Clayton Kershaw and the Rise of the Opt-Out Clause

Yesterday, the Dodgers signed Clayton Kershaw to a seven year, $215 million contract, or, if you prefer, a six year, $195 million extension, as they already owned his rights for 2014 at an arbitration price of around $20 million. That’s the amount that the Dodgers have guaranteed to pay Kershaw anyway, but I don’t know that it’s really all that accurate to describe it in that way, because there’s a pretty good chance the deal is actually going to end up as a five year, $150 million contract (or an extension of 4/$130M) when all is said and done. That’s because Clayton Kershaw is the latest to join the recent trend and get an opt-out clause negotiated into his deal; he can choose to void the final two years of the deal after the 2018 season if he so chooses and become a free agent again heading into his age-31 season.

Kershaw joins teammates Zack Greinke and Hyun-Jin Ryu in having received opt-out clauses from the Dodgers, so this is clearly something LA is comfortable negotiating into their deals in an attempt to outbid other suitors. Texas also gave two opt-outs to Elvis Andrus in his long term extension signed last year, so Kershaw is the fourth player in the last year to receive a guaranteed paycheck but also the right to reset the terms if he stays healthy and performs at a high level over the next few years.

This isn’t an entirely new trend, and probably the most famous opt-out was actually negotiated back in 2000, when Scott Boras got one included in Alex Rodriguez’s initial 10 year, $252 million contract with the Rangers. Rodriguez used the opt-out after the 2007 season, and used the leverage to negotiate a new 10 year, $275 million contract that now looks like maybe the worst contract in sports history. By opting out, Rodriguez replaced the remaining $81 million over three years with that $275 million over 10 years, so essentially, he used the opt-out to negotiate an extra seven year, $194 million extension, and he’s only produced +6.4 WAR since the new money kicked in. Even if you subtract out the $25 million that he won’t be paid due to his 2014 suspension, the new money part of the extension will have cost the Yankees about $26 million per win, assuming he doesn’t produce any more value for them going forward.

Given that success, it’s easy to see why other players would also want to have the right to opt-out of their contracts in order to turn a few guaranteed years into another long term deal. And there have been other opt-outs put in play since: A.J. Burnett with Toronto, J.D. Drew in Los Angeles, CC Sabathia and Rafael Soriano in New York have all used opt-out clauses to go back into free agency and land larger, longer contracts than they were due from the remainder of their initial deal. Ubaldo Jimenez is a free agent right now because his deal with Colorado gave him the right to void the final year of the contract if he was traded, which he was, and he did.

Of course, not every opt-out clause gets used. Vernon Wells declined the right to walk away from the final three years and $63 million he was owed after the 2011 season, given that he was coming off a replacement level season and had turned into one of baseball’s most overpaid players. But, unless there have been a lot of unreported opt-out clauses that never became public knowledge, it appears that a majority of these player options have been exercised, and have usually led to better and longer guarantees for the player than they initially agreed to.

Which brings up an interesting question: are players that are receiving opt-out clauses identifiably different from the general pool of premium free agents, since they seem to have a much better success rate on their initial contract — hence their decision to opt-out of it — than the overall average? My first though would be that the players who are getting opt-out clauses are probably younger than the average free agent signing. Is this true? Let’s check it out.

Player	Age at Signing	Age at Opt-Out
Alex Rodriguez	25	32
J.D. Drew	29	31
A.J. Burnett	29	32
CC Sabathia	28	31
Vernon Wells	28	33
Rafael Soriano	31	32
Zack Greinke	29	32
Elvis Andrus	24	29
Clayton Kershaw	26	31
Average	28	31
Median	28	32

Those nine players represent the ones who were given the right to opt-out of at least two years of their original contract, that we know of anyway. There could very well be others that I’m missing, but I think these nine help illustrate the point that free agents who get opt-out clauses are certainly younger than the pool of free agents overall. This is a logical result, as it would make sense that these are also the players that should be motivated to try and hit free agency again. If you’re already in your 30s, even an opt-out after three or four years is going to put you in the range where your skills are beginning to decline and opting out to negotiate a raise seems less promising.

Basically, this is a selection bias effect. Players who receive opt-out clauses don’t perform better because they received opt-out clauses, but because the worst type of free agent signings — players on the wrong side of 30 — don’t bother asking for them, since they are of little benefit to a player who is signing away years where they will be a shell of their former selves. Guys who come up young and hit free agency young, however, are incentivized to bet on themselves maintaining their skills for a longer period of time, and thus can trade a little less in terms of guaranteed money in exchange for the right to hit the jackpot a second time.

And it seems like a pretty good plan for young free agents. By getting to free agency at 32 instead of at 35, Rodriguez probably earned himself an extra $100 million over what he would have gotten had he hit free agency after the PED revelations and the decline phase kicked in. Likewise, Sabathia, Burnett, and Drew managed to get nice raises after producing for the first few years of a long term deal, only to see their performance drop-off when they signed their new contract that added additional guaranteed years.

And it’s hard not see a pretty clear takeaway for GMs, based on this small sample of players anyway: you want to be the team giving the player the deal with the opt-out, not the team signing the player who just opted out. The best of the second contract performances was probably J.D. Drew, who gave the Red Sox +12 WAR for $70 million from 2007-2011. It wasn’t a good contract, but it also wasn’t the disaster that the second A-Rod deal has become.

Unless his arm falls off in the next few years, Clayton Kershaw will probably hit free agency again after the 2018 season, and if he continues to pitch well for most of the next five years, he’s probably going to trade in 2/$65M for something much larger. And that one probably won’t be a very good idea. That will be the one you don’t want to sign. This one, though? Clayton Kershaw is a pretty good bet to be worth an average of $30 million per year for the next five years. Yes, the Dodgers had to commit more than that to get those five years, and their downside risk is higher because of the two extra years that they might not get but will have to pay for if Kershaw is hurt or terrible. However, 5/$150M for Kershaw would have been a ridiculous bargain, so some extra cost to retain a player of his talents is justified.

That said, given the number of players who have benefited from opting out of their contracts, I wonder if perhaps teams aren’t giving them out a little too easily, or at least undervaluing the potential benefit to the player and not getting a big enough break on the AAV in order to include them. With young free agents, the ones who project to give you surplus value for more than just the first year or two of the contract, letting them opt-out after year a few years has hurt the teams and caused them to miss out on some pretty good seasons at reasonable prices. And they’ve allowed the players to make significant more money than they would have had the entire contract been locked in.

This is probably going to come up again in the negotiations for Masahiro Tanaka. Like Greinke and Kershaw, Tanaka is represented by Casey Close of Excel Sports Management, and they’ve shown a fondness for getting these opt-out deals included in their big contracts of late. Given Tanaka’s age and the fact that he’s still an untested MLB asset, there’s a pretty good chance that he could also benefit from an opt out in his upcoming contract, as two or three dominant seasons in the states would set him up as a before-30 free agent with a big league track record. The willingness to include an opt-out, and where it’s placed in the contract, might end up being a determining factor in who gets to sign Tanaka.