How the Opt-Out Could Improve the Pillow Contract
Over the last few weeks, I’ve written a lot about opt-out clauses. Yesterday, I again attempted to show why opt-outs are a benefit to the player and come at the expense of taking power from the teams. Through all of these conversations, however, we’ve been focused on how opt-outs are currently being used in MLB; to give high-end players the chance to land a significant raise in the midst of a contract that already pays them an awful lot of money. Right now, opt-outs are luxury items that allow elite players to get both the benefits of a shorter-term commitment to a single franchise coupled with a long-term insurance policy in case things don’t work out as they hope.
But there’s nothing that says opt-outs have to be used in that manner, or for that type of player. And in thinking through various scenarios where opt-outs could be placed into contracts, I wonder if the rising acceptance of these kinds of deals might actually end up being a boon to lower-revenue franchises and players at the other end of the spectrum.
Specifically, I’m thinking of how the opt-out might allow teams to reinvent the so-called pillow contract. The term, coined a few years ago by Scott Boras, refers to a one year deal that allows a free agent coming off a disappointing season to land in a particularly friendly environment, re-establish his value, and then hit the market again the following winter. Adrian Beltre was a great example of how a pillow contract can help a player, as he took a one year, $10 million contract with the Red Sox in 2010, saw his wRC+ spike from 81 to 140, and then landed a five year, $96 million deal with the Rangers the next winter.
Over the last few years, the qualifying offer has become a de facto pillow contract, and this year, we saw three players — Matt Wieters, Colby Rasmus, and Brett Anderson — take the $15.8 million guaranteed with an eye towards re-entering next year’s free agent class, when there are far fewer premium players available to compete with. While $16 million for one year certainly isn’t a bad deal for a player, it does come with significant risks, especially for a pitcher. Even a hurler who believes in his ability to bounce back understands that their arm could blow up at any time, and walking away from a chance at a multi-year contract — even one at a modest salary that might not reflect what they feel matches their potential — for a one year deal that offers no long-term assurances is a move that some are hesitant to make.
Pillow contracts are a risky proposition for players, but they’re also not all that great for the signing team anymore either. With more and more teams looking for value on short-term commitments, the price of these types of deals has kept increasing, to the point where guys like Justin Masterson cost the Red Sox $10 million last winter. On a one year deal, the only real way to negotiate a better offer than another team is to up the amount of money — either in guaranteed base or incentives — that a team will pay in the pillow contract season.
With guys like Doug Fister and Mat Latos probably looking for more than Masterson got a year ago, we may be reaching the point where one year bounce-back deals for teams aren’t that appealing to teams anymore either. At these prices, teams aren’t that far away from paying the same kind of salary that a less-risky player would cost on a multi-year deal, and while those deals come with their own risks, at least they also offer multiple years of potential value if the bet works out. For a team making a pillow-contract offer, the best case scenario is you get one decent year and perhaps a chance to land a draft pick if you make the QO the following winter and the player leaves, though as Anderson and Rasmus showed, that’s no guarantee; you might just end up with an even more expensive one year commitment the next season.
So maybe this is where the opt-out really can solve a problem for both sides. Perhaps the opt-out’s surge in popularity will allow a creative team to come up with a new kind of pillow contract.
Let’s stick with Doug Fister as our example. He’s a classic example of a guy who could earn a lot more money if he can prove he’s healthy this year, and so there will likely be a decent number of teams interested in giving him a one year deal in January. But maybe instead of going to one of the few teams that has $12 or $13 million left in their budget when the winter is winding down, a team could structure a multi-year offer that gives him a higher overall floor but also lets him hit the market again next winter if he has the kind of rebound season that both sides are hoping for. And by including the opt-out, the team could significantly increase their chances of getting value from the scenario where he does indeed bounce back.
For instance, instead of paying $12 or $13 million on a one year deal, let’s say a team offered Fister a three year, $24 million contract with an opt-out after the first year, but heavily backloaded the deal to push most of the guaranteed money behind the opt-out. Perhaps it’s $4 million in 2016, then $10 million per year in 2017 and 2018. For Fister, this doubles his guaranteed money, giving him a much higher floor for the worst case scenario, but it also allows teams to potentially come out much further ahead if he has the kind of rebound season that is certainly possible. Instead of loading up the deal with incentives that push his 2016 salary ever higher if he pitches well, the team would lock in a very low salary for the upcoming season, and end up with one of the bargains of the winter if Fister opts-out next winter.
This type of pillow contract could be especially appealing to a team that doesn’t expect to contend in the next few years, like the Phillies or the Brewers. If you’re not particularly concerned with winning in the next few years, payroll efficiency is less of a need, and so it’s not a big harm to the team if Fister ends up not bouncing back and opts into the last two years and $20 million of the deal. Realistically, non-contending teams have to pay premiums to sign free agents anyway, so even if he’s not very good in those years, having a slightly overpaid player on a short-term contract isn’t that big of a deal.
But in the scenarios where the bounce-back happens, the rebuilding team has a really valuable trade chip in July, as a guy like Fister would only be due $2 million for the second half of the season in this scenario, and it would be pretty clear at that point that he was likely to opt-out of the deal, especially since a mid-season trade would take draft pick compensation off the table. In the bounce-back scenario, the rebuilding team gets 100 good innings of a solid pitcher, then gets to deal a very cheap rent-a-pitcher for some prospects that are likely worth more than the $2 million they’d have given to Fister in salary at that point anyway.
For guys like Fister or Austin Jackson, a backloaded multi-year deal with an opt-out after one year might actually work better for both themselves and the signing team rather than pursuing a traditional one year contract at a higher salary. By deferring the guaranteed money until after the opt-out, the signing team would get a chance to land a serious bargain if things break well, and the player gets a significantly higher guaranteed minimum to protect against injury or further decline if things don’t go their way.
With opt-outs being the cool new thing of the winter, maybe we’ll see an enterprising team try to use one to come up with a better pillow contract.
Dave is the Managing Editor of FanGraphs.
Never thought about this but I like the idea. Baseball contracts are getting a lot more interesting (although the Bobby Bonilla one still wins). Thanks for the article!
This is an excellent idea. Heavily backloaded deals carry more risk, though, so the opportunities for these contracts would be scarce, but I feel this is something that would appeal some organizations.
Why would a heavily backloaded deal carry more risk?
Nice piece, thanks Dave. I’m not sure why Austin Jackson would need to do something like this, though; he’s soon to be 29 and just posted a >2 win season. He seems like a 2-3 win player for another couple years.
Serious question: how is the benefit to the team here qualitatively different from the benefit to the team with a regular opt-out contract? The incentives are the same for both the team and the player – the team prioritizes short-term benefit over longer-term costs, and the player gets to hit the market again if/when his value is higher. Whether that’s one year or four, it’s the same concept, and the team benefits because they care more about getting a discount on the front end than they do about what happens on the back end.
For one thing the proposed Fister contract attempts to get more value on the front end than the typical opt-out does. I believe David Price’s new deal, for example, might be slightly back-loaded, but not in any significant way. That means if Price pitches well and opts out the Red Sox will have gotten three good years, but they certainly weren’t a bargain, and definitely not the way Fister could be if he bounced back and only cost 4 million. So I guess geting more bang for your is one potential difference.
Also, with regular opt outs as they are constructed now it’s propably hard to structure them with so much money on the back end since the average value is already so massive to begin with. Price makes 31 million on average, so significantly backloading a deal of that size would mean something like 40-50 dollars a year in years 4-7. While the overall money is the same, and the poteinal bargain years become much more attractive, in pratice I could see a lot teams being crippled by such an enormous payout.
The way I see it is one guy’s value is down so the team has a better opportunity to structure the deal in a way that maximizes their benefit and they can do so with an amount of money that wouldn’t severly hinder them if it fails. The other guy (Price) has his value at arguably an all-time high so the teams can’t structure it in such a beneficial way, and even if they could the amount of money is prohobitive to doing so.
The dollars on the Price deal may not be heavily backloaded, but the value to the Red Sox is still very much frontloaded, because the first years are likely to be Price’s most productive years. If Price pitches produces his 5 projected WAR next year, that’s something like $8M in surplus value to the Sox – obviously, there’s even more surplus value if the contract is slightly backloaded, or if Price pitches like the 6 WAR picther he’s been the past two years. Presumably, Price gave up something, in terms of AAV or backloading, in exchange for the opt-out, which gave the Red Sox more marginal value over the first few years of the contract.
While it’s a much more expensive contract than the hypothetical Fister deal, the same principle applies – by including the opt-out, the team maximizes value in the short term by giving up value in the long term. Which, IMO, is the benefit to the team in giving players opt-outs, as I’m sure they (rightly) care more about short-term value than long-term value.
But again, it’s not as much of a bargain as Fister could be for 4 million. Plus there’s a ton more risk with Price at that much money.
There’s lots of potential surplus value for the Red Sox in the first three years of the Price deal. If Price averages 5 WAR in those years, that’s probably close to $30M in surplus value (depending on the exact contract structure and the price of a win in each year). It’s certainly nothing to sneeze at. And yeah, there’s risk, but there’s risk in guaranteeing $24M to a guy who was replacement-level last year, too. There’s more risk with Price because the numbers are bigger all around.
But the exact numbers don’t matter. The point is, the opt-out does the same thing in both cases; it maximizes short-term value at the expense of long-term value. My thesis here is that this is a thing teams want to do, and that’s why they give players opt-outs.
That’s a really interesting idea. But how would a QO fit into it? Let’s go back to the steven drew situation of a couple of years ago. You have a player with a QO, he doesn’t like his offer, so he goes for one structured this way. The signing team would need a large discount, both first year and total value, to compensate for the loss of the pick?
Could both parties have an option to opt out? Then I could see small market teams going for it. Say Fister, for example. You’d have to up year 1 a bit but year 1 $6M with player opt out, year 2 $8M team opt out, year 3 $10M. Look at that scenario for a team like the Pirates. If Fister’s good in year 1, they got the value, he moves on, everyone’s happy. If he’s ok but there’s still a question that he’d get more in FA, he stays. If Tyler Glasnow is tearing it up in 2017 and provides better value than Fister and there are no other glaring rotation holes, he’s either traded or they can opt out if they don’t find a deal they like.
You may as well just make it a one year pact at that point. I see very little chance that the player would remain with that team (barring a trade) the following season. Simply put, if he’s good, he’s going to opt out, and if he’s bad, the team is going to opt out.
Would a player like Rasmus buy insurance like Scherzer did last year to offset the risk of injury?
http://www.fangraphs.com/blogs/max-scherzer-and-the-incentives-to-self-insure/
Sounds like a solid plan if the payout has a higher NPV than the potential contract offers.
So basically just a pillow contract with a player option for some more money. I think Dave needs to take a step back from the whole opt out thing for minute and let it clear from his head.
Why would he do that? Teams aren’t taking a step back from the whole opt-out thing, so why should Fangraphs?
This essentially moves the ‘high risk/high reward’ aspect of a pillow contract from the player to the team. I can’t imagine many teams going for this unless the GM is hard-capped by the owner not to go over ‘X’ dollars – but even then it’s tough.
The Beltre contract mentioned above was essentially this type of contract, but with only $4 mil extra for Beltre if he chose to exercise the option (with $10 mil guaranteed), so I’m guessing the structure of these contracts will still be more front-loaded than back-loaded to reduce the long-term risk to the team.
Also, the Beltre contract was built to avoid luxury tax penalties from the current year by pushing $3 mil of the guaranteed salary into the following year. So for teams looking to stay under the salary cap this could happen.
Then again – I can’t think of a single player/team that have signed a contract quite like the Beltre contract with the Red Sox. So I’d be surprised if this suddenly became a fad.
Cameron, your articles are like coffee, and this one is like a really good cup of coffee. I didn’t even have to pay $4 for it! I will, however, re-up on Fangraphs+ when the time comes, and I encourage the rest of us daydream believers to do the same.
I don’t understand how this is a good idea. I really want to, but it’s just not. Instead of risking $12mil for one year, you’re saying a team should risk $24mil over 3 years knowing that the only way you realize that contract is if he’s bad.
In a world where Happ gets 3/36 and Leake gets 5/80, your proposal is for teams to guarantee $8/yr to a reclamation project knowing that he’ll only stay in the contract if he’s worth less than that on the open market. How bad would Fister have to be to stay in that deal? Zito-esque?
There is no reason a team should prolong the guarantee AND increase the financial risk as a way to entice a high risk/reward player.
Yea this doesn’t make a lot of sense for the team. If Fister blows out his shoulder in April, they’re on the hook for $24m instead of $10-12m
Interesting article. Like others, I am not sure if the Fister example is the best example to illustrate the concept, but I like the concept and think it merits further thought and discussion.
One thing I was disappointed about the article is that not once was the Giants contract with Cueto mentioned. It would have been a good contract to model what you were trying to do in this article, and at worse, is at least an example of a uniquely different contract being given a pitcher which gives him the opt-out, tries to protect the team in some way in case something goes bad, by spreading the payments.
His contract had a different feature in that his opt-out came with a $5M buyout from the team, guaranteeing him $46M for the two seasons, assuming he is still above average enough (i.e. proving his worth) to forgot the rest of the contract at $21M per year (which by then, is roughly average 2.0-2.5 WAR production over rest of life of contract).
But if he don’t opt out, that $5M is moved contractually to the end of the contract via the team option buy-out of a seventh year, shifting it back.
Plus, $5M was bonus that don’t get paid until 2017, $1M per year, also shifting payments. Then at least the pain of taking on a bad contract is spread over a number of years.
The Giants with this contract is counting on one of two things happening, one is that Cueto returns to his prior goodness, in which case, when he opts out, he’ll be in the situation that Greinke was in this off-season, and two is that if he performs bad enough to not take the opt-out, that he’ll be close enough to average over the life of the contract that he won’t be a total albatross.
For Zito was never worth his contract, but he wasn’t worth nothing either. He was average enough for a number of season, and ate up a lot of innings that saved the bullpen for the playoffs. And he even manned up in the 2012 playoffs and got us key wins, he was instrumental to that championship. Before 2010, and especially if 2010 had not happened, any Giants fans would have been happy with his contract given how he helped them win in 2012, as any amount of money would have been worth getting that first championship after so many years.
Overall, not a huge shift for any team, but this Pillow concept with this optout could work for the Fister example, where the opt-out would give him the $10M he should be expecting this season, while pushing it back for the team if he don’t opt out. So he gets $4M for 2016, opt-out with buyout for $10M, $10M for 2017, and team option for $10M for 2018, with buyout of $6M.
The beauty of this type of contract is that instead of being a linear timeline type of contract, you can branch off for different scenarios. In this example, he ends up with $20M if things go bad, but if he opts out he gets the $10M he was expecting and moves on, while maybe the team can trade him or QO him to get a pick.
And I agree, this works better for rebuilding teams, as well as teams with smaller revenues who needs to buy talent by taking risks like this and trading to get prospects if the player is good enough mid-season.
Oops, screwed up my example. The optout is for $6M, not $10M, I edited the wrong numbers when fixing up my example. And to be clear, his optout is after one season. So he’s guaranteed $20M but if he has a good season, he opts out and still gets $10M.
I don’t think many players will accept $4M (a paycut of $7M if he is right that he is still good), just to get a guarantee of $24M in case he’s bad. I don’t see players thinking that way.
Obviously, none of this is good for teams. I think one of the points of this article is that teams are yielding on contracts in terms of risk to get players and Dave is trying to think of where this might lead to for lower tier players.