organizations with finding more creative ways to keep their payroll costs under control, it seems like signing players to early and affordable extensions is now en vogue. And it looks like this may be just the first wave of teams trying to lock up pre-arbitration players, as Passan alluded to in the tweet above.

The White Sox in particular have been at the forefront of the early extension trend. After signing Jiménez to a pre-debut deal last year, they signed Luis Robert to an even bigger pre-debut contract. They also signed Aaron Bummer to his extension after he had accumulated just under two years of service time, locking in his salary during what would have been his arbitration years, with the option to buy out his first few years of free agency.

When all those extensions were signed last year, many assumed it was a reaction to the slow free agent market that had plagued the previous offseason. If teams were unwilling to shell out big dollar free agent contracts, the next best way for players to hit their payday was to sign big extensions with their current clubs. After signing his record breaking contract with the Angels, Mike Trout expressed some of these concerns in an interview with The Athletic:

“I kind of saw what Bryce [Harper] and Manny [Machado] went through and it drew a red flag for me. I talked to Manny and Bryce. It was a tough couple months in the offseason. They put it in perspective in my mind.”

There were plenty of other factors that went into Trout’s decision, but even the thought of the best player in baseball being worried about receiving a deal in free agency is alarming.

Some players recognize the gamble they’re making if they don’t yet have a guaranteed deal and their health or talent suddenly goes south. For them, the security of a contract extension outweighs the potential lost earnings in arbitration or a future free agent deal. In an interview with Tom Haudricourt, Freddy Peralta expressed exactly that sentiment about the early contract extension he signed last week:

It definitely changes my mind going into every season, knowing that I have a little bit of security. So, that was a big part of my decision. I know my agents weren’t too happy. They didn’t really want to take it. At the end of the day, I know they wanted to wait a little longer, but it was my decision and I made the decision for myself and my family.

Many teams are happy to provide the security players like Peralta are seeking in the form of these team-friendly extensions. Locking in young, up-and-coming players can be risky for teams, as those players haven’t established themselves yet, but it’s a relatively affordable commitment, and one that can pay huge dividends if these players pan out. In that same article, Brewers president of baseball operations David Stearns commented on the risk assessment teams perform when giving these extensions:

It’s a risk tolerance for both sides. In any of these types of pre-arbitration or arbitration negotiations, each side has to do a risk assessment. But, ultimately, it’s the player’s choice. … These type of deals help us get to that retention of players that allows us to build long-term competitiveness and that’s what we’re after.

These pre-arbitration extensions may indicate that teams are a little more concerned about the future of the labor market. The amount of money players are receiving in arbitration has continued to reach record levels year-over-year, making it one of the few areas where they have little control over the payroll costs they’re incurring. (They often resort to service time manipulation to ensure their young players will be paid the major league minimum for as long as possible, and they obviously have the most control over the free agent contracts they hand out.) These early extensions lock in the salaries of a team’s best young players during a time in their careers when, if they do develop their latent talent into production on the field, their arbitration salaries could be far higher than expected.

Of course, not every player will be breaking arbitration records like Mookie Betts or Nolan Arenado, and because comparable player salaries play such an important role in determining arb awards, there is some amount of predictability, even if there isn’t certainty. Cost certainty during a player’s arbitration years is definitely a factor for teams, but so is trying build a roster in the most economical fashion. Teams have shown again and again that they’re willing to go to arbitration over relatively small amounts of money. Ultimately, negotiating these team-friendly pre-arbitration extensions is just another way to hold player payroll down, even if it shifts some payroll costs to earlier in the player’s career.

And these young players don’t really have much leverage in negotiations, either. Beyond the real pressure to gain the financial security these extensions provide, the threat of service time manipulation means that signing a pre-debut extension nearly guarantees playing time rather than languishing in the minors. On top of the already imbalanced labor situation that forestalls free agency until after players have endured six years of team control, these considerations create an environment where teams can approach their young prospects with these kinds of deals without being immediately rebuffed. In the past, young, up-and-coming talents had a big free agent payday to look forward to, so they put off the financial security until later. Now, that big contract isn’t necessarily guaranteed and teams have shown a willingness to use whatever means they can to make sure that payday is deferred longer and longer into the future. Freddy Peralta’s agents may have wanted him to wait a little longer, but one can understand the position he believed himself to be in; life-changing money is incredibly tempting.

There’s one more factor weighing on both players and teams that might be influencing their behavior this offseason: the soon-to-expire Collective Bargaining Agreement. The future of player compensation and team payroll rules is in flux, and it’s unclear how it might change in the next version of the CBA. That uncertainty may be influencing young players to sign these early contact extensions to get a guaranteed payday before the compensation structure potentially gets reworked. On the other side of the coin, teams could be trying to get ahead of potential changes to the labor market that improve compensation for young players. These early extensions ensure the salaries of these young players are locked in before the new CBA is negotiated.

The unsettled future of labor relations presents plenty of challenges for both players and teams in the season before the CBA expires. It appears as though some teams have focused on these pre-arbitration extensions as a way to guarantee some cost certainty in an uncertain future. Whether that trend continues might become clear very soon. We should be in for an interesting last month of the offseason, and another lively round of extension season.

Update: Trevor Story’s two-year extension signed on January 24 was missing from the table above. It’s has been added and the figures updated to reflect the new totals.