Contract Extension Season is Here

In yesterday’s post, I focused on the decrease in winter signings over the past few years. As pitchers and catchers trickle into camp a new signing season begins and that season has seen a considerable increase in activity over the past few years. From 2008-2011 teams averaged around 9 contract extensions in the period starting now and ending near the beginning of June. In the last three years, the average for spring signings has been nearly 13 with a high of 16 in 2012.

From 2008-2011, 35 players signed during the spring, compared to 47 during the winter. Those numbers have reversed in recent seasons. The three-year spring period from 2012-2014 has already seen 38 players sign contract extensions compared with 22 winter signings from 2012-2015. Just like with the winter signings, the service time of the spring signers has not changed over the years. The players that sign in the period between late February and early June skew younger, but the service time has remained consistent, 2.4 from 2008-2011 and 2.5 from 2012-2014.

It is possible that the increased number of signings in the spring is having an effect on future winters. A large number of spring signings in 2012 and 2014 preceded very meager numbers the following winters. The spring signers are younger than their winter counterparts. Increasing the number of young players signing in the spring could bring down the number of players available to sign in the following winters. Of the 38 players who have signed extensions the past three springs, 33 had under five years of service time and 24 were below three years of service time. Many of those players might have been candidates for extensions in later periods had they not signed early in their careers, but it does not appear to have affected the number of quality free agents.

This year’s free agent class was light on the hitting side, but still saw six players sign for at least $75 million and had 16 players sign deals of at least four years. Next year’s free agent class figures to have multiple nine-figure deals with David Price, Zack Greinke, Johnny Cueto, and Jeff Samardzija on the pitching side and Jason Heyward, Alex Gordon, Ian Desmond, and Justin Upton on the position-player side all hitting free agency.

Signing younger, cheaper players in the spring leads to inconsistencies year to year depending on the number of extensions. Over the last four years, the greater the number of extensions, the lower the average annual salary the players receive. The graph below shows the costs and years associated with locking a player up during the spring.

Like the older players who sign in the winter, costs have also gotten higher to sign younger players. For the most part, service time determines the contract. The earlier a team signs a player, the cheaper the contract. For the team, the younger player represents less certainty regarding future production if their present talent has not been fully realized. Signing players in the spring is cheaper, but that is a function of the type of players teams attempt to lock up. After teams have finished discussing contracts with their arbitration eligible players, they tend to negotiate with younger players in camp who have never received a big payday.

Looking at the 156 contract extensions since 2008 sheds light on the the service time differences. For all of the contract extensions at least three years in length for players with less than six years of service time who signed contracts buying out at least one year of free agency, the average contract lasted 4.7 years, guaranteed an annual salary of $9.5 million and bought out 2.7 years of free agency. The average player had three years of service time. The graph below shows the average annual salary for a contract extension depending on service time.

Players with at least four years of service time are not much of a bargain. This comes as no surprise given how close those players are to free agency. They already have some security having gone through arbitration at least once. The players who are taking their first bite at arbitration do not come at the same high cost as their slightly more experienced brethren, but they still do not come cheaply. The pre-arbitration players, still making half a million dollars, can be had cheaply with a decent guarantee of money. Teams may gain more certainty about the performance of a player as he gains experience, but if a franchise wants a true bargain on a contract extension, it should look to those players who are currently making the minimum.

Guaranteeing money for non-prime playing years is not as prevalent in the spring as it was in the recent winter deals. Of the 38 spring contract extensions signed in the last three years, 31 bought out three years of free agency or fewer. The more service time a player has, the greater the free agent years the team will need to pay. Using the same 156 contracts as before, here are the number of free agent years bought out by contract extensions based on service time.

As expected, the closer to free agency, the more years a team must guarantee, with some of those years potentially out of a player’s prime. These contracts are near market value, representing very little in the way of a team-friendly contract. The younger a player is, the more likely the team can buy out a few of the prime years without paying for the downslope of a player’s career.

There is less consistency and predictability in the spring compared to the winter and fewer trends to try and isolate. The upcoming market is not completely defined. While deals seem few and far between in the winter, there are still plenty of players looking for their first big payday. The players receive security, and the owners potentially receive considerable savings if the player performs at a high level. Contract extensions are not fading away, but costs are rising and increased risks need to be taken to receive a big payout for the team. The next couple months should show considerably more activity with extensions than what we saw during all of winter.