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May 7, 2012

Bizball

Who Will Be MLB’s First $300 Million Player?

by Maury Brown

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"Professional baseball is on the wane. Salaries must come down or the interest of the public must be increased in some way. If one or the other does not happen, bankruptcy stares every team in the face." – Albert Spalding, 1881

How long have we been hearing that baseball players are paid too much? By my count, it’s been since it was decided that they should be paid. Babe Ruth was the first to hit the $50,000 mark in 1922, and Hank Greenburg hit the $100,000 mark 25 years later.

More recently, with the advent of free agency, the discussions of salary have raged. After Charlie Finley failed in 1973 to make payments into an annuity that was part of Jim “Catfish” Hunter’s contract, arbitrator Peter Seitz ruled that Hunter should be made a free agent. On New Year’s Eve 1974, Hunter signed a five-year, $3.75 million contact with the Yankees that sent shockwaves through the game. The average salary at the time was $36,566, and the highest paid player in the game was Dick Allen of the White Sox ($250,000).

Further down the tracks of time, Nolan Ryan inked baseball’s first $1 million contract in 1979. Albert Belle was baseball’s first $50 million player in 1996, and 25 months later, Kevin Brown cracked the $100 million mark with his seven-year, $105 million deal with the Dodgers. In 2001, The Texas Rangers gave Alex Rodriguez not only the first contract to surpass $200 million but also the first to surpass $250 million.

There have now been five contracts above the $200 million barrier, three of which have been signed in the last year. Based on Jeff Euston’s work here at Cot’s Contracts, they are:

1. Alex Rodriguez, $275,000,000 (2008-2017)
2. Alex Rodriguez, $252,000,000 (2001-2010)
3. Albert Pujols, $240,000,000 (2012-2021)
4. Joey Votto, $225,000,000 (2014-2023)
5. Prince Fielder, $214,000,000 (2012-2020)

So the question becomes, when will we see the first $300 million contract? It is, after all, just a matter of time.

To begin with, we need to look at the market. According to Cot’s, 9 of the top ten highest-paid players are position players. Only CC Sabathia at $161 million keeps position players from owning the top 10. That changes a bit when you look at average annual value (AAV). Throw out Roger Clemens’ record one-year salary arbitration deal in 2007 with the Astros at $28,000,022 and you get a top five of A-Rod (twice : 2001-2010, 2008-2017), Ryan Howard  (2012-2016), Sabathia (2012-2016), Cliff Lee (2011-2015), and Sabathia again (2009-2015).

What really drives salaries upward, however, is the free agency market, contract duration, AAV, and the amount that clubs can allocate to one player.

On the day that Cardinals GM John Mozeliak began serious talks with Albert Pujols and his agent Dan Lazano about a long-term contract extension, he spoke on a panel at the Baseball Winter Meetings. When asked about how he dealt with free agency, Mozeliak said, “Only one team has allocated as much as 30 percent of their total player payroll to one player and made the World Series,” citing Todd Helton and the Rockies.

So when talking about $300 million in total salary, the discussion begins to really center on clubs that have not only financial capability, but also flexibility. You can spend lavishly on a single player (ahem, Tom Hicks with A-Rod), but doing so will almost always diminish your ability to compile the necessary supporting players as your payroll flexibility wanes. Baseball is, after all, a team sport.

This gets us into contract duration. While dollar amounts have climbed, what’s really changed is contract length. As one long-time NL exec said to me, “Are the dollar amounts high? Sure. But what’s really disturbing is how long some of the deals are. Your ability to get total contract value is very, very difficult.”

That brings us to Alex Rodriguez, Albert Pujols, Ryan Zimmerman, Josh Beckett, and Adrian Gonzalez. Between the luxury tax and agents seeking larger deals, clubs have gotten creative. Or, rather, they have looked for loopholes. In the case of A-Rod and Pujols, the Yankees and Angels added “marketing clauses” into their deals which payout bonuses based on passing key milestones. For Pujols, he receives $3 million for 3,000 hits and $7 million for 763 home runs; Rodriguez gets $6 million each for reaching 660, 714, and 755 home runs and for tying and breaking the major league HR record. Pujols also has a personal service agreement. After the ten-year player contract expires in 2021 (or possibly earlier, depending on how his play goes), a new 10-year deal kicks in. The sides agree that after the expiration of the contract or Pujols' retirement as a player, they will enter into a ten-year personal-services relationship that will pay Pujols $1 million annually. What defines “personal services” is not completely known—possibly an emissary for the Angels in a PR capacity.

While these types of deals are becoming more common, the league and the MLBPA frown upon them. The prior CBA (MLB and the MLBPA have yet to release the new CBA, which was reached six months ago) defined performance bonuses as follows:

“Performance Bonus” shall mean a payment to a Player conditioned upon the Player having achieved certain specified levels of activity, provided that such bonuses must be consistent with Major League Rule 3(b).

3(b) reads:

No Major League Uniform Player's Contract or Minor League Uniform Player Contract shall be approved if it contains a bonus for playing, pitching or batting skill or if it provides for the payment of a bonus contingent on the standing of the signing Club at the end of the championship season.

In other words, the “marketing clauses” for home runs is in conflict with 3(b). The sides had not put their foot down on the loophole, however, until Ryan Zimmerman and the Nationals came along this year. Zimmerman reached a six-year, $100 million deal with the Nationals that kicks in for the 2014 season and runs through 2019 with a club option for 2020. As part of the deal, Zimmerman reached a five-year, $10 million personal-services contract once his playing career ended.

It was here that MLB and the MLBPA decided a change needed to take place with the CBA. With A-Rod and Pujols, they looked the other way with the idea that the two were “exceptional” players and that these types of bonus clauses would be limited to a handful of players. Zimmerman was the straw that broke the camel’s back in the sense that while Zimmerman is a very good player, he is not seen as one of the most exceptional in the game.

For Josh Beckett and Adrian Gonzalez, MLB and the MLBPA looked at what the Red Sox had done in signing players to extensions after Opening Day to move salary for luxury tax purposes into the following season. Now, clubs can choose to put that money against the year that the player plays (so, in A-Gon’s case, although he was signed after Opening Day of 2011, the Red Sox could have paid the luxury tax  calculations for 2011 or roll it over to include his prorated pay for 2011 along with 2012).

What this all means is that agents and players will no longer be able to “back door” salary through other mechanisms that would not count towards the luxury tax. Contracts will either have to be longer or with a higher AAV, the latter of would naturally bring clubs closer to the luxury tax threshold.

So taking all of this into consideration, who could be that first $300 million player? Well, chances are he’s young. While you can sign someone older to a 10-plus-year deal (ahem, Angels with Pujols), it’s generally unwise. After all, you’re all but guaranteeing that you’ll be paying a heavy price for multiple decline years. Older players tied to long contracts are also harder to trade since their performance does not match their hefty salary (especially since these deals are often back-loaded beyond the rate of inflation).  A player who reaches the majors early, accrues service time quickly, and would reach arbitration and, subsequently, free agency at a young age makes for a good candidate.

It’s also important to consider the club, which must have the ability to allocate a reasonable amount of money to a single player. That type of situation is normally tied to large markets (although the Reds’ deal with Joey Votto is certainly an exception) that can support high levels of total player payroll.

Hmmmm… Plays strong. In a large market. Young of age. Not to give Mike Rizzo and the Lerner family heartburn, but if Bryce Harper can be the superstar that he’s projected to be, he could be that $300 million man. His service clock is now ticking, and he’s just 19 years of age. The Nationals have been active in free agency and are sitting in a good position in the NL East. Add it all up, and Harper could be the prime candidate to breach the $300 million mark, possibly as early as 2014.

I’ll come back to this: it’s just a matter of time. While there have been tweaks to the CBA to prevent certain loopholes, inflation and the free agency market will (almost always) continue to escalate. The league is in incredibly healthy shape financially, and with the addition of the two new Wild Card teams to the playoffs, clubs may be more willing to spend to be competitive. With that, clubs that have solid talent will look to retain those players, signing them to long-term deals to keep them off the market. Ten-year contracts are slowly becoming the norm, not the exception. With fewer players hitting the free agent market due to long-term deals, you get into a vicious circle: fewer players hitting free agency means demand goes up, which means longer deals for more money are offered to those players that are available, thus skewing the “value-for-salary” equation. A GM may be reluctant to pay more money or offer more years than they want for a player, but to be competitive in the free agency market, they have to. It’s a game that has been played since Albert Spalding’s time. Don’t expect it to end anytime soon.

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

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