Reading the Fine Print
March 07, 2005
Call it morbid curiosity if you like, but I tried to keep track of all the contracts that were signed this offseason. Like a motorist slowing down to take in an accident, I couldn't help entering each dollar promised into my Excel spreadsheet just to see exactly what happened. I know I missed some deals, but I did my level best to capture every major league free agent and arbitration-eligible contract signed during the winter, and here's what my totals look like (through the middle of last week):
• 305 deals worth $1.85 billion in all (not including option years), $700 million payable in 2005.
• 157 free agents (including Kendry Morales and a few other newbies) and 148 arbitration-eligible players.
• 62 contracts with option years (that's 20% of all contracts).
The big spenders were the New York Mets, who committed to $205 million, followed by the Dodgers ($181 million), Mariners ($126 million), Red Sox ($121 million) and Tigers ($101 million). The Dodgers signed 15 contracts, more than any other team. And the White Sox love those option years, having signed up for six of them -- four in 2007 alone (Hmm, Aaron Rowand or Jermaine Dye or Tadahito Iguchi or Dustin Hermanson?).
At the other end of the spectrum, the Kansas City Royals signed just three major league contracts this offseason, for a total commitment of $3.8 million. That's not very much money -- the next lowest dollar figure was the Padres' $13 million. Said another way, the Mets signed Carlos Beltran for 31 times as much money as the Royals signed altogether.
Well, that's the big picture. Here are some of the more interesting figures, angles and clauses:
Big Bucks and Long Terms
The two biggest contracts were Carlos Beltran's, at $119 million, and Magglio Ordonez's, at $75 million. I believe that Beltran's contract is the fifth-largest free agent contract in baseball history.
But Ordonez also signed the only contract of the offseason that included two (not one, but two) option years. The 2010 option is for $18 million, and the 2011 option is for $15 million, which brings the total contractual value to $105 million if you subtract the $3 million buyout. And these options automatically kick in if Ordonez plays at least 135 games in the previous year. If you include the option years, Ordonez's contract ties for the sixth-largest free agent deal of all time.
The other offseason contracts don't compare to those two. Adrian Beltre's deal is next at $64 million, followed by J.D. Drew at $55 million. Neither deal includes an option year. Poor guys.
Beltran's is the only contract that extends seven years, to 2011, and Ordonez's is the only one that has an option for 2011. There were no six-year deals (including option years) but Drew, Ordonez and Beltre signed for five, and twelve players signed four-year deals. Most of these deals were with players who have been in the majors for six or seven years; in other words, relatively young guys. The only exceptions were Pedro (12 years of major league service) and Delgado (10 years).
The last seven-year free-agent deal was Jason Giambi's in 2001. No comment.
I'll Gladly Pay You Tuesday for a Hamburger Today
The Mets also deferred a significant part of Beltran's salary. They will pay his $11 million bonus in annual installments and $22 million of his 2008-2011 salary will be deferred through a specific payment schedule that pays 1.7175% interest (wonder how they came up with that figure?) from 2012 through 2018. Basically, Beltran will be paid 14 years for playing seven.
So the Mets win the award for agreeing to pay the longest string of cash (call it the Bonilla Prize). But they also effectively knocked down the value of the contract by delaying payments at low interest rates. The Beltran deal is still more expensive deal than the Ordonez deal, but the stretched payments make it only about $5 million or $6 million more expensive than Ordonez's. The biggest story of the offseason was how Scott Boras managed to get Magglio Ordonez a contract in the same league as Beltran's.
The Mets reaped the present value of money in the Pedro deal as well, spreading his bonus over several years and deferring part of his salary out to 2018. Pedro's money is being deferred at 5% interest a year, which won't be a particularly low rate unless Paul Volcker succeeds Alan Greenspan at the Federal Reserve. But they'll probably make more than 5% on their investments in the meantime.
Several players, such as Omar Vizquel and Armando Benitez, will have their signing bonuses paid over several years. And several other players will have part of their salaries deferred. But no team went for the installment plan like those Mets.
Puts and Calls
Options, like playing time bonuses, are very popular. As I mentioned, 20% of all contracts included option years, worth a total of $249 million. If you include the value of these option years, the total value of offseason contracts was well over $2 billion.
What's more, indications are that only about half of the options are completely in the club's hands. The other half of the options are either up to the player, have some measure of "vesting" to them, or could be rejected by the player. I already mentioned Ordonez's option years, but Woody Williams, for example, has an option for 2006 that vests if he starts at least fifteen games in 2005. This sort of option is pretty common; it ensures that a player doesn't get the option year unless he stays healthy and contributes enough to play a significant amount of time.
Moises Alou has a $6 million option that is his to call, not the club's (technically, I think that makes it a "put" instead of a call -- but who wants to get technical?). Todd Walker's contract combines the two ideas -- if he accumulates at least 525 plate appearances in 2005, his 2006 option becomes his instead of the Cubs'. Several players have contracts in which the value of the option year salary will increase if he reaches certain milestones. Several other players can decline the club's option exercise if they feel they can make more in the market. And J.D. Drew can just walk away from his deal after two years if he wants to.
The Dodgers and Eric Gagne added an option year to their two-year deal, but both sides have to exercise it. In other words, they both have to feel it's in their best interests in order for the option year to occur. I'm not sure what either party gets out of a deal like that, but my major complaint is that mutual options are hard to track in my spreadsheet.
Peter Seitz's Legacy
I tend to focus on free agent contracts, but contracts with arbitration-eligible players (players who have played between three and six years) are fascinating, too. Only 14% of arbitration-year contracts were for multiple years, whereas 40% of free agent contracts were multiyear deals. And only 14% of contracts for arbitration-eligible players included option years, vs. 27% for free agents. But the average dollar value of both types of contracts for 2005 were virtually equal: $2.2 million for arbitration-eligible players and $2.4 million for free agents.
This makes some sense, because if ballclubs feel that the arbitration process will overvalue a player, they might non-tender him and effectively make him a free agent. This is what the Dodgers did with Alex Cora, for instance. Cora will make $1.3 million for the Indians next year (though his contract does call for extensive playing time bonuses) but he almost certainly would have made over $2 million with the Dodgers due to the vagaries of the arbitration process. He was less expensive as a free agent than he would have been in arbitration.
Arbitration automatically increases a player's salary each year, as we discussed a few articles ago. When you add in the fact that the maximum salary decrease allowed is 20%, you can see that it might behoove clubs to sign three-year players to long-term deals, effectively locking in their salary through the arbitration years.
Those years spent on the cusp of free agency also make for some interesting contract strategies. Michael Barrett, for instance, would have been eligible for free agency at the end of the 2005 season, but the Cubs wrapped him up to a three-year deal. Several clubs also signed deals with players that include an option for the first year the player is eligible for free agency. These include the Cardinals' deal with Ray King, Texas's deal with Ron Mahay, the White Sox and Uribe, the Yankees and Sturtze, the Twins and Romero and LA's deal with Izturis.
Presumably, the negotiating scenario for these deals is that the player asks for a long-term contract, and the team insists on an option on the first free agency year in return. This seems like a good deal for both sides to me.
And the Winner is?
The most aggressive team this offseason in managing their arbitration-eligible players was Minnesota. Including last Friday's Nathan and Rincon contracts, they have signed virtually their entire bullpen to deals that will lock in their salaries until each player reaches free agency. And in the cases of Johan Santana and J.C. Romero, the contracts extend into their first year or two of free agency. Take a look at all the Twins' most significant deals:
• Free agent Brad Radke for two years at $9 million each.
• Santana for four years, including the first two years of his free agency, at $10 million a year.
• J.C. Romero for two years at $1.8 million a year, plus an option for his first year of free agency.
• Nathan for the next two years, plus an option year that covers all of his arbitration years (financial details not yet available).
• Same with Carlos Silva (at $2.5 million a year).
True, they lost their arbitration case to Kyle Lohse, and they sure would like to unload Jacques Jones, but those are the only blemishes on a fine offseason for the Twins. In a year that saw the return of hyper-salary inflation, it seems to me that the Twins had the best contractual offseason of any major league team by focusing on their fine, young, arbitration-eligible talent.