On Opt-Outs and the Value to a Team, Again

Yeah, I’m writing about opt-outs again. I know, I’ve already written about them a couple of times this winter, so I’m running the risk of beating a dead horse even further, but opt-outs continue to be a source of some controversy, especially since they’ve been handed out so commonly this winter. Last week, Rob Manfred weighed in briefly, stating that he didn’t see the value in opt-outs from the team perspective.

“The logic of opt-out clauses for the club escapes me,” Manfred told FOX Sports on Thursday night. “You make an eight-year agreement with a player. He plays well, and he opts out after three. You either pay the player again or you lose him.

“Conversely, if the player performs poorly, he doesn’t opt out and gets the benefit of the eight-year agreement. That doesn’t strike me as a very good deal. Personally, I don’t see the logic of it. But clubs do what they do.”

I didn’t write about Manfred’s comments when they were published because of the fear of the dead-horse phenomenon, and because all I’d have to add to those comments is that the logic teams are seeing is a chance to save money on long-term commitments by including opt-outs in order to reduce the total amount of guaranteed money they’re including in their offers. But Manfred knows that; he just can’t say it publicly. As commissioner, he’s limited in what he can say about player compensation, especially with a CBA negotiation upcoming, and so I figured I’d just let the comment be.

But then today, Rob Neyer wrote about Manfred’s comments, and added a few of his own. And since his point about opt-outs is the one that I most stridently disagree with, I figure it’s worth bringing this issue up one more time. First, though, Rob’s take on opt-outs.

There is something about these opt-outs that I don’t think has been mentioned often enough. Yes, they’re obviously a tremendous financial benefit for the player. But they’re also pretty, pretty, pretty good for the wealthy teams. If you’re the Cubs or the Red Sox, you’re absolutely thrilled if Jason Heyward and David Price play terrifically in their first three seasons, because that means you’re getting your money’s worth and you’re probably winning baseball games.

But everybody knows the risky thing about these contracts is the so-called out years. So would smart organizations like the Cubs and Red Sox be terribly disappointed if Heyward and Price let someone else pay the freight down the road? Leaving the clubs with a sudden windfall of sorts, and the attendant flexibility?

I think not.

This remains a popular sentiment, and based on the comments I’m still getting in my weekly Wednesday chats, is still a point that a lot of people buy into. And I will continue to maintain that it’s basically wrong; if David Price or Jason Heyward play really well over the next three or four years, the Red Sox and Cubs will not be happy that the players opted out of their deals, because the players will only opt-out if they have below-market contracts — meaning that the team either has to give them a raise in order to keep them around or will have to pay other players current market rates in order to replace Heyward or Price on their roster — and are positive-value assets for the club at that point. They will be happy with their initial decision to sign the player several years ago, since using the opt-out means that the first part of the contract worked out well for the team, but they would have been even happier with that decision if they had not included an opt-out and got to retain a quality player at a below-market price.

Every time I make this point, a significant number of responses reiterate the comment Rob made above; that an opt-out gives teams the chance to get all the good years of a player’s performance but then also not have to incur the risk of the ends of the deal. And I get why it’s easy to think this when we’re dealing with some hypothetical future decision in 36-48 months, but to illustrate my point, I think it’s helpful to look at players currently under contract and evaluate whether we think teams would be better off if they had included an opt-out in those deals at the time they were signed.

Let’s go back three years, and take a look at the crop of players who signed long-term deals back in the 2012/2013 off-season, either via free agency or by extension with their current team. Here are all the $100 million deals signed that off-season.

Josh Hamilton: 5 years, $125 million, $25 million AAV
David Wright: 8 years, $138 million, $17.3 million AAV
Cole Hamels: 6 years, $144 million, $24 million AAV
Zack Greinke: 6 years, $147 million, $24.5 million AAV
Buster Posey: 9 years, $167 million, $18.6 million AAV
Felix Hernandez: 7 years, $175 million, $25 million AAV
Justin Verlander: 7 years, $180 million, $26 million AAV

The Posey deal is obviously the outlier there, because he was still four years from free agency when he signed his long-term extension with the Giants, so his deal is quite a bit different than the rest. In fact, if Posey hadn’t signed that extension, he still wouldn’t be eligible for free agency this winter, so obviously, the Giants wouldn’t have considered giving him an opt-out before their six years of control had expired. So we’ll mostly gloss over his deal, because it’s a different animal than the rest.

The other six deals, however, fit perfectly into the type of player who is getting an opt-out this winter. These guys were all some of the very best players in baseball at the time, and several of them remain that even now, though a couple of them have declined precipitously since the deals were signed, and exemplify the risks teams take when they sign long-term contracts. All those guys signed for something close to the same amount in terms of per-season salary, with number of guaranteed years being the primary differentiator; Greinke was the only one who negotiated an opt-out clause into his deal at the time, but he also had more leverage, since he was a free agent, while Verlander, Hernandez, Posey, Hamels, and Wright all re-signed with their own organization before becoming free agent eligible.

So, looking at what we know about these players right now, would the teams that own these contracts be happy if they had included opt-outs in the contracts when they signed them? Let’s just go through the list.

Hamilton: an opt-out would be irrelevant. The relationship between the player and team soured very quickly, and the Angels ended up paying almost all of the remainder of Hamilton’s contract to send him to Texas. Hamilton would have no interest in opting out of his current contract, and the inclusion of it in the deal would have had no impact on anything.

Wright: Wright has five years and $87 million left on his deal, and coming off a season where he spent most of the year rehabbing a back injury, it seems unlikely he’d do better than that on the open market. And given the relationship Wright has with the Mets, and the fact that the team just went to the World Series, it seems unlikely that he’d actually be all that interested in leaving. Most likely, I think Wright would just decline to use the opt-out, since 5/$87M with the team he wants to play for is probably better than any other deal he could get in free agency.

Hamels: The first case where granting an opt-out would have been demonstrably terrible for the franchise. Had the Phillies included an opt-out in Hamels deal, they’d have been marketing a rent-a-pitcher at the deadline, as Hamels clearly would have voided the remaining 3/$73M left on his deal in order to seek a raise in free agency. The Phillies would have gotten less in return when trading Hamels than they did because they were selling multiple years of a below-market asset, and including an opt-out would have hurt the franchise’s ability to rebuild.

Greinke: Another case where it’s clearly a net loss for the team. The Dodgers had Greinke under contract for 3/$71M, but were outbid by the Diamondbacks when trying to retain him; he not only got three additional years tacked onto his deal, but also upped the AAV of his deal by $10 million per season. The Dodgers lost one of the best pitchers in baseball, and while they still have his $24 million per year to spend on a replacement, they’re not going to get a pitcher anywhere near his quality for that kind of money anymore.

Posey: Unrepresentative example, but yeah, the Giants wouldn’t want Buster Posey to be heading to arbitration this winter, staring at a potential long-term deal in free agency next winter. They’d clearly have to give him a big raise to keep him in San Francisco over what he’s guaranteed now.

Hernandez: Maybe the most interesting test-case for the question, since Felix represents almost every circumstance that people bring up as an example of why opt-outs can be good for a team. The first three years of the extension have gone very well, but his 2015 season threw up a good amount of red flags; his strikeout dropped four percentage points, his home run rate spiked, his walk rate got worse, his velocity continues to trend downwards, and he threw his fewest number of innings since 2008. There are plenty of reasons to think that Felix probably won’t survive as an elite pitcher over the remainder of his contract, but even with all those warning signs, he’s pretty clearly underpriced at 4/$104M.

Steamer still sees him as a +4.5 WAR pitcher for 2016, and while I don’t think he’d quite get Greinke’s contract coming off a poor season by his own standards, he’d blow by the deal Jon Lester got last winter, and I’d think something in the 6/$180M range is probably closer to his market value. If the Mariners wanted to divest themselves of the remaining risk on Felix’s contract, there’s no question there would be a bunch of teams signing up to try and trade for him and his 4/$104M contract. I’d imagine a team like the Dodgers might even offer to add an extra year at a higher AAV in order to get him to waive his no-trade clause, as he’d be underpriced even at something like 5/$140M.

So the Mariners could try, if they wanted, to essentially opt-out of the last four years of Felix’s deal. They’re choosing not to, and that action suggests that they value the remaining four under-market years of the deal — even with the obvious red flags his 2015 season threw up — more than they value the chance to reallocate that $104 million to other players. The Mariners seem to be happy with their asset, even if they would agree that he may very well be in decline and headed for a fall-off. Would Felix opting out save them from themselves, potentially? Perhaps you could see it that way. But would the franchise really be better off with an aging roster led by guys like Robinson Cano and Nelson Cruz but no ace to give them dreams of getting one last playoff push before the team needs to rebuild? And if 2016 doesn’t go well for the team, would they really be better off not having Felix as a trade chip this summer when teams are looking for pitching at the deadline?

Even in a scenario where a heavily-worked pitcher has a significant amount of money left on his deal, I don’t see how the Mariners would benefit from having Felix opt-out of his contract right now. They’d be worse in the short-term, wouldn’t be able to replicate his value for the amount he has left on his contract, and would lose the opportunity to either contend in 2016 or potentially trade him for value at some point in the next couple of years. Yes, they’d divest themselves of the risk of his arm blowing up in March, but they’d divest themselves of more value than risk, and that’s not a trade-off teams want to make.

Verlander: Like Hamilton, a pretty easy “yeah, I’m good” conversation with the agent. Verlander has 4/$112M left on his deal and looks like an average or slightly above average pitcher at this point. He would get less money in free agency, so he wouldn’t opt-out, so neither side would gain anything from having had the opt-out included.

Of course, the reason teams are giving opt-outs is to lessen their financial commitment in salary, so if the Tigers or Angels had offered an opt-out to Hamilton or Verlander in exchange for taking less guaranteed money, they’d actually be getting some benefit from the opt-out, as they wouldn’t have as much dead money on the books as they do now. In the Tigers case, if they had saved $15 or $20 million in salary by giving Verlander an opt-out, they would realize that financial savings without experiencing any kind of lost asset, since Verlander wouldn’t use the opt-out he paid to get.

So it’s actually the scenarios where the player doesn’t opt-out where including the opt-out is good for the team, assuming they got a financial offset for including the provision in the contract. The scenarios where the player does opt-out, though? Those aren’t great for the team. In those cases, the team is losing value, which is why no one thinks the Dodgers benefited from Greinke opting out this winter, and no one would think the Mariners would be better off if Hernandez had an opt-out he could use tomorrow.