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.

We hoped you liked reading How the Opt-Out Could Improve the Pillow Contract by Dave Cameron!

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Dave is the Managing Editor of FanGraphs.

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Bryan
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Bryan

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!