Monday, October 13, 2008

Front Load FA Contracts

Unfortunately for us Yankees fans the hot stove season is in full effect early this year. Talk about who and how much is dominating our Yankee thoughts.

The main peril of the long-term contract is evidenced by the deal Giambi got from the Yanks. & years and a bucketful of money made Jason an immovable object the last couple of years of his contract and essentially made the Yankees try and extract a return from their massive investment.

Giambi's contract from - 

7-Year worth 120M- + he receives a 17M Signing bonus that is paid 3M in 2002, 4M in '03 and '04, 4.5M in '05, 1M in '06 and 0.5M in '07- he will make in 2002-8M, in 2003-9M, in 2004- 10M, in 2005- 11M, i 2006- 18M and in 2007 and 08- 21M and in 2009- Team Option 22M or 5M buyout

Of the $103mm not part of the signing bonus, Jason received $65mm in the last 3 years of the contract and just $38mm in the 1st 4 years. This makes NO sense. Every free agent signs a contract based on their past performance; the scary part of a free agent signing for a team, however, is can the player maintain that level of performance until the end of the contract. As the answer to that question is pretty much always NO, why in the world do teams always pay these players more in the tail end of the contract, when their numbers and skills are declining?

A smarter move would be to front-load the contracts so that their pay is more representative of their performance as they age.

If you take Giambi's contract and turn it around, he would have been making $9mm in '07, and $8mm in '08; $17 mm total instead of $42mm. Not only is it a lot easier to bench a player making $8 or $9 million, but it's a lot easier to trade them if the team should choose. 

Let's take the pending Texiera deal. Boris is asking for 10 years and $200mm; a more reasonable ending point will be something like 8 years $160mm. Let's assume a $17mm signing bonus comes off the top, so the Yanks would have $143mm to pay over 8 years ($17.875mm/yr average). I propose a schedule of - 2009 - $25mm, 2010 - $25mm, 2011 - $20mm, 2012 - $17mm, 2013 - $15mm, 2014 - $15mm, 2015 - $13mm, 2016 - $13mm. 

Assuming some drop in Tex's numbers, in 8 years a still productive player making $13mm should be pretty easy to move if the Yanks should want. In addition, we would be paying the most money for the most productive years. This also serves to insure that we are not paying a bunch of old players ridiculous sums of money for playing out the string of their huge deals thereby leaving room to sign younger, more productive players as the older players' production drops.

I can't imagine that the agents or the Player's Assoc would have any issue with this as the player makes out better by getting more money earlier. It also helps the team as I evidenced above. Hopefully Hal will see this and structure Tex', CC's and AJ's contract in this fashion.


Anonymous said...

Excellent idea. Hope it catches fire.

Anonymous said...

Obviously the player wouldn't mind this because they get their money earlier. But teams don't do this because it costs them money. $17mm in 2008 is worth more than $17mm in 2012. Inflation. Teams also assume that salaries will continue to rise, so a $17mm player in 08 will be comparable to a $22mm player in 2012.

It makes more sense to just balance out the contract - this doesn't mortgage the future (which backloading does) and doesn't leave players making asinine amounts at the end of their contracts - check out Ted Lilly's contract with the Cubs - his salary DOUBLES the next two years.

Anonymous said...

Cash already figured this out with the new A-Rod contract, he gets $20 mil in his last couple years, it'll prob be a bargain by then.

Anonymous said...

Fundamental financial practice...

Your money is worth more today than it will be later; therefore, organizations (or businesses)will backload deals. In form with the comment above, why pay $22 mil upfront, when you can pay $17mil up front AND invest the additional $5 mil somewhere else. For the sake of an example, if the investment yields $1mil in five years, they are getting that player at a discount in the late stages of the contract ($21mil instead of $22mil).

From a player's perspective much is the same. What would you say if your boss said to you. I will pay you $30 an hour this year, $29.00 an hour next year...and $25.00 an hour in five years. Wouldn't make much sense would it? After the first year, you would probably try to find another job or renegotiate your deal.

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