Extensions are all the rage in baseball, nowadays. In the last 24 hours alone, there have been three players inked: Brandon Phillips, Carlos Santana, and Ian Kinsler. That's not to mention guys like Matt Cain and Joey Votto, who signed mega-extensions last week.
If one were to go back and think about an extension that might have started this whole craze to begin with, one can squarely look at the Tampa Bay Rays and Evan Longoria. Almost four years to the day, Longoria's six year, $17.5 million deal with three option years that extend the contract to 2017 is the Mona Lisa of contract extensions for a team. With a week of service time under his belt to his credit, the Rays made a move that allowed them to lock up one of the Top 20 players in all of baseball to the highest value possible. As if that wasn't enough, after only two starts, the Rays made a similar pact with their top prospect Matt Moore this past December, a five year, $14 million deal that can be extended to eight years and $37.5 million after exercising the three option years.
Why bring up the Rays? Well, they understand the true meaning of extensions. In lieu of arbitration, extensions give teams the ability to gaurantee money up front to their players and not have to worry about negotiations once the arbitration process starts. Once arbitration is in the rear-view mirror, the length of the extension can also take up free agent years and keep the player under team control beyond the initial six year period. The extensions that were highlighted above were nothing like the Longoria or Moore deals in the sense that all they did was prevent these players from reaching free agency.
So is there a value in extensions anymore? And if so, what type of value is there? Two years ago, while he was in the beginning stages of becoming one of the most surprising and powerful players in all of baseball, Jose Bautista signed a five year, $55 million extension with the Blue Jays. At that time, people were wondering why Alex Anthopolous would hand out a deal to someone with basically only one year of production (albeit somewhat prodigious production) behind him. In essence, AA saw what Andrew Friedman and his braintrust in Tampa Bay saw. Bautista had not been paid a big chunk of money before, much like an up-and-coming prospect or a low-level player in arbitration.
So he was given a large rate of salary increase in exchange for what turned out to be an investment on future production, which is what all salary negotiations have in common. But unlike free agent contracts, where arbitration usually plays a role in the gradual increase of star players at a rate that holds little or no value for the team, extensions give teams the wiggle room to gaurantee upfront money for value down the line. But the problem with extensions in the prime of player careers, much like free agent contracts, is that they don't end up being as valuable to the team for a majority of that contract. In essence, the extension ends up as a bonus for their services to the team before the extension.
As an example, take a look at the Cain extension. After his rookie season salary of $328K in 2006, Cain signed a four year, $9 million deal that would pay him through 2010 and wipe out three. If you include his August call up with the first three years of his deal, Cain was worth 15.2 Fangraphs Wins Above Replacement. If you estimated the value of a win above replacement to be about $4.75 million, Cain was worth about $72 million to the Giants, grossly underpaying him by over $60 million. His next contract was a three year deal for $27.25 million, replacing the final year of the previous deal. These past two seasons, he was worth 8.9 fWAR, and with win values increasing to approximately $5 million or so, he was worth $17.25 more than what he was getting paid.
Now in his most recent deal, Cain explicitly stated that he didn't want a "team-friendly deal" as he had done that with his two previous contracts. Between the two, the Giants saved about $80 million in value through his arbitration time, the EXACT amount of money Barry Zito was paid to deliver 19 wins less than Cain did. For the money Cain saved the Giants, Zito not performing to the level of his contract took away that value. So Cain was inked to a deal that will gaurantee him five years and $112.5 million starting in 2013, meaning that for him to hold to that value, he will have to worth approximately 20-23 wins starting next season, his age-28 season. Considering it will be his prime, there's a good chance he will live up to that contract, but it's a risk that could wipe out the value Cain himself had given the team since he was called up in 2005.
The Rays were right when it came to extensions. Guarantee the money up front and earn value from them as the player grows into his prime. Once they become free agents, if they are as good as you think they would be, then there's a good chance the value in them will be long gone once they hit free agency. For the Indians, while they aren't getting a "deal" relative to the arbitration costs of young catchers, they are getting a deal on value alone considering the team will have Santana growing into his prime years. Kinsler and Phillips are currently in their primes and there's a chance in the first few years of their deals that they will eclipse or reach the value of their extensions. But if they falter, the team will be stuck with albatrosses on the back end of the deals, leaving teams to decide whether or not long-term deals of any kind are worthwhile unless they are signed early in the careers of budding superstars.
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