JABO: $20 Million Isn’t What It Used To Be

With free agency now officially underway, we’ve reached the point in the off-season where baseball scribes roll out our annual warning to Major League teams: DON’T DO IT! The history of the $100 million contract is served up as a reminder that these mega-contracts have often turned out poorly, with names like Mike Hampton and Carl Crawford trotted out as reminders that big pricey off-season additions don’t come with any kind of guarantee of success. Because most free agents reach the open market around (or after) their 30th birthday, teams are often signing players whose best days are behind them, and end up paying big money to players who are in decline before they even put their new uniforms on.

The newest entry in the annual reminder of big contract risk comes from Will Leitch over at Sports on Earth. In his piece on Tuesday, Leitch notes that players who have been paid an annual average value of $20 million or more during their long-term deals have fared particularly poorly of late.

That is the dirty secret of every free-agent season: Almost every long-term deal that will be signed will be bad. In FanGraphs’ rankings over the summer of the worst five contracts, all five were massive free agency “victories” for the team that signed them, all within the past three years. These deals are terrible business. I know this is exciting. I know we can’t wait to talk about them all. I know some long-term deals even work out (though the only one immediately coming to mind is Matt Holliday). There are 34 players — not counting the free agents signing new deals — who will be making $20 million or more in 2016. The majority of them will absolutely not be worth it.

Leitch goes on to note that just eight of the 34 players scheduled to make $20+ million next year are “boons” to their franchise, while another eight are “up in the air”, leaving 16 as “drains”, including several players who might not even have jobs next year if it weren’t for their guaranteed contracts. It’s unquestionably true that a lot of these major signings in recent years have gone poorly, and undoubtedly, many of the teams who will be celebrating their new acquisitions over the next few months will end up wishing they’d been outbid instead.

But while I agree with Leitch’s overarching point about free agency being an inefficient way to build a roster, I think there are a couple of reasonable counters to his claims. Let’s attempt them.

Read the rest on Just a Bit Outside.





Dave is the Managing Editor of FanGraphs.

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db
8 years ago

In pointing out the backloaded contracts, it is also important to point out the time value of money. Backloading is cheaper for owners, almost all of whom are financially savvy. By contrast, players and agents are probably more interested in the “headline” number and less concerned about the actual value of the contract in present dollars. Hence, both sides are incentivized to create a bigger mismatch between the backend value of a long term contract and the salary being paid.

Eric R
8 years ago
Reply to  db

In many cases, I don’t think the effect is that big.

A $300M deal over ten years at exactly $30M per year vs extremely backloaded [$10M/$15M/$20M/$25M/$30M/$35M/$40M/$40M/$40M/$45M] and figuring that the owner can turn a 6% above inflation profit on cash on hand — I get a difference of $1.5M per year.

So for a contract longer than most, for a higher value than nearly any, with more extreme back-loading than nearly any and a pretty healthy return, just doesn’t make a huge difference relative to $100M payrolls for businesses worth hundreds of millions or billions.

For a more conventional 6/$125M deal, flat vs $10/$13/$18/$23/$28/$33 I get a difference of $600k per year.

Maybe a big payroll team might squeeze out an extra $3-6M per year in PV by back-loading? Best guess, the #1 reason for back-loading is flexibility now since the GM might not even assume the backend of any long deal will be their particular problem 🙂

james
8 years ago
Reply to  db

in the full article he covers that you have to look at a full contract as they are getting cheaper production on the front end, and losing on the back. But you have a good point, inflation is a thing, and these owners are good with money. So inflation is just about 2% per year, but a good investor can get about 5-6%, so it is easy to see how 10 million 5 years from now is just a well invested 8 million now.

pft
8 years ago
Reply to  james

The inflation that counts for baseball is payroll and revenue inflation. Both are considerably higher than the CPI. Revenue inflation in baseball is running around 8-10% per year over the last 10 years while payroll inflation is about 5-8%. Most contract analysis use 5%

Philip Q
8 years ago
Reply to  db

Carlos Beltran’s contract with the Mets is another one that comes to mind that worked out fairly well from the team perspective.

7 years, $119 million.

2.3 + 7.8 + 5.1 + 7.3 + 2.9 + 0.7 + 4.3 = 30.4 WAR

The last year was split between the Mets and the Giants, and even that worked out pretty well for the Mets as they flipped the remaining half season of Beltran’s contract for Zack Wheeler.