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June 3, 2010

Contractual Matters

Restructuring Deals

by Jeff Euston

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As Cubs general manager Jim Hendry began the work of assembling his 2010 roster last winter, he faced a daunting task: construct a team capable of re-claiming the National League Central title, which it had done in 2007 and 2008, and do it with precious little payroll flexibility. The Cubs had more than $125 million committed to 11 players, with another eight players eligible for salary arbitration. Hendry was poised to blow past the 2009 year-end payroll total of $141 million without filling his 25-man roster, before even considering a trade or free-agent signing requiring more spending.

Hendry got some payroll relief in December, dealing troubled outfielder Milton Bradley to Seattle for right-hander Carlos Silva, another player with an expensive contract in need of a change of scenery. Two weeks later, the Cubs brought in free agent Marlon Byrd to man center field, pushing Kosuke Fukudome to right. But as the new year began, the Cubs were still in the market for a fourth outfielder, preferably a right-handed hitter who could provide Fukudome a day off against left-handed pitchers. But the payroll crunch remained.

Into the conversation stepped Ryan Dempster, who approached front-office officials at the team’s winter convention in mid-January and offered to help. Dempster, a right-hander slated to earn $12.5 million for 2010, agreed to defer $3 million of his salary, with the Cubs paying him the money in three installments each February from 2011-13. With the restructuring of Dempster’s contract freeing up another $3 million on the Cubs’ 2010 books, Hendry was able to fill the fourth outfielder spot by signing Xavier Nady to a one-year, $3.3 million deal.

The practice of restructuring contracts is not as prevalent in baseball as it is in the NFL or NBA. But Dempster is one of a group of veterans who has agreed to re-work his deal in order to improve his club’s payroll flexibility or in exchange for a contract extension or additional perks.

Like Dempster, Cincinnati’s Scott Rolen agreed to restructure his contract to help his team bring in more talent. When the Reds added two years to Rolen’s existing deal last winter, the third baseman agreed to convert his $11 million salary for 2010 to a $6 million salary and a $5 million signing bonus paid over three years without interest. That allowed Reds GM Walt Jocketty to add shortstop Orlando Cabrera ($2.27 million), Cuban ace Aroldis Chapman ($1 million) and outfielder Jonny Gomes ($800,000) to Cincinnati’s 2010 books.

Colorado’s Todd Helton signed a reworked extension in March. His existing contract—the largest in National League history at $141 million—called for the first baseman to earn a nearly prohibitive $19.1 million in 2011 and a $4.6 million buyout in 2012. His new deal converts the buyout to a signing bonus, paid in 2011, and defers $13.1 million of his 2011 salary until 2014-23. The restructured extension frees up $8.5 million on the Rockies’ 2011 books and ensures Helton will play out his career in Colorado.

But a contract restructuring is not as simple as a player and his club agreeing to terms for a new deal. The Major League Baseball Players Association must approve of any agreement in order to protect the union’s rights under baseball’s Collective Bargaining Agreement. Under the labor contract, an individual player has the right to negotiate a salary above the major-league minimum and any “special covenants” which might provide additional benefits, such as performance or award bonuses. However, all other terms and conditions of player employment are negotiated by the union and incorporated into the Uniform Player Contract. Any contract term inconsistent with the CBA is void unless approved by the MLBPA.

This prevents a player from being forced to accept a cut in pay, a scenario that occasionally faces players in the NFL or NBA. Agent Scott Boras spelled out the risk of a full-scale renegotiation during a 2005 BP chatwhen asked about an NFL player seeing to renegotiate his contract: “‘Renegotiate’ is not in my vocabulary. I advise players to consider all the variables, such as injury vs. improvement, before they sign a contract. I have had players call me about bad contracts they had signed and I always advise that the sanctity of the contract is important for the survival of any system based on performance. To change it when there is improvement is a double-edged sword that will inevitably lead to degrading the contract when the player malperforms. Unless there is a provision allowing for changes based on performance, anyone who advocates change puts all his clients in jeopardy. It becomes subjective, degrading contracts just as often as improving them, and anarchy results.”

The key, then, in any restructuring is that the player receives some added benefit in return for his agreement to re-work his deal. The benefit may be something as simple as free agency. Andruw Jones agreed to defer $12 million of his 2009 salary in exchange for his release from the Los Angeles Dodgers, who had signed the outfielder to a two-year $36.2 million deal only a year before. Jones’ stint in Los Angeles was doomed from the start, and the Dodgers were happy to allow him to walk away if it provided the club with payroll relief.

The king of the restructured deal is Alex Rodriguez. The Boras client re-worked his landmark $252 million deal with Texas only a year after the contract was signed in December 2000, agreeing to defer $45 million in salary. Three years into the deal, Rodriguez was at it again. He famously attempted to facilitate a trade to Boston by waiving his no-trade clause and offering to reduce salaries in his contract by $12 million in exchange for increased marketing and logo use rights. The union argued that the plan would reduce the value of the remainder of Rodriguez's deal by more than $30 million. The parties were unable to bridge the gap before the negotiating deadline imposed by commissioner Bud Selig, and the ARod-to-Boston deal never materialized.

Rodriguez ultimately did re-work his deal—to facilitate a trade to New York, with the Yankees agreeing to pay for $112 million in salaries and Texas assuming responsibility for $67 million in salaries and the deferred money at a reduced interest rate. In exchange for agreeing to the interest-rate reduction, Rodriguez received a hotel suite during road trips & right to link his web site to the Yankees’ site.

Of course, four years later, ARod opted out of his contract altogether before returning to the Yankees with another landmark deal paying him $275 million through his age-41 season. Odds are he won’t be restructuring that deal any time soon.

Jeff Euston is an author of Baseball Prospectus. 
Click here to see Jeff's other articles. You can contact Jeff by clicking here

Related Content:  Contract Extension,  Deal,  The Who

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