Opt-out clause gives Giancarlo Stanton leverage for even bigger deal

BY Chris Bahr • November 19, 2014

$325 million. That's the number that gets your attention, and it should. The contract that Giancarlo Stanton signed with the Marlins is the largest in the history of baseball, and it will span the next 13 years. There are kids currently in first grade who could theoretically get to the big leagues in time to play with Stanton before this contract expires. The $325 million commitment is twice as much as Loria paid to buy the entire Marlins organization back in 2002. The deal is staggering in both length and cost, but as Jeff Sullivan wrote last week, it's an entirely reasonable contract for one of the game's best players

But there's another fascinating aspect to Stanton's contract: The $325 million figure might end up being nothing more than a mirage. Because of the leverage he commanded, and potentially some lingering distrust of the franchise after its last spend-a-bunch-of-money-then-trade-everyone fake out, Stanton's representatives were able to negotiate an opt-out clause into the deal, meaning that he can choose to void the deal after the 2020 season.

If Stanton continues to perform at an elite level, it's entirely possible that he could void the last half of the deal and land a new contract for even more than this deal guarantees him next decade. After all, Stanton will have just finished his age-30 season when the opt-out decision comes due, and even at that age, elite players are landing 10-year contracts in free agency. Alex Rodriguez used this exact tactic in 2007 to opt-out of the final three years of his initial mega-contract, turning the remaining $72 million into a new 10-year, $275 million contract that the Yankees are still regretting.

Since that deal, the opt-out clause has become an increasingly popular request for premium free agents, as Clayton Kershaw, Zack Greinke and Masahiro Tanaka -- among others -- have had opt-outs negotiated into their contracts. Greinke's decision comes next winter, when he'll have $71 million remaining on the last three years of his deal. Assuming he stays healthy and pitches reasonably well in 2015, opting out should be a pretty easy call, given the market price for high quality arms.

And that is exactly why the game's best players are increasingly asking for these options to be inserted into their deals. For the player, a large guarantee with an opt-out is the ultimate win-win, as he secures a significant paycheck even if his performance declines or he suffers an injury, but he isn'€™t stuck with a below-market salary over the long term if he plays well, or if the economic status of the league improves after he signs his mega-contract.

Opt-outs transfer nearly all of the risk from a player to the team, as the post-option years are generally only going to be exercised if the player is no longer worth the money. Vernon Wells, for instance, had an opt-out in the $126 million contract he signed with the Blue Jays, but by the time Toronto dumped the remainder of his deal on the Angels, he had no interest in hitting the open market, where he would have been paid far less. Giving a player a mid-contract opt-out essentially means that the last half of the deal will only actually occur if the player is overpaid and underperforming.

Opt-outs are always going to favor the player, but there are ways to have them make sense for both sides. And Giancarlo Stanton's deal with the Marlins might provide a template for how opt-out clauses could be a win-win for both players and clubs.

The unique thing about Stanton's opt-out decision is how the salaries are structured in his deal. Because he agreed to take relatively low salaries during the next three seasons -- $6.5 million in 2015, $9 million in 2016, and $14.5 million in 2017 -- the contract calls for the Marlins to pay their star right fielder only $107 million in salary before the opt-out clause must be exercised or declined. That means that if Stanton does void the final seven years of his contract, he'll be walking away from $218 million in guaranteed money, 67% of the total contract he just signed.

It's certainly possible that Stanton will be able to do better than 7/$218M after the 2020 season. After all, we're already seeing the game's best players command deals for around $30 million per season, and with six more years of salary inflation, that price could easily be $35 to $40 million by the time Stanton is eligible to hit the market again. If he stays healthy and plays well, it wouldn't be surprising if Stanton uses the opt-out to obtain an even larger guarantee, pushing his total career compensation over the $400 million mark.

But because the contract is so heavily backloaded, the Marlins will have reaped significant benefits from this contract even if Stanton opts out, as it would result in them having only paid about $77 million for his first four free-agent years, since he was essentially guaranteed something like $30 million in arbitration before he was eligible for free agency had he not been extended. If the Marlins hadn't backloaded the deal and paid him roughly what he would have gotten through the arbitration process, then added the 11 additional years at $25 million per season, those first six years would have cost the Marlins about $130 million, rather than the $107 million he'll be paid before he has to decide whether to hit the market again.

Just in raw dollars, backloading the deal moved $23 million in value from Stanton's side of the ledger to the Marlins'€™ side, assuming he eventually does use the opt-out. But even if he doesn't, backloading the deal makes this contract a bit friendlier to the Marlins, because thanks to inflation, future dollars simply aren't as valuable as today's dollars. And the fact that there's a pretty decent chance that Stanton will only collect $107 million from the Marlins on this deal makes the opt-out far less player friendly than it has been in other contracts.

The Yankees, for instance, are paying Masahiro Tanaka a flat $22 million per season on the 7-year, $155 million contract they signed him to last winter, and that doesn't include the $20 million fee that they had to pay Rakuten after he was posted. By the time Tanaka has the ability to opt-out of his deal, the Yankees will have already paid him $88 million, plus the $20 million posting fee, so if he re-enters free agency, New York will have paid $108 million for four years of Tanaka's services. That's $1 million more than Stanton will cost the Marlins for six years, and as good as Tanaka was last year, he's no Giancarlo Stanton.

Of course, Stanton wasn't a free agent, so the comparison is somewhat apples and oranges. However, as elite players begin to push for opt-outs in their mega-contracts, teams should take note of the structure of Stanton's payouts. Opt-outs will always be in the favor of the player, but that value can be offset if you move enough of the guaranteed money behind the option, making the pre-opt out years so valuable that a team doesn't lose that much even if the player decides to leave.

If a player asks for an opt-out, backloading the deal is the fairest way to give the player the chance to hit the market again without forcing the team to take on all of the risk with none of the benefit. While Stanton's deal is most notable for the total dollar figure, perhaps it will be the structure of the payments that will have the most impact on future negotiations.