Monday, August 28, 2006

I would gladly pay you Tuesday ...

Reading over my last entry, it sounds more like an episode of Star Trek: The Next Generation than a blog about baseball. So to remedy the hazy and inexact nature of my previous entry, I'm going to take this time to talk about cold hard business facts; specifically: options.
When people sign contracts, they often stretch the boundaries of good sense when defining its terms. Nowhere is this more clear than in the use of options: player options, club options, and mutual options. In an effort to find a middle ground in negotiating the length of a contract, player agents and club representatives will often add on an option year. This is a clause that allows either the club or the player to opt for an "extra" year on the contract, due to the previously agreed-upon terms.
For example, a team could sign a player to a 1-year contract for $1 million, with a club option for a second year at $750,000. This would give the club the choice to renew the player's contract for a second year. They can wait through the first year, decide if they want the player back, and then determine whether or not to opt for the option. By the same token, a player can include an option year of their own. A player could sign a 5-year deal for $8 million per year, with a player option for a 6th year at $5 million. This would give the player an added sense of security, and it would enable the team to further secure a player's services without definitely binding themselves to it.
There are three kinds of options. Two I've already mentioned: a player option, and a club option. There is also a "mutual option." A mutual option only kicks in if both the player and the club exercise it. There are usually certain stipulations involved if one party exercises and the other does not. There is also a fourth type of option, which isn't really an "option," per se. It's a "vesting option." It usually involves a certain level of performance to be met in order for the option to kick in. For example, a player could sign a 1-year deal with a vesting option for a second year, with the caveat that the vesting option only kicks in if a player meets a certain threshhold of performance, such as plate appearances or innings pitched. A pitcher might have to pitch 150 innings in the year before the vesting option, or a total of 250 innings in the two years prior, for example. Vesting options are often used with players who are injury risks; a team can secure a player's services for an extra year, but if the player gets hurt and misses significant time, the option won't vest, and the team gets off the hook. Vesting options are also seen as "inspiration" for a player. Most star players have clauses written into their contracts guaranteeing them an additional sum if they achieve any individual milestones; $25,000 for an All-Star appearance, for example. (It also must be noted that teams are often accused of benching or disabling players in order to keep them from reaching contract milestones that would kick in a higher salary). Some players have options that add a proportional amount of money based on their finish in the MVP Voting, or Cy Young voting. Sometimes, vesting options can be bizarre. Curt Schilling signed a 3-year contract with the Boston Red Sox; the option for the fourth year would vest if the Red Sox won the World Series anytime during the first three years. It was a pretty outrageous clause; a put-up or shut-up type. And of course, the Red Sox won the 2004 World Series, and Schilling's $13 million option for 2007 vested.
Given that contracts in modern baseball often tend to favor a player, you most often encounter player option years, giving the player the option to extend the life of the current contract or not, depending on which would be more financially prudent. Most player options (and club options as well) come with "buyouts." You can "buy out" an option year by paying a percentage of the year's salary. For example, Cardinals center fielder Jim Edmonds has a club option for next year for a $10 million salary. The Cardinals can either exercise the option and pay the $10 million, or they can pay Edmonds $3 million to buy out the option, making him a free agent after this season.
Needless to say, "option-renewal time" can give you some disgruntled players. John Smoltz, the otherwise good-natured face of the Atlanta Braves, recently surprised many people by going public with the issue of why the team hadn't made a decision on his 2007 option. It was an uncharacteristic move for Smoltz, which made it seem all the more odd that the team had let their marquee player go this long without any word as to whether he was going to stay in Atlanta or not in 2007.
Another practice that deserves mentioning and often bears upon the discussion of options is the practice of "backloading" contracts. If a player signs a contract for $40 million over 4 years, rarely are they actually going to get exactly $10 million each year. Most teams start out with small salaries in the early years, increasing as the contract goes on. Thus you have a "backloaded" contract, where the money is unevenly distributed to the later years of a contract.
The practice of "backloading" contracts is both understandable and fiscally irresponsible. On the one hand, it's often essential for a team to delay paying a player money that they just don't have yet; they're often counting on the very same star player to help increase revenues and make paying the last years of the contract more feasible. On the other hand, it's a wonderfully tempting chance to put off the payday until later. As Wimpy would say, "I would gladly pay you Tuesday for a hamburger today." It's not much of stretch from that to "I would gladly pay you $15 million next year if you'll work for $4 million this year." Either out of blissful ignorance or sheer desperation, GMs put off the big payday until later. This isn't always a bad idea, but considering the heavily back-loaded contracts signed in recent years, it's hard to defend it as a sound economic practice. Until inflation shoots up to 20% per year (Ha ha! That $15 million won't buy you a gallon of milk in 2025!), these practices will be generally ill-advised.
Option years are another function of that; GMs will agree to "just one more year" when it's so far in the distant future. But the central problem with back-loading contracts is that they are completely bass-ackwards from the realities of a player's development. Because a major league team controls a player for his first 6 major league seasons, the vast majority of free agents are over 30 years old. Therefore, while their salaries are rapidly increasing, their skills are rapidly decreasing.
It wouldn't be such a bad thing if it all evened out. If you could get an equal amount of bargain from the first half of a contract as you got hosed on the last half, you could call it even. But a player's development is rarely that friendly. This especially true as players enter their late 30's, when they tend to suffer season- and career-ending injuries and their skills degenerate at an ever-increasing pace. Yes, it's a bargain to get an MVP-caliber season from someone making $6-7 million a year, but that doesn't even out if they're making $20 million at age 39 to sit at home an rehab an injury.
The best example of the latter is the Astros' Jeff Bagwell. Bagwell signed a heavily back-loaded deal with the Astros in 2002, at the age of 34, through his 2006 season, when he would be :erk: 38. There was also an $18 million club option for his age 39 season in 2007; on the off-chance that Bagwell was that historically rare player who still plays like an MVP at the age most ballplayers have taken up golf. To be fair, it was out of a bizarre sense of kindness that Bagwell signed the deal; he knew the Astros couldn't really afford to pay him what he was really worth (at age 34, at least), so he signed with them at a "hometown discount," knowing he would make it up in the later years of the contract, when the Astros had presumably discovered a grove of money trees.
The trouble was (as you can probably guess) that Bagwell got injured and -- shockingly -- got old. At age 39, Bagwell was not unlike most other ballplayers at that age -- hurting and degenerated. In fact, Bagwell will end up missing the entire 2006 season due to injuries that have basically ended his career. The Astros did try to recoup some of that money through insurance (the one saving grace for teams with brittle, rich ballplayers). However, the Astros' insurance claim was denied, basically because Bagwell played down the stretch in the 2005 season through his injuries. It might have seemed like a good idea at the time to get Jeff Bagwell for $8 million at age 34 and $10 million at age 35. But the Astros should have had the foresight to notice that although Jeff Bagwell is a Hall-of-Famer -- he's also human. The same could be said of Barry Bonds (except for the part about being human), who earned $20 million in 2005 to sit at home and nurse his knees. I don't know if the Giants were able to recoup any of that money, but this is a glowing example of the risks of heavily backloaded contracts for players entering their late 30's: it's nice to get a great season for $8 million, but it's much, much worse to pay $15-20 million for NOTHING. Baseball GMs should show more fiscal responsibility than a Popeye cartoon character.

OK, that went on a bit longer than I anticipated, but it was all meant to introduce you to the wonderful world of baseball contracts; specifically OPTIONS. While many baseball commentators are talking about next year's potential free agent class, I'd like to talk about the players on each team who still have decisions pending on their option years. Will their team pick up the option, and should they? These are the questions I want to ask about some pretty big All-Stars and some pretty mediocre humpties. And along the way, we can explore the bizarre nature of baseball contracts. Check back tomorrow, as I'll look at each team's 2007 options and discuss whether or not they should get picked up.

In the meantime, please pray for the National League.

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