As teams prepare to throw around big money, how wary should they be of big-money, long-term deals?
With free agency now officially underway, we've reached the point in the offseason where baseball scribes roll out our annual warning to Major League Baseball teams: DON'T DO IT! The history of the $100 million contract is served up as a reminder that these mega-contracts have often turned out poorly, with names like Mike Hampton and Carl Crawford trotted out as reminders that big pricey offseason additions don't come with any kind of guarantee of success. Because most free agents reach the open market around (or after) their 30th birthday, teams are often signing players whose best days are behind them, and end up paying big money to players who are in decline before they even put on their new uniforms.
The newest entry in the annual reminder of big contract risk comes from Will Leitch over at Sports on Earth. In his piece on Tuesday, Leitch notes that players who have been paid an annual average value of $20 million or more during their long-term deals have fared particularly poorly of late.
"That is the dirty secret of every free-agent season: Almost every long-term deal that will be signed will be bad. In FanGraphs' rankings over the summer of the worst five contracts, all five were massive free agency 'victories' for the team that signed them, all within the past three years. These deals are terrible business. I know this is exciting. I know we can't wait to talk about them all. I know some long-term deals even work out (though the only one immediately coming to mind is Matt Holliday). There are 34 players -- not counting the free agents signing new deals -- who will be making $20 million or more in 2016. The majority of them will absolutely not be worth it."
Leitch goes on to note that just eight of the 34 players scheduled to make $20+ million next year are "boons" to their franchise, while another eight are "up in the air," leaving 18 as "drains," including several players who might not even have jobs next year if it weren't for their guaranteed contracts. It's unquestionably true that a lot of these major signings in recent years have gone poorly, and undoubtedly, many of the teams that will be celebrating their new acquisitions over the next few months will end up wishing they'd been outbid instead.
But while I agree with Leitch's overarching point about free agency being an inefficient way to build a roster, I think there are a couple of reasonable counters to his claims. Let's attempt them.
1. Evaluating a contract by how productive the player is at the end of the deal misses the point of these contracts. Basically every long-term free-agent deal is signed with the knowledge that it will end with the player being paid far more than he's worth in the final years of the deal. But the teams attempt to extract enough value at the front of the contract to make the overall deal a win for both sides. Neither side is concerned with aligning dollars and productivity within the years of the contract being signed, which is why most mega-deals are heavily backloaded, even though it's well understood that production is expected to be heaviest at the front of the deal before the decline erodes a player's value.
Take Jered Weaver, for example; Leitch lists him among the "drains,"given that he'll make $20 million in 2016 and now features a fastball that sits at around 83 mph. Certainly, Weaver wouldn't get $20 million on a one-year deal as a free agent this winter, and the fact that he's being so highly compensated is an obstacle to the team's ability to put enough talent around Mike Trout. But keep in mind that Weaver's making $20 million this year in part because he accepted just $14 million in salary back in 2012, the first year of the deal, when he threw 188 2/3 innings and had a 2.81 ERA. By the runs allowed version of WAR, Weaver was a five-win pitcher in the first year of the deal, and his performance was worth about $35 million, or almost three times what he made that year.
In fact, in the first four years of Weaver's contract with the Angels, he's been paid $64 million, but has been worth $90 million, based on the market price of wins in those years and his run-prevention performances. Weaver could fail to throw a single pitch for the Angels this year and that contract would still represent a good deal for his franchise, even as it ends quite poorly. The Angels got their value up front, and now Weaver's getting paid back for accepting below-market rates during the years in which he pitched well.
Jayson Werth, also on Leitch's list as a drain, is a similar case. Five years into the seven-year, $126 million contract that was hailed as one of the biggest mistakes in baseball history when it was signed, Werth has racked up $92 million in value, a little bit more than the $84 million in salary he's been paid to this point. Now, granted, he probably won't be worth the $42 million he has left on his deal over the next two years, but again, he only has that much left because the deal was heavily backloaded -- and Werth was a massive bargain during the productive years of the deal.
Free-agent contracts end poorly for the signing club by design. Just as teams choose to trade future value for present production when they swap a prospect for a major leaguer whose rights they don't control for very long, so do teams choose to maximize the present value of their long-term deals by pushing a larger share of the costs of the contracts onto the last few years of the deal. Simply looking at an aging player's production and salary misses the forest from the trees, and does not reflect the value that teams actually got out of signing guys like Weaver and Werth.
2. Yes, $20 million is a lot of money, and when you see players signing deals that guarantee them that kind of annual salary, it's easy to expect premium performance. But $20 million in today's market isn't the same as $20 million a few years ago. While it was only a few years ago that the best players in the game were mostly signing long-term contracts for around $25 million per year, that number has gotten wiped out as the top-end benchmark with recent signings.
Over the past couple of years, three players have topped $30 million per year in annual average value; Miguel Cabrera, Clayton Kershaw and Max Scherzer. Mike Trout's six-year deal with the Angels pays him $33 million per season in the three years he would have otherwise qualified for free agency had he not signed a long-term contract to stay in Anaheim. Giancarlo Stanton's 13-year, $325 million contract pays him $310 million over the 11 free-agent seasons he got guaranteed as part of his deal, or $28 million per season, and he got an opt-out clause so he can hit the free-agent market again if he stays healthy and thinks he could get a raise after the 2020 season. And of those deals, only Scherzer's came with the leverage of open-market negotiations; the other players all signed their deals before they reached free agency, suggesting that they likely would have gotten even more had other teams been able to bid.
So, $30 million is the new $20 million. That's the AAV David Price is going to shoot for, most likely, and it wouldn't be surprising to see Zack Greinke and perhaps Chris Davis also get up near $30 million per year on their deals, since they're likely going to command shorter contracts than some of the other premium free agents this winter. And as the top-end salaries rise, so do the contracts of players in the next tier down, and then the tier below that, and so on.
A few years ago, $20 million per year was a significant benchmark, and the only guys who were able to reach those lofty heights were star players with impeccable resumes. These days, $20 million buys you an above-average regular, a guy who can play every day and help your team, but isn't ever going to be mistaken for a franchise cornerstone. Average players now cost about $15 million per year, mediocre veterans with some track record of success at the end of their careers get around $10 million per year, and part-time platoon guys with some usefulness get $5 million per year. This is what happens when your sport has $9 billion in annual revenues; everyone gets really, really rich.
Of course, there are going to be some guys who end up as total disasters; anyone who watched Hanley Ramirez and Pablo Sandoval play this past season can attest to that. But we also need to go in with realistic expectations for what $20 million per year buys in today's MLB economy. That price doesn't get you an elite player anymore, and doesn't even really get you all that close in most cases. If we're going to recommend to teams that they should beware of contracts over that price point, we'd have to also point out that mid-level deals for decent stopgaps aren't any safer. And there aren't enough roster spots to spend $5 million per year on four players instead of spending $20 million per year on one guy. Unless our advice to major-league teams is just not spend any money in free agency, there's no real way to avoid risk in the marketplace.
The best thing a team can do is set itself up to not need free agency in order to contend. If you can develop and extend your own prospects and make savvy trades, then the free-agent market can be used to supplement a roster instead of trying to build a winner by simply throwing around money. But if you have a roster full of young, underpriced players, the rest of your payroll has to go somewhere, and while spending it on a free agent is less efficient than putting it into other resources, it's more efficient than just not spending it at all.
Baseball is rolling in money. If we think every deal that gets signed this winter is likely to be a mistake, maybe it's time to re-examine our baseline.
