Embracing the Opt-Out

Note: The following piece is also published at Banished to the Pen, a group blog created and run by fans of the popular Baseball Prospectus podcast Effectively Wild. I will be contributing more work there in the future. If you like a wide variety of excellent baseball content, please check them out!

When CC Sabathia signed his first contract with the Yankees in December of 2008, I made the argument to some friends that the opt-out clause that had been negotiated into the deal was actually a feature for New York. The story went that Sabathia, born and raised in a small town in California’s bay area, was unsure how he and his family would adapt to living in the big city. While I don’t doubt the sincerity of those concerns, the prospect of the big lefty hitting free agency again at age 31, a time when he was still likely to be churning out near-peak performances that he could parlay into another mega-contract, was surely the driving factor in the push for such an option.

Yankee fans were particularly sore over the decision to include the clause in Sabathia’s contract after having just dealt with the Alex Rodriguez fiasco one year prior. Rodriguez, coming off arguably the best offensive season of his career in 2007, opted out of the 10-year, $252 million dollar contract he signed with the Rangers prior to 2001. After a soap opera that saw the Yankees initially refuse to negotiate and then Rodriguez virtually beg them back to the table, the Yankees bafflingly bid against themselves and inked A-Rod to a new 10-year deal, this time worth $275 million. Sabathia’s deal, announced almost a year to the day that Rodriguez’s contract was finalized, was officially a seven-year contract for $161 million, with the opt-out coming after the third year. Sabathia was 28 at the time he signed the deal.

Conventional wisdom says that offering a player an opt-out clause is pretty much always a bad idea. The logic behind this is sound. The clause essentially grants the player the ability to make the absolute best of his situation, leaving the team at his mercy. If Sabathia performed well in the first three years of his deal and believed he could do better than his remaining contract on the open market, he could opt out and score himself an extra pay-day. If he underperformed, got injured or otherwise thought he could not do better than his present contract, he would decline the option and stay put. In either scenario, Sabathia was the one who held all the power. It’s hard to view this as anything but a negative from the team perspective, as they have no say in the matter.

However, if Sabathia performed well for three years and then decided to opt-out, the Yankees would have acquired his ages 28-30 seasons for a grand total of just $60 million (his salary breakdowns from 2009-2011 were $14m-$23m-$23m.) An average annual salary of $20 million for a player who produced 17.5 Fangraphs WAR and 18.3 Baseball-Reference WAR over a three-year span is a bargain of mouthwatering proportions. Any team in the sport would do backflips to acquire that kind of performance on a deal that small. The only reason pitchers get six and seven year contracts in the first place is because the market demands it…not because teams feel good about offering those kinds of terms, even for pitchers of Sabathia’s ilk. If Sabathia opted out after three years, he’d then be a 31-year old with an additional three seasons of wear on his arm. At that point, I argued, an efficient team looks at him and probably decides against signing him to another long-term deal for nine figures. An efficient team thanks CC for three great years and wishes him luck with his next team.

The Yankees, as it turned out, were not a particularly efficient team. Sabathia used the leverage of the opt-out to work out a 5-year, $122 million dollar extension with the team after the 2011 season. Sabathia cut the Yankees a bit of a break by only extending his guaranteed contract one year, to 2016, with a vesting option for 2017. Regardless, even that relatively team-friendly extension doesn’t look so hot for the Yankees these days, as Sabathia has posted just 7.4 fWAR and 3.2 bWAR in the three years since signing it.

The decision to give that extension to a 31-year-old starting pitcher with five consecutive years of 240+ innings, however, should be treated as an entirely separate transaction. While it’s true that the Yankees had no say in whether Sabathia exercised the opt-out clause, they certainly had say over whether or not to offer him a new deal. Granted, letting go of an ace that averaged six WAR per year and helped deliver a World Series is much easier said than done, but, as with the A-Rod deal, the Yankees mistake came not in offering an opt-out, but rather in re-signing the player once the option was exercised.

It’s interesting that, despite multiple examples of players exercising these clauses and either re-upping for more money with their current team (Rodriguez, Sabathia) or heading for greener pastures (J.D. Drew, A.J. Burnett), teams don’t seem to be wavering at including these options in contracts. This offseason alone, we’ve thus far seen two high-profile signings include them: Arizona’s deal with Cuban import Yasmany Tomas, and Miami’s record-setting contract extension with Giancarlo Stanton. With such a willingness to include the options, one has to wonder if teams don’t see some of the potential perks outlined above.

Plenty of analysts were quick to point out that Stanton’s astounding 13-year, $325 million dollar extension with Miami might never come to total fruition if Stanton chooses to exercise the opt-out clause included after year six. Perhaps even more interestingly is the realization that Miami will only pay Stanton $107 million for the first six years of the deal, covering the slugger’s age 25-30 prime years. The remaining $218 million of the deal is backloaded into the final seven years. If Stanton chooses to enter free agency after year six, the Marlins are off the hook for the entirety of it. Should that happen, Jeffrey Loria and the Miami brass will sleep well knowing they scored Stanton’s prime years at an outrageous discount and can let some other team foot the bill for his decline years.

Tomas’s six-year, $68.5 million dollar deal with the Diamondbacks is structured similarly, albeit on a much smaller scale. Arizona gave Tomas an opt-out after the fourth year, and backloaded $32.5 million of the contract into the final two years. Should Tomas play up to expectations and then opt into free agency, the Diamondbacks will have secured his ages 24-28 seasons for just $9 million per year. 

I don’t mean to overstate my case. Opt-out clauses are risky propositions for teams. The uncertainty of whether your star player will be around next year or be suiting up for your division rival is not an enviable position. It requires meticulous planning, and a lot of contingencies. You could make a strong case that the Dodgers recent decision to commit four-years to Brandon McCarthy is a safeguard against the possibility that Zack Greinke opts out of his deal after next season. Whether he does or doesn’t stick around could easily throw a wrench into the team’s long-term plans. Beyond that, engaging in Marlins or Diamondbacks-style contract-backloading brings about all the more risk. After all, the more money a team filters to the back of a contract, the harder it will be for a player to top it in free agency, and the less the incentive for him to try. You don’t want to be the team throwing hundreds of millions of dollars at players unless you’re prepared to pony up. No matter how likely it seems that a player will exercise his option, he’s one injury or Vernon Wells-esque debacle away from changing his mind.

All of that said, the continuing trend of opt-out clauses in player contracts is evidence that teams are, at worst, not yet scared of them, or, at best, speculating on their hidden benefits. They’re not only a tool that can entice players to sign in your city, but one that can deliver prime-year performances at reasonable or even discounted cost, with the potential bonus of being absolved of the player’s decline phase.

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