The Opt-Out Clause Is Evolving
Jake Arrieta is now officially a member of the Phillies. For a few weeks, this arrangement was feeling increasingly inevitable, as Scott Boras wasn’t finding longer-term offers, and as the Phillies have had tens of millions of dollars of payroll space. The Phillies are getting closer to relevance, and, among the would-be Arrieta suitors, they have to worry about efficient spending the least. So, here we are, with Arrieta having had his formal press-conference introduction. The Phillies still aren’t anyone’s wild-card favorites, but Arrieta unquestionably makes them stronger. The rotation is now deeper than just Aaron Nola.
The player in question is interesting enough on his own. Entire books could be written about Arrieta’s career, and he still has another few chapters to go. Arrieta has experienced dizzying highs and unthinkable lows, which makes him out to be something inspiring. But let me warn you right now, this is not a post about Arrieta’s professional achievements. It’s not a post about whether I think Arrieta is going to age gracefully. This is a post about the contract. The inanimate paper contract. Specifically, this is a post about a clause in the contract. You should leave now if you don’t care about this. But with the Jake Arrieta deal, the Phillies and Scott Boras have agreed to something new.
As it’s been reported, Arrieta signed with the Phillies for three years and $75 million. This is the breakdown:
- 2018: $30 million
- 2019: $25 million
- 2020: $20 million
Pretty straightforward. The contract is front-loaded. Additionally, Arrieta can opt out after the 2019 season, if he wants. That would mean he effectively signed with the Phillies for two years and $55 million. All of that looks fairly normal, in this day and age. What’s particularly interesting is the new twist. While Arrieta has an opt-out clause, the Phillies can also void that opt-out clause. And it’s voiding through a contract extension, that would pay Arrieta $20 million in both 2021 and 2022. Those salaries could go up to $25 million each, if Arrieta makes enough starts over the next two years. And those salaries could go up to $30 million each, if Arrieta finishes high enough in the Cy Young voting. This is a structure we haven’t seen before.
Arrieta signed for three years and $75 million. This might end up being two years and $55 million. Or it might end up being five years and $115 million, or $125 million, or $135 million. There are a lot of ways for this contract to go. And what the Phillies have basically done is give themselves some extra protection.
Consider the example of a more familiar contract. The Red Sox gave J.D. Martinez an opt-out. The Red Sox actually gave J.D. Martinez more than one opt-out, but, anyway. The opt-out, on its own, works well for the player, and it works against the team. Opt-out clauses in general are a way for teams to give more value to players without those values coming in the form of salary. They can be important for teams worried about approaching the competitive-balance-tax threshold. For Martinez, if he’s bad, he gets his guaranteed money. But if he’s very good, he can choose to re-enter the free-agent market. In theory, Martinez would only opt out if he stood to earn more money from a new deal. This is why such clauses are player-friendly. If Martinez were in position to opt out, the Red Sox would like to still have him. The team loses out on good seasons, putting a cap on a contract’s upside.
Now look at what the Phillies have done. I believe this to be the first opt-out-clause offset. Forget about the first two years. Those two years are set in stone. Headed into 2020, Arrieta could opt out of one year and $20 million. But the Phillies could also effectively choose to extend him, for three years and $60 – 80 million. If Arrieta is just pretty good, I imagine he’d opt out, and that would be that. But now imagine that Arrieta is very good. He rediscovers his control and his cutter-slider hybrid plays up again. It might not be the most likely outcome, but if Arrieta gets back to pitching like an ace, then the Phillies don’t have to lose him. Just as the value to Arrieta is the possibility to opt out if he thinks he can get more than $20 million, the value to the Phillies is the possibility to keep Arrieta if they think he’ll be worth more than $60 – 80 million. The Phillies end up with some protection, because they could extend Arrieta for less than they figure he’d get on the market.
This feels like a natural evolution of the opt-out clause. Opt-out clauses aren’t as complicated as they seem; they’re more or less just multi-year player options. They’ve started to show up increasingly often. At first, contracts included one opt-out clause. Then we saw contracts with multiple opt-out clauses, like Martinez’s, or Jason Heyward‘s. Now we have our first opt-out offset. And, when I asked around, I got the impression we’ll see more of this. More teams are going to talk about voiding opt-outs with contract extensions. Teams might think about including club options, following player opt-outs. A standard opt-out clause has a value to the player, which some people estimate to be around $20 million or so. Teams are going to look to drive that value down, by asking for their own protective clauses. There’s nothing nefarious here — all contracts are negotiated, and agreed upon. This is just something to get used to. If a regular opt-out tripped you up before, things are only going to get more complex. I can’t even imagine how they’re going to structure Bryce Harper’s free-agent deal next winter. That’s going to necessitate untold levels of creativity.
To bring this back to Arrieta, he’s a 32-year-old former ace with a number of downward-pointing arrows. By far the most probable outcome of all of this is that Arrieta simply spends three years with the Phillies, earning the $75 million. If he were to opt out, he’d be doing so headed into his age-34 season. How many 34-year-old starters are going to find $20 million on the market? Arrieta probably won’t opt out, which would render the clauses irrelevant. Sometimes complicated contracts work out simply.
But, you never know. The ball still dances out of Arrieta’s right hand. He just hasn’t been controlling it quite so well. Arrieta might find his location again. He might get Cy Young support again. It’s not too terribly probable, but if Arrieta were to experience a career resurgence, then the Phillies have negotiated built-in protection. Instead of just allowing Arrieta to walk early, the Phillies have given themselves the chance to hang on to Arrieta for even longer, at what would presumably be a below-market rate. This is a new twist in the opt-out world, and it’s not going to go away, as agents ask for more opt-out clauses in the first place. Teams are going to ask for their own clauses in return, to protect themselves in case players are extremely good, or extremely bad. It’s the way this was bound to go. It was never going to be regular opt-outs forever. And so it’s going to be on the agents to make sure that, in any given deal, they’re not conceding so much that the player opt-out loses almost all of its value. Used right, an opt-out clause can be a powerful tool. We’ve just now seen our first industry response.
Jeff made Lookout Landing a thing, but he does not still write there about the Mariners. He does write here, sometimes about the Mariners, but usually not.
So it’s unclear to me, and maybe nobody knows, but does Arrieta have to opt out first for the Phillies to be able to pick up the extension, or can the Phillies decide on their own to void the opt out by extending him before he has a chance to opt out?
The way Jay Jaffe’s article read yesterday, it looked like Arrieta decides first, and then the Phillies get to decide if they want to let him hit the market or pick up the extension.
Phillies decide first
+1 ^
But isn’t the middle ground between the two clauses — the scenario where Arrieta’s performance is good enough for him to want to opt out, but not SO good that the Phillies want to void his opt-out — almost vanishingly small? I’d have liked to see a little more analysis of that case, because to me, this seems like a near-certainty to just come out as a 3-year contract with a performance-incentivized extension.
Yeah, there’s a very narrow path to where Arrieta opts out and the Phillies don’t want him extended. As such, I’m not convinced the opt-out here really has much value to Arrieta at all, aside from any psychological aspects.
Jeff, you can see a circumstance where Arrieta evolves into a pitcher (maybe 5 WAR with comparative health in the first 2 years) who might get 3/$40-45 from that point forward. It that’s the case, the Phillies might be fine not paying him $20M for year 3, and Boras might like the opportunity to opt-out and get him a bigger guarantee (at a lower AAV) for what might be the balance of his productive career.
As someone pointed out way down in the comments section of the Jaffe article, there exists a point at which Arrieta might be so good that he would not want to opt out, but would rather play out the third year, and then hit free agency.
Edit: If the Phillies choose first, as Jeff says, this scenario does not exist. Where is it reported that the Phillies choose first?
This is what I saw.
http://www.espn.com/mlb/story/_/id/22725546/jake-arrieta-philadelphia-phillies-agree-multiyear-deal
“Arrieta can opt out of the deal after two seasons, but the Phillies can void that opt-out clause if they first trigger a two-year extension to make the pact a five-year deal, according to FanRag Sports.”
I believe that is just referencing Heyman’s original tweet, which is more ambiguous and does not include the “if they first” part.
https://twitter.com/JonHeyman/status/973322316984782848
Though it probably would make more sense if the Phillies have a deadline to pick up the extension before Arrieta can choose to opt out.
I can think of one scenario where Arrieta opts out and the Phillies don’t exercise their extension option – Mike Trout.
Trout is a well-known Philly fan. He’s been good about not talking too much about what will happen when his deal runs out, but he grew up not far away and was a huge Phillies fan. Trout is a FA in winter 2020-21. The Phils have almost nobody signed for 2021 (Herrera plus a $17.5M option on Santana) but their arbitration figures are likely to be getting high by then with Hoskins hitting arbitration for the 1st time that year and all of Nola, Velasquez, Altherr and Eickhoff in their final year of arbitration. Projecting arbitration that far out is obviously a huge guessing game, but b-ref has them at about $85M in arbitration which runs their payroll out into the $95M range if they don’t bring back Santana and that’s assuming they don’t sign anybody else the next 2 offseasons which seems incredibly unlikely given where the team is on the contending curve so it’s probably going to be a good bit higher than that.
If they want to sign Trout, you know it’s going to take $40+M. Exercise Arrieta for another $25M and that payroll is starting to really get up there.
But supposing it makes economic sense to exercise the option — meaning that Arrieta is performing at superstar levels and the contract is below-market — wouldn’t the team still want to keep him as a controllable asset at that point? I haven’t seen reporting on what kind of trade protection the contract includes but it seems hard to imagine, even with a full no-trade, that the team would want to just let him walk when they could almost surely get *something* in exchange.
Not necessarily.
If the young Philly pitchers develop the team might thank Arrieta for his service and let him walk to free up cash for Trout or other options.
Try this scenario: Arrieta stays healthy and produces 3 WAR in 2019.
And the phillies decide they can get 2WAR from one of their young players and they can use the $20M for Trout or a killer bullpen or…
Context matters. Teams let good players walk all the time.
I disagree. If they’re going to pony up to sign Trout, they’re going for it, and they’re going to want to surround him with as good a supporting cast as possible. If they can get a $30M player for $20M, they’re doing it.
Or, put another way, if they’re not interested in a $30M player at $20M, they’re not interested in winning and wouldn’t want to sign Trout who at that point will be likely starting to decline.
Also, what examples can you give of a team declining an option when the player’s “value” (interpret that however you like) was 50% greater than they’d pay if they exercised the option?
Sign Trout for $40+M and you are committed to winning (or at least trying to win). If you have a team in Philly and are committed to winning, keeping a $20M starter isn’t a big deal at all. There’s no way they take a “guaranteed” $10M profit and give it away for nothing.
I feel like that middle case is more about PHI than about Arrieta. They would have to exist in some circumstance where Jake is worth better than 1/20 but PHI doesn’t want to keep him.
That might be payroll pressure from making a run at Mike Trout combined with a bunch of breakouts from controllable pitching talent, sure, but I think the more likely scenario that would cause this would be relative disaster. If large swaths of the team suffer injury, underperformance, or fail to develop and they have to start the rebuild all over again … then the Phillies might not want to bother paying for Arrieta.
Both options are possible.
So is a scenario where the starting pitching develops but not t he bats.
Because the Phils are still rebuilding they don’t know what they have or where they’ll be in two years. Limiting downstream exposure is worth overpaying this year.
No.
Because the value of a 34 year old pitcher and a 36 year old pitcher is quite different.
Assuming $/WAR is up to $10M at that point,
Arrieta opting out would imply he is at least a 2.0 war pitcher.
It is not very likely for that to be true without him hitting the games started bonus so I will just use $25M/year for extension.
Using standard assumptions, $70M/3 year is beneficial for the Phillies only if Arrieta is at least a 2.8 war pitcher for 2020.
It is not obvious to me whether it is more probable that a 34 year old Arrieta is projected to be higher than 2.8 war or in (2.0, 2.8) bucket.
RMHF–I agree with you on this. It’s essentially a 3 year deal with a lot of incentives and a 2-year team option.
IMO, this deal suddenly looks way, way better for the Phillies knowing that they decide on the opt-out first. The Phillies can keep him if in the improbable event that he suddenly turns back into an ace…heck, even if he remains a #3 starter he might be worth keeping at that point. And in the scenario that they opt-out of keeping him, they’d probably be fine with him ducking back into the FA market a year early anyway.
This is really starting to piss me off. This contract is a two-year $55 million guarantee with a $60 million club option for three additional seasons (with performance escalators) or one year player option for an additional $20 milliom if the team does not pick up the club option. Why do we need to keep writing about these contracts in confusing and hard to digest ways? Yea yea I know, Boras and player’s union wants it to look like more than it is, but I think lawyers are the real winners with all this new complicated contract language!
I find your explanation less clear than the opt-out framing that’s been the norm.
A. 2 year guarantee, 3 year club option or 1 year player option if team option is not picked up
B. 3 year contract with opt out after year 2, but team can void opt out if player tries to use it and tack on an additional 2 years, or player leaves after year 3
You really think the second one is easier to digest?
Not to belabor this, but yes. The second tells a sequential story that naturally highlights the decisions the team and player must make.
I agree that the contract can be expressed much more easily than most have attempted.
It is a 5 year contract for 115M. The Phillies can terminate the final three years at 20M, but Arrieta can add a year back on for $20M if they do terminate it. Years 4 and 5 have incentives.
I think I like this ever more than my explanation. Kudos!
Man, as a Sox fan I seriously wish they had put some protection in the JDM contract like this to lock him in above the original number in case he goes all the way off
I mean they can always offer him an extension. Dombrowski does seem like the kind of guy to me that would get overwhelmed by all this contract stuff ha ha
Prorate JDM’s 2nd half over an entire season he hits 76 bombs. I was getting my baseball fix on yahoo earlier today (don’t laugh) and I read this:
(Bryant) is coming off a season in which he hit .295 with 29 homers and 73 RBI. Martinez, meanwhile, hit .306 with 31 homers and 73 RBI last year…after the all-star break.
Arrietta needs to Utilize his curveball a lot more this year, compared to last. It was his best strikeout pitch last season but he only threw it like 12% of the time. I think it would be benificial for him to throw it more and sequence it behind certain pitches.
I wonder if this is the beginning of a trend in which players basically say “I want a contract that ensures I will be paid what I’m worth — I mean, what a WAR calculator says I’m worth, in more or less real-time over the life of the contract.” And teams basically agree, with maybe a bit of downside protection for both sides factored into the deal.
It would do wonders for the players’ reputation. Of course, the narrative is bullshit, because fans never think about how the players are actually underpaid at the beginning of most free agent contracts and only think about how the guy at the end of his contract is not worth anything. Robinson Cano has been paid $33.5 million less by the Mariners than he has been worth (according to Fangraphs). In the likely event that he is worthless or next to worthless at the end of that deal, that fact won’t save him from the scorn of the fan that lives in the here and now.
just more proof that the owners have the leverage. Phillies brass were the first to realize how much leverage it has and added on the team friendly opt-in clause to the contract.
I’ve read conflicting reports – looking for an authoritative answer … how do opt-outs impact AAV for luxury tax purposes. Same question about with incentives.
Straight 3 year deal – $25M AAV
First 2 years (guaranteed amount) – $27.5M
Opt out – Phillies exercise their option – no performance escalators – $23M
Opt out – Phillies exercise their option – all performance escalators – $27M
Luxury taxes are calculated at the end of the year I believe This should be calculated as a straight 25m(minus the incentives), so if he opts out and isn’t extended the phillies got away with a small amount of savings those 2 years I’d think?
I commented the contract in response to Jay Jaffe’s article and got quite a few responses even though I was late to comment. The contract is fascinating. I see it as any of a number of different possibilities. It could be a five year contract if he is good because the Phillies will exercise their override option , but a three year contract if they choose not to, except that Arrieta could still choose to opt-out after year two whatever his performance is. It appears that he could be with the Phillies for either 2-3-or 5 years depending on what happens on the mound.
The bigger issue is that teams are shying away from backloaded contracts with opt-outs. After the Marlin’s fears of Stanton getting injured enough to decide to not opt out (and be a $30M/year injury-riddled hit to their payroll), teams are front-loading the big cash before the opt-out, so the salary pattern follows the aging curve more closely.
There may be a simple explanation for this, but I’ve always wondered why teams and players aren’t willing to put together contracts that have minimal base pay but are heavily loaded with incentives based on performance.
Is there something in the CBA that prevents it? Would you assume that teams are averse because of luxury tax threshold implications? Are players not willing to take on that level of volatility?
It seems like the only time you see contracts like that are with players who are highly unlikely to reach a significant proportion of their overall compensation via performance incentives.
You can only have incentives for awards, all star selection, and stats like innings, games, games finished, and plate appearances. You can’t have incentives for things like HRs, wins, ERA, or stolen bases. Basing compensation largely on these could end up being counterproductive to your goal.
What TKDC writes is a big part of it.
Within those limits from incentives that the CBA allows in contracts, the closest contract to what you’re proposing is (I think) Maeda’s current deal with the Dodgers.
As summarized at Maeda’s Fangraphs page, his base pay is $3 million per year (8 / $24 million). Each year, however, Maeda has up to $8 million of incentives:
– $250,000 for every 10 IP after (and including) 90 IP up to 200 IP, so that’s up to $3 million per year
– $1,000,000 for his 15th, 20th, 25th, 30th and 32nd starts, so that’s up to $5 million per year
Last year Maeda started 25 games and threw a total of 134.1 innings, so he should have earned $4.25 million in incentives on top of his base salary.
IIRC, his deal was structured that way because of issues with his physical. For a player with health concerns, it has some obvious appeal as a way for the team and player to bridge a value gap in negotiations.
The problem it can set up, of course, is potential conflict between the player and team if the player feels that the team ends up making playing time decisions to keep the player from hitting thresholds that are tied to big bonuses. It seems notable as a sign of good faith, for example, that the Dodgers got Maeda three starts in September 2017 (the last on September 21) to get him exactly to the 25 start threshold last season.
Hanley Ramirez, for example, has a slightly different structure but similar concept with a $22 million option for 2019 that vests if he receives 1,050 plate appearances combined over 2017 and 2018. He got 553 PA’s in 2017, so he needs 497 PA’s in 2018. The Red Sox have an obvious and very large financial incentive for that 2019 option not to vest. It’s pretty easy to argue for Ramirez right now being nothing more than the short side of a platoon with Moreland at 1B and J.D. Martinez at DH. The financial implications of that vesting option could create a messy situation between Ramirez and the Red Sox, though, if serious injuries to other players, or Ramirez hitting much better than Moreland in 2018, put the Red Sox in a situation where it looks like Ramirez might legitimately deserve 500 PA’s of playing time based purely on on-field factors.
If this format catches on can we start calling it a “swaption”? E.g. Arrieta signed for 3/75 with a 3/60 swaption after year 2
technically incorrect. He signed 2 guaranteed. He could become an FA after 2 if the team doesn’t want his “swaption”.
How about a “Three-Out” contract, as in 3 outcomes. “Jake signed a Three-Out contract, 2/55 player, 3/75, 5/155 Team”?
I wonder if this were inspired by Justin Upton’s renegotiation of his Angel’s contract upon his potential opt-out decision.
Harpers going to get 500m over 10 years with an opt out after year 3, but a club option opt back in at a rate of 75m a year but Harper option reopt out after 4, with a club option to opt back in year 6.