We’re all weirdoes. Truly, we are. If the collective intents of our nature were described to any of us without reference points we’d eagerly dismiss ourselves as being ridiculous nitwits. This is perhaps best seen in our eagerness to categorically judge the actions of others into being either positive or negative, with little regard given to the complications and unconsidered dynamics that destroy the unsophisticated dichotomies that we build for ourselves for the sake of simplification.

In sports, this occurs most often in “analyzing” trades and transactions. Trading Wil Myers, Jake Odorizzi, Mike Montgomery and Patrick Leonard for James Shields and Wade Davis is good for the Tampa Bay Rays and bad for the Kansas City Royals. I don’t disagree with such a notion, but mine is an opinion that comes with a caveat: It’s based in a vacuum context on my own limitations of understanding.

I’m not familiar with the job security of Royals General Manager Dayton Moore, other than knowing that his current contract runs through 2014. I don’t know about the pressure that ownership has placed on him to succeed right now, and I’m unaware of what other alternatives he had. It could very well be that the factors that I can’t consider were the most informing for the decision. Perhaps, all things considered, it’s a win-win situation.

Unfortunately, our minds aren’t considerate, they judge. One party is good, and so the other must be bad. As soon as we find the benefits, we lazily dismiss the other option as being a consequence. Staying within the world of baseball, we find this phenomenon occurring once again with the terms of Zack Greinke’s recently signed free agent contract with the Los Angeles Dodgers.

As part of the deal, Greinke has the option of walking away from his six-year contract after three years. There is little doubt that pitcher benefits from the arrangement. If, after three seasons in Los Angeles, Greinke proves himself to be as excellent as many believe he can be, it’s quite likely that he can earn more money than the $71 million he’s currently guaranteed as part of the back-end of his deal with the Dodgers.

It’s been assumed that this is a concession that Los Angeles had to make in order to sign the pitcher to such a long contract. It’s been thought of to be a negative for the team because it means that Greinke could leave earlier than the club would theoretically prefer, while still enjoying the security of a six-year guaranteed contract if he doesn’t think he could earn more on the free agent market.

I’m not so convinced that such an opt-out clause is as detrimental to the Dodgers as it’s being presented. In order to understand this perspective, two concepts need to be explained: aging curves and where value is derived in long-term contracts.

This first is a simple concept to grasp. Using historical data, we find that starting pitchers don’t get better after their age 28 or 29 seasons. They get worse. This shouldn’t be very surprising. We feel the decline of our physical abilities as we get older, and so too do professional athletes.

Given the way that Major League Baseball contracts work, with two to three years of contract renewal and three to four years of contract arbitration, we can expect that by the time a pitcher signs a contract as a free agent, he’s reached his decline stage of his career. Therefore, a pitcher performing in the first year of a free agent contract is most likely performing at his true talent best in terms of the years covered by the deal.

However, long-term contracts aren’t constructed in a manner that pays a player according to his performance. Contracts are much more likely to have an even annual distribution. This means that front offices consider things like a player’s probable decline and inflation to offer a contract that is fair by comparison to other contracts as a whole rather than season by season. Therefore, a team ends up underpaying for performance at the beginning of a contract, and then overpaying for performance at the conclusion of a contract.

It’s a bit like paying for a car via payments over time. As the car depreciates in value, you’re still making the same monthly payments, as you were when the car was at its most valuable. So, would it be a terrible thing to have the depreciated vehicle and the amount of money you owe on it completely removed from your responsibility halfway through the arrangement you’ve made? Ultimately, it represents the opportunity to pay for the peak performance at a reduced rate, and that’s it.

In terms of Greinke and the Dodgers, it also means that the pitcher performed at such a high level as to warrant a better contract on the open market than what he agreed to three years previous. The enormous amount of value that’s gained in those three years makes a short-term contract – into which Greinke’s opting out would essentially transform the deal – worthwhile. The team would have to look at re-signing Greinke to a new and presumably more expensive contract as an entirely different deal with an entirely distinct examination of factors from the process in which they engaged when they signed the pitcher this off-season.

It would hardly be surprising to me, given the way in which pitchers decline, if the money they committed to spending on Greinke before he theoretically opts out, would be better spent on another asset instead of bringing back what will be a 32-year-old pitcher for another multiple-year contract. However, the contract that follows the most recent signing is irrelevant.

The Dodgers can look at this as two potential contracts, both of which offer the team good value. Contract A means that Greinke stays for six years and is paid what the team considers to be a fair amount of money for an expected quantity of production. That’s great, but Contract B, as a sole entity, is even better. Contract B means that Greinke provided enough production over three years to lead him to believe that he can earn more on the open market than what he originally agreed to be paid. That means that the player provided a lot of value over the short term. The Dodgers will be able to reap this without a long-term commitment, and then choose if they want to pay a premium for more years of the pitcher when he’s even more likely to decline than he was when the first deal was signed.

It’s easy to be confused by our urges to compartmentalize the outcomes into good and bad categories, especially when we think of a player and a team as adversaries in negotiations. However, if we parse through the possibilities, we realize that contract options can be mutually beneficial. If Zach Greinke opts out of his contract after three seasons in Los Angeles, it could be a very good deal for both the player and the team.

Comments (20)

  1. You fail to mention any negative for the club if Greinke opts out of his contract. Surely, you can parse some sort of unfavorable consequence for the team.

    • With there money, I imagine it would be less of a negative if he did compared to say the Jays. Finding a suitable replacement ideally should be much easier with the Dodgers resources.

      • Resources are equal, both are identical expiring contracts. The difference is location. Cali baby!!!

    • The negatives are obvious: 1) The team gets stuck in a bad 6-year contract; 2) Greinke opts out and is awesome for another team; 3) He opts out, gets re-signed, and is terrible for the Dodgers.

      I didn’t emphasized them because the whole point of the piece is to suggest there’s something more than common perception to the agreement.

  2. The other possibility being that Grienke falls apart and you still owe him 71M

    • I don’t think he brought it up as this would be an automatic concern if there was no opt out.

    • This is a risk for any contract though. The Dodgers were willing to have Greinke under the terms of Contract A or Contract B. The point of this piece is to suggest that Contract B might end up being more favorable than Contract A.

  3. Well when the Jays handed out a similar style contract it worked out pretty well for them! Suck it AJ Burnett!

  4. At the end of the day the Dodgers are short an option that has a high probability of being valuable. If his market value is higher than the remaining years on his contract, he signs somewhere else, if not he stays. The most important situation is that by giving him the 3 yr option instead of the vanilla 6 yr deal, that you lose the ability to trade him if his mkt value is higher than the remaining years on the deal, but have all of the downside of choking on the deal if he sucks. While it’s possible that it’s not as bad as this worst possible outcome the fact that the team bears the downside risk of underperformance makes the player option unambiguously a bad thing for the team.

  5. I get full credit for this post as I made a comment to this effect about 8 hours ago on the other Grienke post.

    Kidding. But this is well written. I really think if you are trying to sweeten a contract for the player, opt-outs around their 32-33 season is the way to go. Especially if a) you don’t plan on resigning him if he does opt out, or b) you are the New York Yankees (or LA Dodgers now), and can afford the re-up if you want to keep them around for longer.

    I will say that the opt-out, sign with different team, decline sequence almost never happens in reality. Mostly because it is usually the Yankees who seem to end up in the opt-out scenario.

    • Burnett is the popular example, but J.D. Drew did it, too. It didn’t work out for the Red Sox to give him that big contract, even though he provided two years of good value. It’s not working out with A-Rod, and we’ll see how Sabathia’s elbow holds up before we judge there, although it would be pretty hard to imagine not giving him whatever he wanted.

      • I wasn’t counting Sabathia and A-Rod because they re-signed with the same team, which was presumably the plan all along for the Yankees in the case of an opt-out.

        J.D Drew gets a tough rap in Boston, but he was actually worth 13 fWAR over his 5 years there. So, using the 5M per WAR (though admittedly it probably wasn’t that high at the time his contract was signed), Drew was worth 65 M over those 5 years. They paid him 70M. So it wasn’t an extreme overpay at all. It just sort of felt like it.

  6. I thought the exact same thing when AJ Burnett opted out of his contract. Yeah it sucked that we lost him after his best year, but at the same time the contract was mildly backloaded, and if we just looked at it as a 3 year deal we actually got great value, and the organisation got exactly what it wanted, AJ on a 3 year deal and not so much for 5 as the last 2 years injury risks are higher and effectiveness is likely lower. At the time when he opted out it sucked, but overall the contract was a good one.

  7. Not too beat a dead horse but A.J. Burnett exemplifies why player opt-outs arnt that bad for teams really. If you could sign Zack Greinke for 3 years at 52M or so would you do it? Fuck yeah. Which is what Zack’s contract essentially looks like if he opts out, 12M in 2013 and 20M or so in 2014 and 2015. Every team in baseball would jump through hoops to sign Greinke to a contract like that. Therefore best case scenario for Dodgers really is he opts out and they get 3 prime years of great value from one of the top pitchers in baseball, or he doesn’t opt out and the Dodgers get 6 years of control over a top pitching asset without getting too deep into his decline phase at a price they can stomach. Seems like the definition of a win-win deal for the Dodgers.

    • Exactly. No team in baseball wouldn’t sign Greinke to the front of this contract. If the risk in doing so is that he takes up another three years providing less value, it’s a risk worth taking if you’re willing to sign that six-year deal in the first place.

  8. Great post. A thought, I’ll add, however. Obviously a player opt-out is a clause that benefits the player more than it does the club. This is simply because the player has the insurance to get the full 6 year deal if he plays poorly enough, and the freedom to excel in another market if he has a great 3 years.

    A team option, by comparison benefits the team because it can cut dead weight if an investment doesn’t pan out. And, if a deal begins to look like a steal after the first part of it, the team can choose to exercise the option and keep a player at what would be a discounted rate. The first Longoria contract is a great example of this: they signed him to a 6 year deal locking up his arbitration years at just under $3 MM AAV. Then he had team options for the following three seasons, which would be paying him $ MM AAV. So if his first six years were fantastic, the Rays could sign him up for the following 3 (in fact, the options were a 1 year extension and a two year extension, but the point’s the same) for what they would perceive to be good value, and if his first six years were a bust, they could cut bait and move on.

    What this leaves me asking, after Greinke’s news, is how much more he could have been paid had he not had had the player option included after year three. What is that worth, $5MM? $10 MM? How much more would he have received if there were a team opt-out (and buy-out) after year three? I’m sure someone has researched this…somewhere, but I find it to be an interesting question, particularly in this era of Dodgers money.

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