The Worst Contract Extensions in History

Here’s a fun fact. In baseball history, there have been exactly twenty-five nine-figure deals — twenty-five contracts for $100,000,000 or more. Four of them have gone to free agent pitchers. Position players have received the other 21, and of those 21 contracts, 11 have been contract extensions, and just 10 have been free agent contracts. (Of the top five contracts in baseball history — Alex Rodriguez, Alex Rodriguez, Derek Jeter, Joe Mauer, and Mark Teixeira — four three were extensions.)

(Technically, as Bryan and Art Deco point out below, Alex Rodriguez was a free agent when he signed his second contract with the Yankees. But I view it as an extension, because he essentially used the opt-out in his contract as a bargaining tactic in his negotiation with the Yankees — who were the only team able to afford the amount of money they wound up paying him. That’s a judgment call on my part, though, and if you want to consider him a free agent both times, that alters the numbers a little bit: ten extensions, eleven free agent contracts.)

So why have more position players been paid more money when they weren’t on the free market than when they were? It’s too facile to say that free market competition actually depresses player salaries, but it’s beyond question that teams have a tendency to bid against themselves, both on the free agent market and when negotiating extensions. After all, the two biggest contracts in baseball history both belong to Alex Rodriguez, and both his free agent contract with the Rangers and his extension with the Yankees were largely the result of a team bidding against itself. Of course, the Yankees can better afford to bid against themselves than could the Rangers.

The easiest answer, of course, is just to ascribe everything to the Yankee Effect, the Yankees’ ability to spend any amount of money on a player they want, forcing other teams to pay Yankee-like prices both to acquire players and to prevent players from going to the Yankees as soon as they are eligible for free agency. But that may be facile too. After all, it’s counterintuitive that a team would have to pay more for a player when there is no one to negotiate against. They would be better off letting the player become a free agent and negotiating with them once they hit free agency.

Am I oversimplifying the data and drawing a spurious conclusion from an admittedly small sample size? To some extent, sure. But this does jibe with our general reaction to many of the extensions handed out, from Joe Mauer to Ryan Howard to Todd Helton. Why did the Phillies, Rockies, and Twins hand out free agent dollars to players under team control? Did they really save money?

The jury is out on three of the eleven richest extensions in history, those featuring end dates between 2015 and 2020: Troy Tulowitzki, Miguel Cabrera, and Joe Mauer. But we can start to evaluate the other eight. First, Ryan Howard and Alex Rodriguez are signed through 2016 and 2017, but they have already started to look like albatrosses. And the jury is more or less in on the other six. They are listed below:

1. Derek Jeter, NYY, $189,000,000 (2001-10)
2. Todd Helton, COL, $141,500,000 (2003-11)
3. Johan Santana, NYM, $137,500,000 (2008-13)
4. Vernon Wells, TOR, $126,000,000 (2008-14)
5. Ken Griffey Jr., CIN, $116,500,000 (2000-08)
6. Albert Pujols, STL, $100,000,000 (2004-10)

Of those eight contracts, three of those have been unmitigated disasters (Helton, Wells, and Griffey), two have been qualified if overexpensive successes (Jeter and Santana), two are likely disasters (Howard and Rodriguez), and only one was a clear success (Pujols). In other words, seven of the eight extensions have been hard to justify on their dollar value alone.

This is discouraging, considering that teams ought to have a competitive advantage when it comes to evaluating their own players: they see more of their own players than anyone and know more about their players’ health than anyone.

One would expect more stupid money to be spent on the free agent market than in team extensions. But at least among the most expensive contracts, the opposite has been true. Moreover, just two of those eleven extensions were handed out by the Yankees, the same number as the Rockies. Obviously, the Yankee Effect doesn’t tell the whole story.

It’s hard to fault a team like the Twins or Rockies for wanting to lock up the team’s most popular player forever, preventing them from ever leaving the team. And considering that a guy like Mark Teixeira — who is nowhere near as valuable as Joe Mauer or Troy Tulowitzki — can get $180 million on the free agent market, they may be right to want to lock up their players as long as possible.

But many of these teams have a curious sense of timing. Ryan Howard signed his mammoth extension in February 2009 April 2010, despite being under contract for two one and a half more years; Tulowitzki signed his two weeks ago, despite being under team control for four more years. Theoretically, a player’s price should increase the closer he is to free agency. So the earlier a team extends that player, the more money they should save. But how much money did the Phillies and Rockies save? How much more could Howard or Tulowitzki reasonably have commanded, had the team waited another year or two (or, in Tulo’s case, another three years or four)?

The Jayson Werth free agent contract prompted widespread snark, as even sexagenarian Mets GM Sandy Alderson commented, “I thought they were trying to reduce the deficit in Washington.” But just as many inexplicable dollars are being spent on extensions, which aren’t even a market — they’re a response to a hypothetical market, and in recent history they’ve been a poor investment. If eyebrows should be raised anywhere, contract extensions are the place to start.