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January 3, 2012

Bizball

Behavioral Spending: Inside the Back-Loaded Pujols and Reyes Contracts

by Maury Brown

Each day, here at Baseball Prospectus and elsewhere, bright minds work diligently to quantify player value. Eyes scan stats, watch games, and spin numbers, all in that effort to find nirvana where we can quantitatively say this team is good or bad based upon its makeup.

It’s an impossible endeavor, of course. There are variables outside of control at play. Before you think I’m talking about injury, think again… I’m talking owners and the influx of revenues.

OK, it’s more than that. It’s also risk.

Risk may be the single most important part of the game today in terms of how contracts are negotiated and, ultimately, how rosters are constructed. “Risk” for the Clevelands, Pittsburghs, and Oaklands of the world are far different than the risk that the Yankees and Red Sox take on. The margin for error is much different due to the extreme differences in revenues to toy with. Make a critical error with a free agent signing with the Indians, and you potentially damage payroll flexibility for years to come. Make that mistake with the Yankees, and you can absorb it easier by either replacing that player through free agency or by not dinging the pocketbook nearly as badly.

It’s not a metric, but it is something that was a large part of my discussions with the head of analytics for a National League club at the Winter Meetings. This person’s opinion I hold in high regard not because of his brilliant ability to spin numbers but because he fully grasps the big picture.

The Winter Meetings were the best study yet in behavioral spending. Both the Marlins and Angels have two separate reasons for being able to spend grandly this year. All told, the two clubs accounted for 92 percent of the spending on free agents on deals confirmed by the league to be part of the Winter Meetings.

For the Marlins, it comes from revenues associated with their new stadium. Nearly all their premium seating and suites are sold out. Plus, ownership no longer has to share other revenue streams that were once controlled mostly by the Dolphins when they were at Sun Life Stadium.

For the Angels, it’s not money now in hand but the money about to be garnered. In signing Albert Pujols and (and to a lesser extent C.J. Wilson), there is a huge marketing element that comes into play as the club now basks in a new television rights extension with FOX Sports that owner Arte Moreno had been working on since February of 2011. The deal is reportedly between $2 and $3 billion. Moreno was quick to point out at the time the agreement was reached with Pujols and Wilson that on top of the lucrative media-rights revenue stream, “Basically, we have no debt on the team,” which is more impressive when you consider that the Halos filled Angel Stadium to 86.1 percent of seating capacity last season (ranked 9th overall in the league), compared to 89.1 (ranked 6th) in 2010 and 88.8 in 2009 (ranked 5th).

So, in both these cases, decisions come with less initial risk. It also may cause owners to make decisions they might not otherwise make. Money has a strange way of clouding your thoughts.

The Marlins deal for Jose Reyes is a great example. Logically, you can’t say whether the new stadium will garner the kind of revenues at the gate later in the contract as it will initially. It’s certainly possible, but it’s not a given. With that, many (myself included) thought the deal would be frontloaded. Instead, it’s heavily back-loaded (see details below).

The Marlins have not said this, and maybe they will deny it, but they don’t allow no-trade clauses. What could have happened with the Reyes deal is ostensibly an “artificial no-trade deal” —the dollar amounts at the end of the contract making it harder to move him in a trade.

The Pujols deal, in my mind, actually makes more sense. Before you bash me summarily about the head and shoulders, it makes sense from a long-term dollars perspective. Adding arguably the best player in the game today, Arte Moreno may be able to garner hundreds of millions more out of the television deal. Even if Pujols is a shell of his former self in say, five years, having Pujols as a chip to bargain with as part of the TV deal absorbs that loss.

As was the case with the Reyes deal, the Pujols contract is heavily back-loaded. Reportedly, Pujols allowed for the contract to be designed as such to bring in C.J. Wilson. Here’s how the Pujols deal breaks out:

Another change to consider when evaluating these deals is how the market for free agents has continued to escalate. Total years in a deal have expanded. In speaking with a former longtime GM from the ‘80s, he said his club would have never dreamed of offering more than three years to a starting pitcher. Now, that’s the jumping off point.

In other words, if you wanted Albert Pujols, you had to get in bed with the devil and talk about a 10-year deal. That was just the price of dealing with him. As they say, you can’t win the lottery if you don’t play, even if getting hit by lightening has better odds.

Ultimately, available revenues and how availability sets the free agency market plays into the physiology of a club’s dynamic. As that analytics man said to me, “A good agent can influence owners to make poor decisions. A well run organization has a solid plan and doesn’t deviate from it haphazardly.”

So if this behavioral spending—a subjective thing—holds true, we can make some predictions.

Depending on how the new ownership of the Los Angeles Dodgers plays out, it’s likely that they will be the Angels or Marlins of next year’s Winter Meetings as a new television rights deal that could hit well in excess of $3 billion is struck (depending on how FOX’s efforts in court plays out now, but that’s for another day). And it may not just be the Dodgers. As other new television deals or stadiums come online, depending upon their teams’ overall roster structure, owners are going to push to spend their money while they have it (though smart owners and GMs don’t spend for spending sake).

In terms of total dollars spent, here’s how each club spent in free agency during the Winter Meetings (see the table below), broken out by year and total contract outlay over the life of the agreements.  Some nuggets:

  • A total of 13 players were tallied by Major League Baseball as being signings that occurred as part of the Winter Meetings, with seven clubs inking players (Marlins, Angels, Mets, Dodgers, Indians, D-Backs, Pirates).
  • $565,740,000 in total contract dollars were assigned as part of the signings. The Pujols deal alone accounts for 45 percent of the amount.
  • Of the 13 players signed, just five were single year agreements (Sizemore, Bedard, McLouth, Rauch, with Joe Martinez having a split contract that sees $490,000 in the majors)
  • The Marlins spent $191 million on Bell ($27M), Reyes ($106M), and Buerhle ($58M)
  • The Angels spent $331.5 million on Pujols ($240M base plus $10M for personal service contract) and Wilson ($77.5M)
  • In doing his deal heavily back-loaded, Pujols will earn $4 million less in 2012 than he did in 2011, and it’s not until 2013 that his salary matches the last year of his deal with the Cardinals ($16M).

Player

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Total

NOTES

Heath Bell

$6M

$9M

$9M

$9M
(vesting)

           

$27M

Vesting option for $9M. $3M signing bonus

Jose Reyes

$10M

$10M

$16M

$22M

$22M

$22M

$22M
(club)

     

$106M

$22M club option, $4M buyout

Mark Buerhle

$6M

$11M

$18M

$18M

           

$58M

$4M signing bonus, deferred without interest

CJ Wilson

$10M

$11M

$16M

$18M

$20M

         

$77.5M

$2.5M signing bonus

Albert Pujols

$12M

$16M

$23M

$24M

$25M

$26M

$27M

$28M

$29M

$30M

$254M

Could peak at approx. $265 million. Receive $3M 3,000th hit and $7 M if he breaks Barry Bonds' career record of 762 home runs. Has 10-yr service contract

Joe Martinez

$490K

                 

$490K

Split contract. $490,000 if in the majors

Chris Capuano

$3M

$6M

$8M
(mutual)

             

$10M

$8M mutual opt. performance bonuses: $75,000 each for 160, 170, 180, 187, 195 innings annually. $0.25M for 360 innings in 2012-13

Jerry Hairston, Jr.

$2.25M

$3.75M

               

$6M

 

Grady Sizemore

$5M

                 

$5M

$4M in performance bonuses: $0.25M each for 450, 475 PAs. $0.5M each for 500, 525, 550, 575, 600, 625, 650 Pas. award bonus: $0.5M for Comeback Player of the Year

Erik Bedard

$4.5M

                 

$4.5M

may earn additional $0.5M in performance bonuses

Nate McLouth

$1.75M

                 

$1.75M

may earn additional $0.45M in performance bonuses

Jon Rauch

$3.5M

                 

$3.5M

$0.5M in performance bonuses

Frank Francisco

$6M

$6M

               

$12M

 

 

$70.49M

$72.75M

$82M

$83M

$67M

$48M

$27M

$28M

$29M

$30M

$565.74M

 

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

Related Content:  Deal,  Cj Wilson,  Year Of The Injury

12 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

Hoff

If Reyes isn't completely hamstrung, but the Marlins stink in a few years(which they will) it still won't be a problem to find some trade suitors. Even a 3 or 4 win jose is worth the risk over those last 2-3 years, especially if they can catch him on a year playing well down the stretch heading into the playoffs.

Basically Loria is a fraud, who has no clue how to build a team and is trying to half ass his way into putting a decent team in the next ball park. I guess they can't be faulted for trading for failing the pujols bidding when it was reported they had the high bid, but they're not ready to win, and they're decisions are only justified in a win now context. Why screw over your top position player and overpay a closer for an 70 win team with no farm system
Given that they can't be justified, the only explanation is trying to jump start interest in the team. It won't work, but I think its the only explanation of what they think they're doing.

Teams who make the playoffs after being terrible don't do it in tough divisions without careful planning and tons of luck. Even if johnson and hanram return to form, this team is not going to compete with washington atlanta or philly (two of whom should be even better next year).

Jan 03, 2012 06:33 AM
rating: -1
 
Sharky

Great read, Maury (as usual). Really terrific.

Jan 03, 2012 06:34 AM
rating: 6
 
jtanker33

Dumb question: Where is the extra 4M in the Pujols deal coming from? You point out he's getting 240M plus 10M for the personal services contract, but show 254M as the total value.

Jan 03, 2012 06:53 AM
rating: 0
 
BP staff member Maury Brown
BP staff

Not dumb, at all. In fact, I need to look into this. Initially reported as $254M, but could have changed, or totals up due to other factors.

Jan 03, 2012 08:18 AM
 
MichavdB

Look! This may be the first time I see anything other than the standard Excel 97 graphs in an article at BP. Looking forward to the new year with BP. Oh yeah, good article. Thanks!

Jan 03, 2012 07:30 AM
rating: 2
 
BP staff member Maury Brown
BP staff

To all those commenting about me returning to BP, a heartfelt thanks. Lots to write about these days. Would look for quite a bit on new CBA when final details are released. Once again, thanks!

Jan 03, 2012 08:21 AM
 
ScottyB

I know "time value of money" and blah blah blah, but isn't it somewhat counter-intuitive and counter-productive to pay a player MORE when they are LESS productive?

I mean, the horrible back-loading of Hunter and Wells means that the Halos had to backload Pujols, and this whole "backload the contract because the money we save in the first few years gets invested with Madoff with a 12% return, and we come out a winner" is a large part of the Mets current woes (see Bonilla, Bobby).

Jan 03, 2012 12:08 PM
rating: 0
 
BP staff member Maury Brown
BP staff

Difference (as noted in bullet points)... Pujols takes a cut in pay ($4M less in '12 than in '11) and doesn't see same pay as '11 until '13, hence the large escalation.

In terms of comparing Pujols to Bobby B. difference iliad deferred payment with Mets. Not so with Angeks and Pujols. Also, tail end escalates slightly with adjust for market and inflation escalation.

Now, all that said, if it too much pay at the end of the contract when he's in the throes of decline? One would say, yes. Maybe emphatically so. The justification is in value -- on and off the field -- up front. I think it's bad form, but in terms of dollars available, plus ability to bring in Wilson it makes better sense than the Reyes deal. I didn't put in the article, but more than one has wondered that with the back-loading, the SEC investigation, etc. it's almost as if Loria is priming the pump to sell. Value of the Marlins may never be higher than over the next couple of years.

Jan 03, 2012 13:58 PM
 
BP staff member Maury Brown
BP staff

Pardon typos, folks... replying via iPhone

Jan 03, 2012 14:00 PM
 
cfinberg

Never apologize for the Iliad. It might make readers mistake this for an Ironic Column...

Would anyone want to buy the Marlins? I'm skeptical that they'll be competitive or otherwise play compelling baseball in 2012 or anytime soon thereafter. I'm skeptical of the new digs (I'm predicting a grossly humid viewing experience). I'm skeptical that Miamians will actually want to brave I-95, I-395, or the Dolphin Expressway in order to catch games. I'm skeptical of the median household income in the Miami area, and its ability to spring for frequent baseball tickets. I'm CERTAINLY skeptical that the fan base in South Florida will be any more enthusiastic that its counterpart in Tampa-St. Pete.

As for Loria's intentions, when has he ever chosen the long view when given the opportunity? Bud is sick of his antics, the government apparently feels the same way, and Miami is ambivalent at best. His dog and pony show is ending. If I were him I'd want out too, and if he hopes to turn a profit on the sale then this is probably his only path.

Jan 03, 2012 19:52 PM
rating: -1
 
ScottyB

Thanks for the response. I was attepting to make a broader point than just the Pujols/Angels situation, though. He's an exceptional player and his moving $ back does allow them to pay Wilson. I get it.

I just think that backloading contracts, in general, work far worse in practice than they do in theory.

Jan 04, 2012 19:29 PM
rating: 0
 
kcheaden

At a BP book chat a few years ago at Petco Park with Sandy Alderson I asked him this very question. Obviously Sandy is a very intelligent man and he basically answered with "time-value of money, blah, blah." As a someone in the finance/accounting field I understand time value of money and I completely disagreed with his answer then (and still do).

When dealing with free agents I think matching money with the years of more predictable production is the route to take. Baseball players aren't machines that you can reasonably predict their performance (and maintenance costs) for seven years down the road. Yes, we all have an idea how a guy should age but human beings (especially in the post-steroid era) are much more likely to deviate from that "projected" performance.

The 1st three years of a deal are usually the ones in which you can best predict a player's performance - match their highest annual salaries with those years or use signing bonuses to front load a free agent deal. This would decrease the risk of having a player giving you 5m production with a 20m salary in year five.

If you want Prince Fielder offer him a five year, 130m. Front load it so that 100m is paid out over the first three years of the deal, say a 10m signing bonus, and then salaries of 30,30,30,20,10. Given the fear of Prince not aging well due to body type at least you're only on the hook for a combined 30m for his age 31 and 32 seasons. But barring disaster you should be getting your monies worth in the first three years. You aren’t necessarily going to get fair “value” for your money (MORP of $25m versus $40m outlay in year one alone) but if your team is close enough to winning within the next three years to be considering Fielder then you can justify overspending.

Jan 06, 2012 19:09 PM
rating: 0
 
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