Sal Perez and Awarding Contract Extensions Out of Fairness

Earlier this week, Salvador Perez and the Kansas City Royals agreed on a second contract extension. In terms of financial need or justification for the Royals, there weren’t any compelling reasons for the Royals to sign Perez to another extension when his previous contract kept Perez under control through the 2019 season. Even with no extensions, Perez would not have been a free agent until after this season. In his analysis of the deal, Jeff Sullivan focused on the human element of the deal and being fair to Perez. Ken Rosenthal wondered if this would start a trend and named a few other players who might benefit from teams deciding to be a bit more fair. Perez is certainly not the first player to sign a very team-friendly deal, but he is also not the first player to be awarded a second deal despite having a number of years still left on his first contract.

In Rosenthal’s piece, he acknowledges that Perez was a “special case,” noting that the Royals catcher had recorded just 158 plate appearances at the time he signed the contract. That lack of experience led to a very low guarantee and the three team options that would have prevented Perez from reaching free agency for another four seasons. While acknowledging both the lack of need and the recognition of fairness, Rosenthal suggested six other players who might fit the same bill as Perez, although perhaps on a smaller scale given their larger guarantees: Paul Goldschmidt, Anthony Rizzo, Jose Altuve, Chris Sale, Madison Bumgarner and Chris Archer.

On the whole, these types of extensions save massive amounts of money for teams, but we can take a look at the contracts Rosenthal discusses and compare them to Perez’s to see if they are actually close. The first few columns of the table below should be self-explanatory, but the last column, FA Surplus Value, might not be. To calculate the surplus value, I took current projections, applied standard aging curves, set the cost of a win at $8 million for this year along with 5% increases in years thereafter and compared the value of the projected production to the cost for free agent years only. For the players below, their arbitration salaries have also been at a discount, so if you want to include those values, feel free to add on another 20% or so (whichever number you feel like) to capture that discount as well.

Bargain Contract Extensions
Player Years Left (w options) Dollars Left (w options) FA before Contract FA after Contract FA Surplus Value
Sale 4 $47.25 M 2016 2019 $118.2 M
Rizzo 6 $59.0 M 2018 2021 $104.1 M
Bumgarner 4 45.25 M 2016 2019 $84.9 M
Goldschmidt 4 $40.0 M 2017 2019 $68.5 M
Perez 4 $16.75 M 2016 2019 $67.0 M
Altuve 4 $20.5 M 2017 2019 $49.9 M
Archer 6 $45.25 M 2019 2021 $45.9 M

Rosenthal did a very good job identifying the super-team-friendly contracts. Perez falls right in the middle of those contracts in terms of surplus value, but what makes his case different is the very low salary-level in relation to the other players — this, even if his options had been picked up. The top-four players on that list are massive bargains, but at least they will be paid around $10 million or more per year — double that of Perez. Altuve is in nearly the same boat as Perez in terms of salary, but he gave up just two years of free agency, which limits the surplus value.

Looking back through MLB Trade Rumors’ extension tracker, I identified players who were locked up to a second extension while still possessing multiple years on their first one. The idea: to find some sort of precedent for the Perez contract, or perhaps something closer to the situations of Sale, Bumgarner, Goldschmidt and Rizzo. Certain names come to mind immediately when considering players who’ve received a second extension while still playing on the first. Miguel Cabrera, for example. And Ryan Howard. These are classic cases of a team mistakenly extending players before they’d have to, but neither case is really similar to Perez’.

There are a handful of situations like Cabrera’s and Howard’s, and I put a recent list of those players in the table below.

Major Second Extensions
Yrs Left to FA $ Left Deal End Added Yrs Added $ Actual/Proj Value Surplus/Deficit End Yr
R. Zimmerman 2 $26 M 2013 6 $100 M $34.3 M -$65.7 M 2019
Jake Peavy 2 $17.5 M 2009 3 $52 M $61.5 M $9.5 M 2012
Ryan Howard 2 $39 M 2011 5 $138 M -$14.9 M -$152.9 M 2016
F. Hernandez 2 $41 M 2014 5 $134 M $150.6 M $16.6 M 2019
J. Verlander 2 $40 M 2014 5 $140 M $95.7 M -$44.3 M 2019
Joey Votto 2 $26.5 M 2013 10 $225 M $279.5 M $54.5 M 2023
D. Pedroia 2 $21 M 2015 6 $89 M $102.1 M $13.1 M 2021
M. Cabrera 2 $44 M 2015 8 $248 M $182.8 M -$65.2 M 2023

Given the years left on some of these contracts, there’s much left to to be determined about them. Votto and Howard were not actually on contract extensions that bought out free agent years, but on contracts which bought out only arbitration seasons. In any event, all of these players were just two years from free agency and had a decent amount of money coming to them without signing an extension. They do not really fit the mold of the players like Perez or even Goldschmidt or Sale. The current bargain-contract players might enter that realm in a couple years, but they’re not there yet.

The players in the last chart are not the only players who signed second extensions. There are three comparable cases to Perez, Goldschmidt, et al. over the last decade.

Extensions on Bargain Extensions
Yrs Left to FA $ Left Deal End Added Yrs Added $ Actual/Proj Value Surplus/Deficit End Yr
Troy Tulowitzki 4 $38.7 M 2014 6 $119 M $127 M $8 M 2020
Ryan Braun 5 $40.5 M 2015 5 $105 M $73 M -$32 M 2020
Evan Longoria 4 $36.6 M 2016 6 $99 M $107 M $8 M 2022

When Tulowitzki, Braun, and Longoria signed their contract extensions, they were all under control for at least four more years at absolutely bargain rates. In each case, the teams added around $100 million to the contracts, and in each case, the team turned a bargain contract into one that is closer to neutral. The Tulowitzki contract still had some value when he was traded last summer, although that value was likely higher in previous seasons. Braun has fought injuries and PED suspensions, and the Brewers could have let him go with no obligation and maybe picked up a draft pick without extending him. Longoria likely would have been in line for more than $100 million after this season, so his contract still has some value.

In each of the cases above, the team felt it was important to lock in cornerstone, face-of-the-franchise players. The teams didn’t need to sign the players to extensions, but believed locking these players in was worth the cost for goodwill, fairness, and the possibility of employing a player for almost the entirety of his career. These three contracts have not been major successes or failures, but the fairness principal that we saw for Salvador Perez costs a lot more for those three players and would likely be the same for the players that Rosenthal mentioned in his piece. All of them meet the same criteria as Braun, Tulowitzki, and Longoria — or at least come close — but it would be fairly surprising to see any of those teams add on a nine-figure extension so their stars are compensated closer to their value.

Craig Edwards can be found on twitter @craigjedwards.

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8 years ago

My first thought here was that it seems problematic for teams to be fully harmed by bad contracts while not fully reaping the gain for good contracts. The equilibrium outcome of this is less player money overall (since if the upside of an investment is lower teams will pay less for it).

The flip side of this–at least in part–is players who have no remaining playing career but have a good sized salary choosing to retire rather than report for duty. E.g. Cuddyer. The equilibrium outcome of this is that players with good character (or those teams expect to retire if they can’t produce value) will earn larger contracts since the downside risk is lower.

The big difference is that players are in ‘one-shot’ games while teams are in ‘repeat’ games.

Should the fairness extend to players whose salaries are smaller due to team control? Why-why not?

I don’t have a point, just some random thoughts.