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The Evolution of Structure, Options, & Common Sense with MLB Free Agent Contracts

The Evolution of Structure, Options, & Common Sense with MLB Free Agent Contracts
Untitled Document
As MLB free agency FINALLY starts to kick into gear this offseason, we'll take an in-depth look at how contracts have changed (or have they?) over the past five free agent seasons. The key here is to assess these contracts not for their total value on the surface, but the structure, practicality, and ability to opt-out, block trades, maintain worthy cashflow, etc...
 
Top Free Agent Contracts Since 2014
A look at the top 5 contracts signed in each of the past 5 free agent seasons, including adjustment terms (opt-outs, trade clauses, options), and our opinion on which side, team or player, hold the better outcome in each deal.
PLAYER POS TERMS AAV ADJUSTMENT WIN
2018
J.D. Martinez DH 5 yr, $110M $22M Player Opt-Out: 2 yr, $50M ($25M AAV); 2nd Opt-Out: 3 yr, $72M ($24M AAV) Player
Yu Darvish SP 6 yr, $126M $21M Player Opt-Out: 2 yr, $45M ($22.5M) Player
Carlos Santana DH 3 yr, $60M $20M 2021 Club Option Team
Eric Hosmer 1B 8 yr, $144M $18M Player Opt-Out: 5 yr, $105M ($21M AAV); No Trade Player
Wade Davis RP 3 yr, $52M $17.3M Final year vesting option, trade bonus Split
2017
Yoenis Cespedes OF 4 yr, $110M $27.5M Full No Trade Split
Edwin Encarnacion DH 3 yr, $60M $20M Club Option in 2020 Team
Aroldis Chapman RP 5 yr, $86M $17.2M Player Opt-Out: 3 yr, $56M ($18.6M AAV); Full No Trade Player
Dexter Fowler OF 5 yr, $82.5M $16.5M Full No Trade Split
Kenley Jansen RP 5 yr, $80M $16M Player Opt-Out: 3 yr, $42M ($14M AAV) Team
2016
Zack Greinke SP 6 yr, $206.5M $34.4M $62.5M deferred, 15-team trade block, trade bonus Split
David Price SP 7 yr, $217M $31M Player Opt-Out: 3 yr, $90M ($30M AAV) Player
Jason Heyward OF 8 yr, $184M $23M Player Opt-Out: 3 yr, $78M ($26M AAV); Full No Trade Player
Chris Davis 1B 7 yr, $161M $23M $42M deferred, partial no-trade Split
Justin Upton OF 6 yr, $132.75M $22.125M Player Opt-Out: 2 yr, $44.25M ($22.125M AAV); 20-team no trade list Player
2015
Max Scherzer SP 7 yr, $210M $30M $105M deferred, present day AAV $27.3M Team
Jon Lester SP 6 yr, $155M $25.8M Full no trade clause. Final year vesting option Team
Hanley Ramirez DH 4 ye, $88M $22M Limited no trade, final year vesting option Team
Pablo Sandoval 3B 5 yr, $95M $19M Final year club option; 3-team trade block Team
James Shields SP 4 yr, $75M $18.75M Player Opt-out: 2 yr, $31M ($15.5M AAV) Team
2014
Robinson Cano 2B 10 yr, $240M $24M Full No Trade Clause Player
Jacoby Ellsbury OF 7 yr, $153M $21.8M Full No Trade Clause, final year club option Player
Shin-Soo Choo OF 7 yr, $130M $18.5M 10-Team No Trade Clause Player
Brian McCann C 5 yr, $85M $17M Full no trade, final year vest Player
Curtis Granderson OF 4 yr, $60M $15M
Team
 
Where Were We?
5 years ago players owned the winter. If you were a notable player allowed to reach free agency, you were garnering a top average salary, an absurd length of terms, AND the ability to block trades. In almost all cases, player’s owned 100% of the leverage, forcing teams to go well outside their bounds financially and in terms of a team-building process.
 
5-Year Analysis

2014 was really the year the MLB world began to raise eyebrows with free agent spending, as a player like Jacoby Ellsbury not only cashed in, not only guaranteed 7 years, but also held the Yankees hostage with a full no trade clause. That kind of treatment should be designated for elite contracts player contracts only. Team’s had completely lost control.

But clearly this wasn’t a secret, as the top 5 contracts in the 2015 free agent class resulted in MUCH more equal-leveraged fashion. Yes, Pablo Sandoval was a bust on the field, yes James Shields has no business owning a Player Opt-Out, but as a whole, these signings were much more representative of good sense. Even Max Scherzer - an elite free agent - maxed out at 7 years, was awarded no opt-outs, and didn’t wind up TOO far out of bounds for the Nationals.

But 2016 is where the agents/players pushed back - in a big big way. The only somewhat reasonable contract, ridiculously, was Zack Greinke’s 6 year, $206.5M deal in Arizona. Why? Because Arizona gets him for 6 years, not 2 - not 10. A starting pitcher of his caliber on the open market is always going to max out in terms of average salary ($34.4M), and the DBacks threw in limited trade protection to sweeten the deal - but not a full no-trade clause.

The remainder of the top free agent contracts in 2016 were a mess though in terms of structure and team leverage. David Price, the 2nd best pitcher on the open market, pulled in a 7 year deal at $31M per year, with a 3 year $90M player opt-out in his front-pocket, meaning the final 4 years of the deal (at his choice) are worth nearly $32M a year. Then comes arguably the single worst contract in MLB free agency history: Jason Heyward’s 8 year deal, at $23M per year, with a 3 year $78M opt-out available, and full no trade protection. Take that Jacoby Ellsbury.

Numbers aside, 2016 was the year the player opt-out really became prevalent, to a fault really. For years a shorter termed guaranteed contract followed by one or two club options was the “go-to” structure for a top but not elite free agent. But in 2016, MLB contracts started to look a little more like NFL contracts in that the full reported value of the contract really didn’t tell the story.

Fast forward to 2017 and we see two very different use cases of the player opt-out - at the same position. Aroldis Chapman cashed in on his World Series performance with the Cubs by fleecing the Yankees for a 5 year deal that reset the market for relief pitchers at $17.2M per year. However it also came with an opt-out after 3 seasons, through which he’ll have made $56M - a whopping $18.6M AAV. Toss in a full no-trade-clause and a red bow on top, and Chapman walks away with a 100% player-friendly contract. Flip the switch to the Dodgers , who re-signed their closer Kenley Jansen just 5 days after the Chapman deal became official. Jansen’s deal also runs 5 years ($16M per), with a player opt-out after 3 years. However his deal includes $42M through the first three seasons, or $14M per year. In other words, should he NOT opt-out, Jansen will have the ability to make $19M per year over the final two seasons of his contract - an incentive for him to stay, which is good for the team. It should also be noted that the deal does include a trade bonus ($1M), it does not include any trade blocking abilities.

 
Where Are We Now?

Much has been made of how nearly all notable MLB free agents in 2018 went unsigned through December, January, and much of February - some even calling for legal grievances to be put into place as owners held firm.

Now that signings are slowly starting to come down (Hosmer, Martinez, Darvish), we can begin to assess the structures of this year’s class. It appears thus far that while overall AAVs are down across the board, that player’s still did well in garnering strength in structure.

Hosmer’s 8 year $144M contract has a 5 year, $105M player-opt out, making it solid $22M per year deal before dropping down to $13M per year for the final 3 seasons. Hosmer held a $21M market value in our system.

JD Martinez and the Red Sox finally made the marriage work, locking in a 5 year $110M contract, that could be a 2 year $50M, or 3 year, $72M. In other words, this is a front-loaded deal, putting a much deserved $25M AAV on his first two seasons, then a less risky $22M salary on year three. If Martinez continues to bat .300 while nearing 40 HR a season, he’ll be back on the open market come 2020. Martinez held a near $26M calculated market value with us.

Yu Darvish was the first big SP to lock in, when the Cubs gave him a 6 year $126M contract, but with $45M over 2 years after which Darvish can bail out. If he’s still on top of his game come 2020, a 4 year, $80M deal likely won’t be enough to keep him in the fold. Darvish held a $21.9M calculated market value with us.

Related: Track all 2018 MLB Free Agent Signings


Thoughts Going Forward

The early signs in 2018 are positive for the sport going forward. While a lack of 10 year, $400M contracts isn't sexy, the deals for these notable players thus far have been good business - for both sides.

JD Martinez put up numbers last year that warrant $25M a year. But he hasn't always performed near that kind of production, a common trait for players set to hit the open market (peak in a contract year). Team's appear to be using the player option as a way to "tease" contracts into looking like great deals for the player: Take a lot of money up front, give yourself a chance to leave if you can't tolerate a little less money through the remainder of the contract, and if you're still worth elite money, we'll talk a bigger better deal before you ever leave (see Justin Upton).

In other words, an 8 year $144M contract for Eric Hosmer sounds like a mega blockbuster signing for San Diego. But a 5 year, $105M deal is not only a fair AAV for a player who can fill up the stat sheet, but it's a sensible length for any team who needs to remain fluid and flexible as they continue their building process.

However, the real trend we've seen in this analysis is that the market tends to react every other year. A "team-friendly" signing class is generally followed up by a player-grab smash the next season. Which leads us to 2019, a free agency period that has the potential to include Bryce Harper, Manny Machado, Josh Donaldson, Daniel Murphy, Charlie Blackmon, Andrew McCutchen, Brian Dozier, Clayton Kershaw, & David Price. In most cases here "elite" contract structure will not only be required - but likely rewritten.