Several Cincinnati Reds players — Joey Votto, Homer Bailey and Brandon Phillips — have multiyear agreements that are often mentioned as examples of bad contracts for the team. How could Joey Votto be worth $25 million to the Reds in 2018, or Bailey worth $21 million? Brandon Phillips surely can’t provide $13 million in value to the Reds next year.
Before weÃ‚Â analyze the three contracts and the value of the players, let’s get past the legitimate debate about the social worth of entertainment. When an elementary school teacher earns $30,000 or a police officer $50,000, while at the same time an entertainer in sports, music or film earns 100 or 1000 times more, we have to tread cautiously in equating salary to “value.” JustÃ‚Â look at that disparity, shake your head and tell yourself that entertainers are worth whatever people are willing to pay them, free market and all that. And just move on.
Let’s assume we’ve done that and head into the clinical discussion of the value of major league players in relation to their long-term deals.
SalariesÃ‚Â for major league baseball players are determined in three distinct legal contexts. Based on MLB’s reserve clause, for six years of service time, a player can only work for one team unless they release him. For the first three years, the employer is free to set whatever salary it wants, bounded at the bottom edge by the league minimum negotiated in the MLB collective bargaining agreement. The player has no recourse other than to quit and therefore has no leverage. The minimum salary is $507,500 in 2015. It is based in no way on the market value of the player.
After three years of service time, a player remains under team control, but can negotiate a salary and has the right to arbitration. Arbitrators choose between the team’s offer and the player’s demand based on which is closer to salaries of similarly situated players.Ã‚Â In this situation, the player has more leverage than before because of the threat of the arbitration process, but still can’t negotiate freely with any team. Player salaries remain substantially below market value.
After six years of service time, the player becomes a free agent and can negotiate with any team. In this situation, the player has substantial leverage. Free agent contracts are the closest thing that MLB players have to a free market negotiation and determination of value. Those players are the subject of this post (mostly).
That’s not to say that subjective factors don’t enter the deal-making process. A player might want to give their local team, the one that developed him, what’s called a hometown discount. On the other side, owners may become attached to their own players and be willing to pay above market value.
But mostly the negotiation hinges on how much production the player will provide. Major league teams make internal calculations that estimate run production and run prevention talents of the players they are considering. Presumably they develop ways to measure the player’s output that allow comparisons. How does a certain pitcher’s value compare to a certain hitter’s? How does a speedy center fielder’s value compare to a power hitting catcher’s? And so forth.
WAR (wins above replacement) is an example of that kind of statistic. A player’s WAR represents the best estimate of the sum of the pluses and minuses for that player’s pitching, hitting, defense and base running contributions. The publicly available WAR estimates (FanGraphs, Baseball-Reference, Baseball Prospectus) have slightly different methodologies – just as different major league teams would come up with varying estimates for a player. But WAR estimates have become more refined and more in line with each other over the years.
Whether or not you agree with a particular estimate of a player’s WAR, the general task itself is unavoidable. Whether it’s called WAR or something else, teams (and player agents) must come up with objective, quantifiable ways to compare players with different skills. These estimates do form the basis for contract negotiations.
To determine how much teams value each win above replacement we can look at free agent agreements in a given offseason. Estimates vary but are within a general range. For example, before the 2014 season, researchers came up with estimates ofÃ‚Â $6.3 millionÃ‚Â andÃ‚Â $7.0 millionÃ‚Â per WAR. A few months ago, Mike Maffie crunched the numbers for the 2015 offseason and estimated teams paid $7.5 millionÃ‚Â per WAR.
The dollar value of a WAR rises over time. The growing revenue streams pouring into the sport mean more money is chasing the same number of players. It’s straightforward supply and demand in the labor market. How fast is the value of WAR rising? Dave Cameron (Fangraphs) recently published a study where heÃ‚Â used two estimates, 5 percent per year and 10 percent per year. Last year, Matt Swartz came up withÃ‚Â an average inflation rate of 6.8 percent over the next six years.
To determine the value of a player, multiply the estimate of WAR he will earn in each year of his contract by the going market rate for WAR that year.
That brings us to the Votto, Bailey and Phillips contracts. I’m going to adopt the following assumptions based on current research:Ã‚Â (1) a WAR in 2015 is worth $7.5 million on the open market, (2) the cost of WAR on the open market will grow at an annual rate of 7 percent, and (3) player aging occurs at 10 percent/year through age 30, 15 percent/year from age 31-35 and 20 percent/year above age 36. You can dicker about any of these, but they are based on well-accepted, mid-range estimates.
Joey Votto is owed $209 million through 2023, his age 39 season. I’m using an estimate of 6.0 WAR for Votto in 2015. He earned 6.25 WAR in 2013 and I believe he’ll surpass that because he’s hitting with more power now. But to be conservative, we’ll go with 6.0. This chart shows how much Votto will be worth over the duration of his contract:
The first column represents the season in question. The second is the player’s age that season. The Salary column represents the amount the team has agreed to play the player for that season. The WAR est. column represents an estimate for 2015 and then reductions each year based on the aging factors outlined in the assumptions. The WAR val. column takes the $7.5 million estimate for this year and that value times the 7 percent inflation assumption in subsequent years. The Value column is the product of multiplying the two previous columns – the WAR a player is estimated to earn times the market value of WAR.
Based on those assumptions and estimates, the value Joey Votto will provide to the Reds will exceed his salary over the duration of the contract.
Again, the assumptions matter. Will Votto produce 6.0 WAR this season or 6.5? Is a WAR worth $7.5 million now or $7.2? Will the inflation rate be 7 percent or 7.5 percent? etc.Ã‚Â Think of these tables as estimates based on averages.
Homer Bailey is owed $91 million through 2019, his age 33 season. I’m using a starting point of 3.0 WAR for 2015. That’s below what he produced in 2013 and his healthy stretch of 2014.
Based on the assumptions and estimates defended above, the value Homer Bailey will provide the Reds will exceed his salary over the duration of the contract.
Brandon Phillips is owed $39 million over the next three years, ending with his age 36 season. I’m using 1.4 WAR as the starting point. As you would expect for a player of Phillips’ age, his WAR has trended down the past four seasons: 4.7 (2011), 3.0 (2012), 2.2 (2013) and 1.4 (2014). My starting point of 1.4 WAR for 2015 gives Phillips the benefit of the doubt that his production the past two seasons was affected *more than it should have been* by injuries. Injuries, and slower recovery times, are part of aging and that’s part of theÃ‚Â aging factors in the assumptions. But for the purpose of this analysis, assume that BP was affected by more than the average amount.
Based on the assumptions and estimates defended above, the value Brandon Phillips will provide the Reds will be less than what the Reds are paying him, but maybe not by as much as is commonly assumed. Think of it this way: It’s not that difficult for a player of Phillips’ caliber to produce one WAR, taking defense into account. One WAR will be worth $8.6 million by 2017 and Phillips is only being paid $14 million. His 2017 salary isn’t that large when looked at in context.
Just to demonstrate how major league clubs take advantage of their legal control over players for six years, let’s take a look at Devin Mesoraco’s recent contract extension. The deal covered Mesoraco’s three arbitration-eligible years and his first year of free agency. Estimating his WAR is more difficult than for the other three players because of the much less extensive track record. He produced 4.65 WAR in 2014. I’m starting him off with 4.2 WAR in 2015, which assesses a standard 10 percent aging penalty. But the uncertainties are large. Was 2014 a fluke? Will he play more games or fewer? Is his hip injury career threatening? Could he reach even greater heights in his age-27 (prime) season?
Even with that considerable uncertainty, the table reflects how much value the Reds could derive from Devin Mesoraco relative to what they are paying him. When employees don’t have the leverage to walk away, employers benefit in the negotiations. Even with the legal protection of arbitration, players under MLB rules operate in nothing like a free market until they become a free agent.
Joey Votto and Homer Bailey’s contracts are “right-side up” while Brandon Phillips’ is “under water” although not by much. Again, these estimates are based on considerable uncertainty. But that’s inherent in multiyear-contract negotiations. We’re attempting best guesses knowing full well there’s a huge range of outcomes (in both directions).
Teams should attempt to keep contracts short and confined to younger age ranges if they can. But in negotiating with free agents, clubs can lose out to another organization who might be in a better position financially or willing to take greater risks.
Long-term contracts are great deals for the team in the short run and bad deals in later years. If Votto has a 6.0 WAR season in 2015, he’ll earn $45 million in market value for the Reds while they pay him just $14 million. Think of the latter years ofÃ‚Â long-term deals as deferred payment for the early years.
The inflation in WAR value is important to grasp. When Votto signed his large contract extension at the start of the 2012 season, one WAR was worth $5 million. By the time he’s 36 and earning $25 million a year, one WAR will cost more than double that to replace on the open market. It’s not that difficult to imagine a superstar player still producing 2-2.5 WAR at age 36.