Teams Saved $500 Million by Locking Up Players Early

There is an inherent risk/reward dynamic for both team and player when it comes to locking up young players to guaranteed contracts past their arbitration years. Without a guaranteed contract, teams can go year to year with players through the arbitration process and, in the event of player injury or decline in performance, the team can drop the player without consequence. However, once that same player reaches six years of service time, he is free to choose any team he prefers, often at an expensive price.

For the player, going year to year naturally exposes him to a possible loss in future compensation due to the risk of injury or a decline in performance. That said, by going year to year, the player essentially bets on himself during the arbitration process and reaches free agency at the earliest possible time — and with the benefit of a potentially large payday.

Where these two interests meet, teams and players reach agreements early in careers to buy out the player’s remaining arbitration years and some years of free agency. A team’s ability to absorb risk in handing out contracts is much greater than the player’s risk in turning the contract down, and the savings are generally much greater for the team.

From the winter of 2008 through the summer of 2011, teams and players agreed to 53 contracts both (a) at a point before the player in question had recorded four years of service time and (b) in which the contract featured no guaranteed money beyond 2016. Among those players, there are some bargains and some duds. By examining only the free-agent years for which clubs paid ahead of time, we can calculate rough approximation of how much money teams saved or lost by locking up players early in their careers.

While there are some players who might have been non-tendered during the arbitration process — therefore costing teams a bit more money than they would have going year to year — there are also players who would have earned considerably more during the arbitration process than their contracts provided. When teams sign players to these type of contracts, the major win for the team comes in free agent seasons, and the major concession by the players are those same years. As a result, the analysis below will focus on those years.

To determine how much money was saved or lost by the teams during the free agent years, we will look at the salary for the player during those years and compare it to the production the player provided. Multiplying WAR by the cost of a win (using $8 million for 2016 and $250,000 less for each year prior), we can estimate a player’s value during those years. For players still under contract in the coming season, FanGraphs Depth Chart projections allow us to supply a likely WAR figure for the 2016 campaign. Players who signed another extension before the current extension was over are still included to show the value they would have had — as well as the fact that that value should have been taken into account when the new contract was signed.

First, we will take a look at the neutral contracts, where the money saved or lost was $10 million or less. Roughly half of the contracts (27/53) fall into this category. The chart below shows each player, the money they were paid, their value and the surplus or deficit. Players who have another option after this year were highlighted in blue. Date of Extension from MLB Trade Rumors.

Ryan Braun would have been a free agent after last season if not for his five-year extension that starts this season. Jaime Garcia and Wade Davis will have the opportunity to make their deals look even better by outperforming projections this season, and potentially providing value in 2017, as well. Several players, like Davis and McLouth and Span, had trade value due to their contracts, benefiting the team. Some of the zero-zero deals occurred because teams had options on final years of arbitration that were not exercised or because there was no buyout for a free-agent option year. Much of the small negative numbers are due to buyouts on options that were not exercised. Ubaldo Jimenez had his free agent option year voided when he was traded. For the most part, these are deals that would not be considered wins for the team and might be considered wins for the player given the guaranteed dollars they received without the team receiving the hoped-for benefit.

Before getting to the bargains, take a look at the bad deals for the team, where the deficit is greater than $10 million.

There are a decent amount of slugging players whose lack of slugging and declining defense hurt their value. It is doubtful the Royals would take back the Billy Butler signing, and Justin Morneau’s contract did not work out due to unfortunate injury problems. If Alexei Ramirez had been even slightly above replacement last season, he would not have made this list. The Rios contract was likely a mistake when it happened. Bruce’s contract might still provide some value, either in the form of recovered performance over the next two seasons, or in extracting some trade value from the other team. Carlos Gonzalez, who did not make this list due to guaranteed money owed in 2017 is in a similar, although slightly better, situation than Bruce with the Cincinnati Reds.

Finally, we come to the team-friendly contracts, those cases in which a team received surplus value and players gave up some free agency money in exchange for security.

The Reds might not be winners with Jay Bruce, but the team came out way ahead on Johnny Cueto and Brandon Phillips. The Tampa Bay Rays signed three of the players above, and traded two of them before their contracts ended, while also extending Longoria. These players lost some of their free agent value by waiting on free agency, but it has not prevented them from signing another large deal. Many of these players have gone on to sign considerably bigger contracts, especially Robinson Cano, who was an absolute bargain for the New York Yankees, but is proving not to be the same with the Seattle Mariners. After signing the early extensions, the players in the group above have gone on to sign contracts totaling more than $1.5 billion.

When we combine the three groups together, they look like this:

Teams have extracted a net value of over $500 million in savings by locking young players up with extensions taking them into free agency. Despite team wins in only one-third of the contracts, the savings are so great and the risk to team is so low that the net benefit works out incredibly well for the team. Teams still must choose wisely when giving out these types of contracts, but when they pay off, the team makes out very well.