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slant.gif (102 bytes) From the Desk of the Commish

Commish

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July 6, 2004

Reaping the Benefits of Your Farm

A hot topic of conversation at BDBL South was the difficulty of awarding contracts to former farm players whose option years have expired.  It has been said that this is the most difficult decision a BDBL GM has to make.  How difficult, really, is this decision?  How have these decisions turned out in the past?  How common is it for a team to underestimate or overestimate these players?  How great is the penalty when an incorrect assessment is made?  These are all questions I hope to answer within the next two dozen paragraphs.

There are basically three outcomes of any contract decision: either the contract is too long, too short or just right.  This applies to all players whose option years have expired.  For established players with several years of Major League experience, this decision can seem relatively easy, as their future performances can be more accurately predicted and there is seemingly less risk involved.  However, I believe there is also significantly more risk with established players, as their salaries are usually several times greater than a player coming off the farm.

If a $100k player doesn't pan out as hoped, there is very little risk involved in terms of financial ramifications.  If you sign such a player to a four-year contract, his salary will be $100k, $1.1m, $2.1m and $3.1m during those four years.  The worst-case scenario, then, is that you eat a total of $4.9 million over those four years (the player's full salary over three years, plus half his salary in year four.)

If a $10 million player doesn't pan out as you had hoped, however, the penalty is far more painful.  A four-year contract would mean eating perhaps as much as $25 million over three years.  For example, the Blazers have overpaid for Mike Hampton for two years in a row now, and they are obligated to pay him at least $25 million over the next three years.  Even if a $10m player is signed to only two years, if that player doesn't pan out in year two, it means eating $5 million in penalty money -- which is more than you'd pay in all four years combined for that underperforming farm player in the example above.

Buyer's remorse is extremely common among established veterans, but how often does it happen with rookies?

To find the answer to that question, I began with a list of players that were members of a BDBL farm between 1999-2002, and have racked up at least 20 career win shares prior to this season.  (And yes, this means taking into account all the usual caveats about win shares.)  For the most part, players that have totaled less than 20 wins shares were either not signed long-term or were signed too recently to be properly evaluated.

In total, there are 80 players that fit this criteria.  I then calculated the market values (i.e. the price each player would fetch in the auction if he were eligible) for each of these players using a secret formula inspired by BDBL mastermind Jim Doyle.  Since Jim has now officially abandoned this formula, I can reveal that his formula was to multiply win shares by .35.  I found, however, that the correlation between win shares and actual market price in the auction is improved if you break out hitters (WS * .34), relief pitchers (WS * .36) and starting pitchers (WS * .61).

I then compared current market value to current salary.  Of the 48 players that are still playing under their original contracts, only one (Kaz Sasaki) is currently performing below his market value.  Two players (Kris Benson and A.J. Burnett) were released without penalty under Rule 18.11, and two others (Jeff Weaver and Russ Branyan) were released at a total of $2.6 million in penalty money.

Yes, even Pat Burrell would fetch 66 cents more on the open market right now than he is currently being paid, according to the Doyle Formula.  Based on that limited study, then, it appears that overpaying for farm players is very uncommon in the BDBL.

How about the opposite problem?  What about those players that weren't signed long enough?

Of our original group of 80, there are 32 players that have been released, or whose contracts have expired, since they occupied a spot on a BDBL farm club.  For these 32 players, I took the most drastic example and calculated the player's current salary as if he had been signed to a long-term (more than four years) contract when his option expired.  Of those 32 players, 16 are currently worth less than their salaries would have been had they been signed long-term.  (Meaning their teams made the right decision by not signing them long-term.)  That leaves 16 players who apparently weren't signed to a long-term deal when they should have been.

Three of those players (Gil Meche, Guillermo Mota and Adam Eaton) had negative value in 2003, and since all three were free agents in 2003, not signing them long-term was probably the correct decision to make.  One other player, Wade Miller, was released as a farm player, and wasn't picked up again until he was eligible for the 35-man roster.  That leaves a dozen players that should have been signed long-term, but weren't.  Let's take a look at these dozen players to see if there was a good reason why there were not signed.

(Note: "Salary" denotes the player's actual BDBL salary, "LT Salary" denotes the player's salary had he been signed long-term and "DV" denotes the player's "Doyle Value.")

Jacque Jones

Year Salary LT Salary DV
2000 $0.1m $0.1m $3.0m
2001 Free agent $0.1m $3.7m
2002 N/A $1.6m $3.4m
2003 N/A $3.1m $8.5m
2004 N/A $4.6m $4.8m

For some reason, Jones was released in 2001, despite the fact that he was carrying a salary of only $100,000 and had a market value of $3.7 million.  As you'll see, this is pretty uncommon.

Jason LaRue

Year Salary LT Salary DV
2000 $0.1m $0.1m $0.7m
2001 $0.1m $0.1m $1.0m
2002 $0.1m $0.1m $3.0m
2003 $1.1m $1.6m $3.7m
2004 Free agent $3.1m $3.4m

To be fair, most of LaRue's value comes from his defense, which is very tough to attach a dollar figure to.  In the '04 draft, LaRue went for just $1 million, so perhaps the Doyle Formula doesn't work with defensive specialists.  Given that LaRue could have been drafted for $1 million in '04, it would have been foolish to sign him for $2.1m (or $3.1m long-term.)  So, in hindsight, the Arizona Heat made the right decision when they decided to give LaRue a two-year deal.

Luis Rivas

Year Salary LT Salary DV
2001 $0.1m $0.1m $0.3m
2002 $0.1m $0.1m $2.7m
2003 $0.1m $0.1m $2.0m
2004 Free agent $1.6m $2.0m

Like LaRue, most of Rivas' value comes from defense.  And like LaRue, Rivas was drafted far below (at $500k) where the Doyle Formula predicts in 2004.  So, like LaRue, the Blazers made the right call by dumping Rivas when they did, as they could have picked him up for $500k rather than sign him for $1.1m or $1.6m.

Matt Clement

Year Salary LT Salary DV
2000 $0.1m $0.1m $3.7m
2001 $0.1m $0.1m $3.0m
2002 $1.1m $1.6m $2.4m
2003 $2.1m $3.1m $6.7m
2004 Free agent $4.6m $6.1m

Predicting how a pitcher will perform next year is close to impossible -- never mind predicting how he will perform three or four years down the road.  Just ask Tony Chamra, who spent $9.5 million on Kevin Millwood, or Matt Clemm, who took a $9.5 million gamble on Hideo Nomo.  When Clement's option year expired, he was 25 years old, coming off a year in which he threw over 385 innings over the previous two years.  He was also coming off a year in which he walked 125 batters and threw 23 wild pitches in 205 innings, while allowing 22 homers in a ballpark (San Diego) that is among the best pitcher's parks in baseball.  All things considered, giving Clement a three-year contract at that time was a pretty big gamble.  In hindsight, however, Clement would have been a bargain in each of the next four years.  At minimum, then, Clement's owner was off by one year.  However, his team did save $12.4 million over four years, which more than makes up for that error in judgment.

Adam Kennedy

Year Salary LT Salary DV
2000 $0.1m $0.1m $0.7m
2001 $0.1m $0.1m $3.7m
2002 $0.1m $0.1m $2.7m
2003 Free agent $1.6m $5.8m
2004 N/A $3.1m $4.8m

At the end of his option year, Kennedy was a 25-year-old middle infielder with Ex range, coming off a season in which he hit .270/.318/.372.  Tossing aside the horrible plate discipline, he was a pretty decent hitter for a middle infielder, with 58 doubles over the previous two seasons and some demonstrated ability to hit righties.  Yet he was handed a contract of just one year, then was tossed out onto the open market, where he fetched $5.5 million in the 2003 auction.  In hindsight, it seems unfathomable that Kennedy wasn't given at least two years minimum.  The worst that could have possibly happened is that his team would have had to pay a $500,000 penalty.  Not a huge risk, considering the substantial upside.

Rob Mackowiak

Year Salary LT Salary DV
2002 $0.1m $0.1m $1.4m
2003 $0.1m $0.1m $4.1m
2004 Free agent $0.1m $2.0m

Granted, Mackowiak might not be a $2 million player this year (the Doyle Formula isn't perfect, you know.)  But he did go for $1 million on the free agent market, which is $900,000 more than his salary would have been had he been kept.  Which begs the question: why release an undervalued player?   At the end of his option year, Mackowiak was coming off a season in which he hit .244/.328/.426, with 22 doubles and 16 homers in 385 AB's at age 26.  My guess is that Mackowiak's age, combined with an underwhelming minor league record, caused his owner to come to the conclusion that the $500,000 penalty was too great a risk for too little reward.

Jay Payton

Year Salary LT Salary DV
2001 $0.1m $0.1m $4.8m
2002 $0.1m $0.1m $1.0m
2003 $1.1m $1.6m $5.1m
2004 Free agent $3.1m $5.1m

At the end of Payton's option year, he suffered through the worst season of his career, hitting just .255/.298/.371 in 361 AB's.   And at 28 years old, there didn't appear to be much room for improvement.  Despite his poor performance, however, his GM took a gamble by giving him a two-year contract.  That gamble paid off when Payton blossomed after a trade to Colorado.  This winter, Payton was drafted at $5 million, which is right in line with the Doyle Formula's predicted value.  Though Payton would still be a bargain had he been awarded a long-term contract at the end of his option year, giving him just two years was the right thing to do.  As it stands, the teams that owned Payton from 2001-2003 saved $9.6 million, which isn't anything to sneeze at.

Carlos Lee

Year Salary LT Salary DV
2000 $0.1m $0.1m $3.4m
2001 $0.1m $0.1m $4.8m
2002 Free agent $1.6m $5.1m
2003 N/A $3.1m $5.8m
2004 N/A $4.6m $6.8m

This is a strange one.  Both Lee and Jacque Jones were original members of the Ft. Lauderdale Marlins franchise.  When the franchise changed ownership, Jones was released before his option year had begun, despite the fact that his market value was $3.6m higher than his salary.  That same year, that franchise's ownership awarded Lee with a contract of only one year, despite the fact that his market value was $4.7m higher than his salary.  The following year, Lee was thrown back into the free agent pool, where he was selected in the third round of the draft, at a salary of $5 million.

Jon Garland

Year Salary LT Salary DV
2001 $0.1m $0.1m $0.6m
2002 $0.1m $0.1m $2.4m
2003 $1.1m $1.6m $5.5m
2004 Free agent $3.1m $6.1m

At the end of Garland's option year, he was just 21 years old, and had posted an ERA of 3.69 over 117 innings during the previous season.  That's the good news.  The bad news is that his ERC was 5.16, and he had allowed 16 homers and 55 walks in those 117 innings, while whiffing only 61.  When the potential risk was weighed against the potential reward, Garland was handed a two-year contract.  Had he been given a three-year deal, his salary would be about $3m lower than his actual market value (Garland was drafted during the $5m rounds this winter), and $4m lower than his "Doyle Value."

Michael Young

Year Salary LT Salary DV
2002 $0.1m $0.1m $2.4m
2003 $0.1m $0.1m $3.7m
2004 Free agent $1.6m $7.1m

It's hard to believe today, but when Michael Young's option year expired, his GM determined that he wasn't worth keeping for more than one additional year.  At only 25 years old, it was determined that Young would not be worth $1.1m at age 26, and the potential $500,000 penalty was deemed too steep.  But Young enjoyed a breakthrough year at age 26, hitting .306/.339/.446, and has followed that up by hitting .333/.374/.503 over the first half of this season.  It's easy to look back now and wonder what on earth his GM was thinking.  As mediocre as Young was in his option year (.262/.308/.382), he was still valued at $3.6m more than his salary.  If he had been given a two-year deal, the risk would have been $500,000 in penalty money, while the reward turned out to be $6 million in savings.  But then again, hindsight is 20/20.

Eric Gagne

Year Salary LT Salary DV
2000 $0.1m $0.1m $1.1m
2001 $0.1m $0.1m $0.7m
2002 $0.1m $0.1m $1.4m
2003 $1.1m $1.6m $6.9m
2004 Free agent $3.1m $9.0m

At the end of his option year, Eric Gagne was a struggling, yet highly-regarded 25-year-old starting pitching prospect.  He was coming off a season in which he posted a 4.75 ERA over 151+ innings, but in this case, ERA was a little deceptive.  He allowed fewer hits (144) than innings (151+), struck out 7.7 batters per nine, and walked just 2.7 per nine.  Based on those numbers, his GM decided to give him a two-year deal (or one year without the benefit of 20/20 hindsight.)  And in that second year, of course, Gagne morphed into one of the most dominating relievers in the history of baseball.

Kip Wells

Year Salary LT Salary DV
2000 $0.1m $0.1m $1.8m
2001 $0.1m $0.1m $1.2m
2002 $0.1m $0.1m $3.7m
2003 $1.1m $1.6m $7.9m
2004 Free agent $3.1m $9.8m

At the end of his option year, Wells was 25 years old, and was coming off a season in which he posted a 4.79 ERA through 133+ innings.  His peripherals were not very good: 145 hits, 14 homers, 61 BB's, 99 K's and a MLB-leading 14 wild pitches.  Wells' owner took a two-year gamble, and it paid off when Wells was $6.8m undervalued in 2003.  Unfortunately, he missed out on $7.7 million in savings in 2004.

So what have we learned so far?  For starters, there have been very few cases where a farm player was signed to a contract that turned out to be too long.  And when it has happened, the penalty for that mistake has been very minimal -- often less than $2 million.  The majority of "wrong" decisions have been teams playing it too safe, and giving their player a contract that turned out to be too short.  The "penalty" in these cases was missing out on substantial savings -- often more than $6 million per season.

Of course, we only have five years worth of data so far, so there is no telling how some of the longer contracts will fare over time.  The following table lists the number of win shares that a player must accumulate in order to be worth his salary on the open market:

Salary 1.6 3.1 4.6 6.1 7.6 9.1 10
Hitter WS 4.7 9.1 13.5 17.9 22.4 26.8 29.4
RP WS 4.4 8.6 12.8 16.9 21.1 25.3 27.8
SP WS 2.6 5.1 7.5 10.0 12.5 14.9 16.4

Now, let's take a look at some of the players that are currently signed to a long-term deal coming off the farm club and compare them to the table above:

Mark Prior
Prior has accumulated 29 total win shares already in his brief career, and he has already saved his team a total of $17.5 million over the past two years.  Last season, Prior was valued at $13.3 million, which is a higher dollar value than his salary will ever reach under his present contract.  He is contracted through the 2011 season, and even if he completely falls apart (which is highly unlikely), his salary wouldn't become an overwhelming burden to his team until 2008, when his salary will be $6.1 million.  There is no such thing as a safe bet when it comes to pitching, but Prior is just about the safest there is.

Albert Pujols
Pujols was signed to the longest contract of any player in BDBL history two winters ago, and for good reason.  In just three seasons, Pujols has already saved his team $32.9 million.  In order to be worthy of his $10 million salary in 2011, 2012 and 2013, he will need to accumulate 29 win shares -- a feat he has accomplished in each year of his three-year career.  The only question with Pujols is his real age, though that isn't as much of a factor in this day and age as it used to be.  Even if he falls apart and is worth only half his salary toward the end of his contract, the amount of savings now may justify the amount of overpayment later.

Carlos Zambrano
Zambrano is signed through 2009, which means he will have to rack up 12.5 win shares in the final year of his contract in order to be worthy of his $7.6m salary.  Zambrano racked up 18 win shares last season, and has 10 already this season through about 90 games.   Due to his injury and usage history, he's a bit more of a risk than some other pitchers, but even if he completely tanks, the penalty is not all that high: $3.1m in 2006, $4.6m in 2007, $6.1m in 2008 and $3.8m in 2009.  Plenty of teams carry more dead weight than that on an annual basis.

Mark Mulder
When Mulder's option year expired at the end of 2001, he was considered to be one of the best young pitchers in the game.  His team took the safe path, however, and chose to sign him to just four years.  Over the past five years, Mulder has saved his team $32 million in salary.  He has just one year remaining, and is currently on pace to post 24 win shares -- a market value of $14.6 million, which will be $10.5 million more than his 2005 salary.  Chances are very, very good that Mulder will be worth more than his $6.1 million salary would be next year had he been signed to a contract of five years or more.

Barry Zito
Mulder's MLB teammate, Zito, has saved his teams more money ($36 million) than any other player in the BDBL over his career, with the exception of yet another of his Oakland teammates, Tim Hudson ($44.4 million.)  At the end of his option year, Zito was given a five-year contract, which is due to expire at the end of 2006.  Even though Zito is suffering through the worst year of his career this season, he would still fetch $6 million on the open market if he were a free agent (according to the Doyle Formula) -- which is $1.4 million more than his 2005 salary will be.  In fact, I'd bet that Zito would be still be below market value in 2007 if he were signed for that long.

Alfonso Soriano
Soriano was signed to a 10-year deal two winters ago, before his real age was revealed.   Regardless of his age, Soriano will be hard-pressed to accumulate the necessary 29 win shares eight years from now in order to justify his $10m salary, as he has reached that magic mark only once in his career thus far.  He has consistently been valued around $9 million each year, however, so if he is not worthy of his $10 million salary in 2012, chances are he won't be too overpriced.

Lance Berkman
Berkman was signed to a seven-year deal, at the end of which he'll be paid $9.1 million.   Over the past three years, Berkman has been valued at $10.9m, $10.2m and $8.5m.   He will be 31 years old at the end of his contract, and at the moment he seems like a pretty safe bet to be worth his salary at that time.

Austin Kearns
Probably the most controversial contract ever signed, Kearns was signed to a bold eight-year contract last winter, which means he is due to be paid $10 million in the final year of the deal.  Will Kearns be a $10 million player by 2011?  I say yes.   Everyone else in the league says no.  Time will tell.

As you've seen, the "safe" decision when signing former farm players to contracts is not always the best decision.  As with all decisions we make as BDBL GM's, the potential risk must always be weighed against the potential reward.  The potential risk for farm players is very low, due to their low salaries.  If you guess wrong and sign a player to too many years, you pay a slight penalty, either by keeping a useless player on your roster that is earning a salary of $1.6m or $3.1m, or by paying a penalty of $1m or $2m in order to release the player.

If you guess wrong and sign a player to too few years, however, you pay a much greater penalty in that you are missing out on saving millions of dollars on Draft Day.  In addition to the players listed above, the following players have each saved their teams more than $20 million over their BDBL careers: Freddy Garcia, Mark Buehrle, Randy Wolf, Ichiro Suzuki, Jeff Weaver, Roy Oswalt, Ramon Ortiz, Joe Mays, C.C. Sabathia and Rafael Furcal.

When you have a $6 million player occupying a spot on your roster at the cost of only $1.6m, you are, in effect, "saving" $4.4 million, which you can then spend elsewhere.  The teams that win in the BDBL are generally the teams that get the most production out of their $63.5 million salary cap.  If you pay market value for each one of your players, and you get $63.5 million worth of production out of your roster, chances are your team will not win in the BDBL.

Many teams think nothing of bidding $10 million on a player in the auction, committing themselves to paying the same $10 million salary two years down the road.  This is deemed to be a "safe" gamble, because the player is usually a veteran with a well-established track record and a projectable future.   However, how many times have we seen these gambles fail to pay off?

In the past two auctions alone, we've seen teams get stuck with huge contracts for players such as Vlad Guerrero, Mark Kotsay, Jim Edmonds, Kirk Rueter, Jarrod Washburn, Sammy Sosa, Steve Trachsel, John Olerud, Luis Gonzalez, Adrian Beltre, Mike Sweeney, Garrett Anderson, Andy Pettitte, Tom Glavine, Larry Walker, Kevin Millwood, Shawn Green, Hideo Nomo, Kip Wells, Mike Lieberthal, Jeremi Gonzalez, Tim Salmon, Jose Vidro and Trot Nixon.  Yet these same teams will hesitate to give a young farm player an extra year on his contract out of the fear of being stuck with a $3m penalty several years down the road.

When assigning a contract to any player, a GM should consider the following factors:

  • What is the player's highest potential market value at his peak?
  • How old is the player, and how old will he be at the end of his contract?
  • If everything goes wrong, how much of a penalty would you be willing to pay?

This past winter, I was faced with long-term contract decisions for several former farm players, including Kearns, Sean Burroughs, Juan Cruz and Dennis Tankersley.  Right or wrong, I believe Kearns will be worth at least $10m when he hits his prime.  Since his salary will never be higher than $10m under his present contract, salary is not a concern.  I think once a player reaches 31 years of age, you have to re-evaluate that player on a year-by-year basis, as every player ages differently.  Therefore, I didn't want to lock into Kearns past age 31.  Kearns turns 31 in 2010, which means I can sign him through 2011.  And if everything goes wrong, and Kearns turns into an injury-prone bum, his salary won't begin to hurt me until five years into his contract, when his salary reaches $6.1m.  Even during the final four years of his contract, when his salary will be $6.1m, $7.6m, $9.1m and $10m, Kearns isn't likely to be worth less than $3m, which softens the blow quite a bit.  It is a penalty that I am willing to pay, and in my mind, the potential reward is well worth the potential risk.

For Burroughs, I have doubts that he will ever hit for enough power to be worth more than $8 million on the open market.  Therefore, the most I am willing to pay under a long-term contract is $7.6m, which puts his contract length at six years.   The problem is that Burroughs will be 28 years old in six years, which means he'll be right in the middle of his peak when his contract expires.  If Burroughs becomes another George Brett, I will live to regret not giving him a longer contract.  But if he does become the second coming of Brett, at least I will have enjoyed having him for six years at less than market value.

Cruz and Tankersley were both coming off disappointing seasons.  Both were once top-20 prospects, but both seemed to have taken several steps backward as prospects.  Even if both bounce back to their previous forms, I'm not convinced either will ever be valued at more than $2.1 million.  That puts them in line for a three-year deal.  Age is not a factor, since each will still be in his prime three years from now.  In terms of risk, if both turn out to be duds, I am looking at $3 million in penalties three years from now to release the two of them.   That amount of penalty money is very easy to swallow, especially when you consider the potential reward.  And if I'm wrong, and either one turns out to be worth more than $2.1 million, at least I got a year or two of undervalued performance out of them.

Another important question to ask yourself before making any contract decision is: If I am wrong about this player, how much more would it cost me to get him back?  For example, if I am wrong about Burroughs, and he does develop 20-25 home run power en route to a George Brett-like career, how much extra would it cost me to get him back?  I would estimate that Burroughs' absolute highest ceiling on the free agent market would be $10 million, which means it would only cost me an extra $900k ($10 million minus the $9.1m salary he would have made had he been signed an extra year) to get him back.  Then, not only would I get him back at only $900k more, but I would get him the following season for $900k less than what it would have cost me had I signed him for two extra years.  And as long as I don't trade him, I'm guaranteed to own the first tie-breaker on him when he becomes a free agent, no matter where I finish in the standings.

Finally, if the player in question is not someone you envision building your team around, you should ask the question: What would be the most attractive contract for this player on the trade market?  For example, I could have easily given Cruz and Tankersley four-year contracts, and it wouldn't have made much of a difference to me (in terms of potential penalty money) if I planned to keep both players for all four years.  But since they may become trade bait sometime down the road, the more attractive contract in terms of trade value is a three-year deal, where there is less risk involved for a potential trading partner.  Soriano, for example, has far less trade value under his current contract than he would have if he had been given a shorter contract, simply because teams are leery of taking such a big risk in the latter years of his contract.  If New Milford plans to build around Soriano for the next ten years, his contract is not an issue.  If, however, they plan to trade him, then giving him a ten-year deal was a bad decision.

Without question, these decisions aren't easy by any means, but that is all part of the challenge of being a GM in the BDBL, and these decisions aren't too different than the decisions MLB GM's must make each and every year.  In my opinion, teams have been far too conservative in handing out contracts over the years, as they are too afraid of being stuck with an unwanted contract.  But there are far worse things than having a $3.1 million dead spot on your roster.  It is far worse, in my mind, to let a potential $3.1 million in savings walk away via free agency.  And if you have enough undervalued players on your roster, you can afford to overpay for a player or two.