Blue Jays and the Much Maligned Mega-Contract

Mega-contracts (multiple years at big bucks) are becoming increasingly common.  Could this be the new efficiency for baseball and for the Blue Jays?

When Robinson Cano signed his 10-year, $240 million deal in 2013, many writers believed it was a great mistake on the part of Seattle.  Some even questioned whether it was the worst contract in all of baseball.  Their argument was basically that by the end of this contract Cano’s performance would have declined to the point that his salary would be a gross overpay.

This argument is not unique to Cano.  Similar comments were made about David Price’s 7/$217m, Albert Pujols’s 10/$240m, and Miguel Cabrera’s 8/$248m, and just about every other mega-contract signed in the last decade.

Clearly, the argument has some merit.  Players do see declining performance as they age, and the risk of Prince Fielder-type meltdowns is very real.  But is it possible that these contracts are not as bad as they appear, and that baseball executives are not the fools that writers make them out to be?

The Votto example

One example of such a “bad” contract is the10 years/$225m that Cincinnati gave to Joey Votto going into the 2014 season.  The conventional wisdom was that Votto would outperform the average annual value (AAV) of $25 million in the early years, but that the contract would prove an albatross in the later ones.

It is now (almost) 2017, and speculation is rampant that the Reds are “receptive” to trading Votto, and the 8/$192m potentially left on his contract.  Many writers believe that the Reds would have to eat salary to get rid of such a large contract (in much the same manner that the Padres did with the Upton trade).  But would they – or should they?

Clearly, nobody knows that the future holds for Votto (or any player in a similar situation).  So the answer to that question is highly dependent on the assumptions used.  That said, consider the following assumptions for Joey V’s next 8 years:

  1. Votto had a poor (for him) 2016, with a fWAR of 5.  But over his last 3 healthy seasons, he has averaged a fWAR of 6.4.  So, for purposes of this analysis, let’s assume that he can achieve a fWAR of 6 in 2017.
  2. Let’s also assume that JV would lose an average of 0.5 fWAR per year as he ages.  An argument could be made for a lower figure, as elite hitters sometimes age better (think David Ortiz) but the 0.5 is the standard rule of thumb.
  3. In terms of how much a win is worth ($/WAR), assume $7 million in 2017, increasing by an average of 7% per year.
  4. Further assume no outlier outcomes:  no attacks from sentient sprinkler heads, telephone book disconnections, or knee injuries while riding a bicycle over his son.

Now let’s look at the value generated over the course of Votto’s contract, relative to the salary paid.  Take the last year of Votto’s contract – the $20 million option that (hopefully) the team picks up in 2024, when JV is 40 years old.  In that year, based on the above assumptions, Joey puts up a WAR of 2.5, or just a bit over league average.  But those 2.5 wins are worth $11.24 million each, for an earned value of $28 million.  Far from being an albatross, JV is a golden goose.

Is it possible that the Jays recognize this math?  That they realize that, five years from now, $20 million will buy far far less in terms of elite-level talent than it does now?  This might explain the Russel Martin 5/$82m contract, and the acquisition of the Tulo contract (with 6/$109m remaining at the time).

And if they do, could this create an efficiency that they could exploit?  Like when Cuban players were relatively cheap, and bargains like Cespedes and Chapman could be found?  Or when the Royals were the first to recognize the value of an elite bullpen, and were able to acquire top relievers at inexpensive prices?  In each case, the market ultimately recognized the efficiency and compensated … but the first teams to recognize the opportunity reaped the highest benefits.

So what would exploiting this opportunity look like?  Well, it could mean targeting players in trade talks who were elite level talents but under substantial long-term contracts that might prove burdensome to their teams.  Players like Joey Votto.  It might also mean a greater receptiveness to signing existing Jays to similar “monster” contracts.  Would a Josh Donaldson consider a contract in the 8/$200m range, possibly backloaded, given that he is already under team control for 2017 and 2018?  And it could also impact on free agent negotiations, if the so-called “5 year rule” went out the window.

The bottom line

There is considerable risk associated with long-term contracts.  But that risk – and the sensitivity that other teams have to that risk – can also create opportunities.  And, as with other opportunities in the past, the first teams who recognize and exploit those opportunities will reap the greatest benefits.

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