Theo Epstein, Martin Prado, and Front Office Value

According to recent reports, the Marlins are on the verge of signing third baseman Martin Prado to a contract that would keep him from hitting the free agent market this winter; the extension will cost them roughly $40 million over three years, keeping Prado in Miami for his age 33-35 seasons.

According to even more recent reports, the Cubs are on the verge of signing President of Baseball Operations Theo Epstein to a contract that would keep him from hitting the free agent market this winter; the extension will cost them roughly $50 million over five years, keeping Epstein in Chicago for his age 43-47 seasons.

Between the two of them, the Epstein news is certainly more significant. The architect of the best team in baseball, Epstein is now the highest paid executive in the sport, and this represents about a 250% raise over the contract he got when he got to Chicago, which paid him $18 million over five years. The Prado deal is more of a run-of-the-mill contract extension for a nice player, but it barely rated as news in the baseball landscape. But given the differing lengths of the contracts, Prado is actually making more per season, and the two deals are roughly comparable in value.

In other words, MLB just told us that one of the best executives in the game is worth about the same as the decline years of a solid non-star, a guy who should be expected to be something like a league average player during the contract he just signed. I’m sure the Marlins and Cubs weren’t trying to create this kind of juxtaposition, but thanks to the timing of these two deals, we can say that the market is currently valuing coveted front office members in a similar way to an average player.

On the one hand, it’s very easy to think that this means that high level executives are still being wildly underpaid. A couple of years ago, Lewie Pollis — now working for the Phillies — put forth this very argument in his Honors Thesis at Brown University, building a model that claimed the best executives in baseball were worth something like seven or eight wins per year to their franchises, which would translate to something like $50 million per year in value. Previously, Benjamin Morris has argued that Billy Beane has been worth hundreds of millions of dollars to the A’s, and that the Red Sox screwed up by not luring him out of Oakland.

Of course, the Red Sox failure to land Beane led them to hire the very same Theo Epstein, and things worked out pretty well in Boston during his tenure. Epstein’s success makes it difficult to accept Morris’ argument that the team made a mistake by failing to spend enough to lure Beane out of Oakland, and more broadly, raises the primary challenge in determining fair executive compensation; what is the baseline we’re measuring against?

For Prado, we have a fairly well understood idea of what the Marlins would get from a league-minimum third baseman. The market for players is fairly predictable, and we generally know what the Marlins should expect to get from a guy they claim on waivers or sign to a minor league contract. Quantifying Prado’s value is not that difficult because we know what the expected performance of not spending the money would be, and how many wins that would project to cost the Marlins over the next three years. Given his age and production, we should expect him to be worth something like +5 or +6 WAR over the next three years, so the Marlins are paying about $7-$8 million per win, right in line with the current market rate for players.

On the other hand, though, we really don’t have a great way of understanding the expected performance level of a theoretical replacement-level GM. Pollis and Morris based their valuations of the top-line executives by looking at the moves the organizations made during their tenures, but this kind of analysis has one very obvious flaw; the GM (or President of Baseball Operations, more likely these days) might get to be the one to make the final call on a transaction, but he certainly didn’t make the decision by himself, and summing up all of the organizational expertise that goes into each decision into one individual ignores the fact that much of that expertise would remain in place even if you didn’t have the top guy around.

Assistant GMs, directors of various departments, quants, programmers, scouts, analysts, and interns all contribute to the organizational knowledge base, and that knowledge contributes to the decision making process. It might be more fair to say that Pollis and Morris argue that entire baseball operations staffs could be worth tens of millions per year, and they were just using the name at the top of the chain as a proxy for the value of the entire staff, which is why there wasn’t a line of teams trying to outbid the Cubs for Epstein’s services even as his contract expired.

While Theo made it clear he had no real desire to leave, and that likely hindered any other teams from making a run at him, if anyone in the game believed that the top executives were really creating seven or eight wins per year in value by themselves, they wouldn’t have let the Cubs keep him for just $10 million a year, which is the going rate for a mediocre back-end starter. The market is clearly not agreeing with the idea that front office personnel are on par with the best players in the game in terms of organizational value, seemingly because most teams believe they can find a younger, cheaper executive to carry out similar ideas and direct their organization in a the same general direction.

In other words, teams seem to believe that the value that a guy like Epstein has comes not from an inherent talent, but from transferrable knowledge, and if you can find someone who has learned from one of these guys, perhaps you can get that knowledge without paying a premium for it. That appears to be one of the drivers behind the trend of hiring young analytical types from prestigious northeast universities — which isn’t without its downsides — as teams look for their own Epstein or Beane, rather than trying to poach the ones already out there.

If the belief of transferrable knowledge is correct, than the baseline for a replacement level executive should be pretty high, since it isn’t that hard to find a a smart guy who worked under smart people and could have absorbed the knowledge necessary, and can surround themselves with the kinds of people who will help build the organizational knowledge base up to make good decisions. And if the replacement level for an executive is pretty high, than each individual front office member isn’t worth all that much, and that’s how we end up with Theo Epstein making less per year than an aging Martin Prado.

After all, the Cubs also extended GM Jed Hoyer and Assistant GM Jason McLeod at the same time, strengthening the case for organizational success being about assembling a quality front office, not just landing a dynamic leader at the top. We don’t know how much Hoyer and McLeod are making, but given that McLeod was in the running for the Twins President of Baseball Operations gig, he probably had enough leverage to extract a decent paycheck, and Hoyer would need to make even more than that, given his position as McLeod’s superior. So, while Epstein himself is making less than Prado, it’s likely that the Cubs top executive trio is at least close to Prado’s annual salary, and perhaps even a bit above.

Of course, that doesn’t mean that baseball is properly valuing the contributions of its front office members. The pay structure within baseball operations organizations is very top-heavy, with guys with executive titles making six or seven figures while the guys a few spots down the rung are hanging out closer to $50,000 to $75,000 per year, and the guys on the lowest spots of the ladder making far less than that. It still remains likely true that there are some significant inefficiencies involved with pay for front office talent below the Assistant GM level, and teams could get a strong return on investment if they could identify which mid-level office members should spark a bidding war.

The salaries for the top level executives are going up pretty fast. Andrew Friedman reportedly got $35 million to join the Dodgers, which was an outlier in executive compensation before this Epstein deal; it’s likely that these deals will help push up the salaries for other successful GMs and Presidents when their contracts expire. And hopefully the rising pay at the top will encourage teams to be more aggressive in paying the rest of their baseball operations staff higher wages, since it’s acknowledge that Epstein, Friedman, Beane, and all the rest aren’t doing this work by themselves.

But it is interesting that, even as the market begins to adjust compensation upwards for front office staff, we’re still in a day and age where the highest paid executive in the sport is signing an extension worth a little less per season than Martin Prado. I’m pretty sure the Cubs wouldn’t trade Epstein for Prado if given the choice, but given the realities of the markets for players and front office personnel, this is still where we are. We don’t know enough to say whether it’s correct or not, but it still feels like front offices are being underpaid relative to what teams are spending on players, given the impact that a quality front office can have on assembling a winning team.

But what is the right number for each executive? How much would losing Epstein hurt the Cubs if they were able to retain Hoyer, McLeod, and the rest of their baseball operations staff? How much does any one individual matter in a staff where so many people are contributing to the decision making process?

Right now, I don’t think we really have answers to any of these questions. ‘m not sure the teams do either. And that lack of confidence in our ability to quantify the impact of each person probably factors into the lower salaries. After all, we’re pretty sure we have a decent handle on Martin Prado’s value. Theo Epstein’s value? We think he’s pretty good at his job, but beyond that, we’re all kind of still throwing darts.