A little over a month ago I presented an article about the value teams receive on large contracts given out to position players, and compared that to how teams fared on similar sized contract extensions covering (or largely covering) free agent years. I found that on average, teams
overpaid the free agents by (edit: careless use of the word, in fact I've taken pains to try and avoid using this word in my conclusions - see comments for detail) received around 22 to 25% less in on-field value (using a linear S/WAR) relative to the salary paid, whereas the contract extensions were more on the order of 4 to 8%. I then looked at the value teams received on large contracts given out to free agent pitchers and contract extensions covering free agent seasons, which revealed a similar trend in that the free agent contracts were even more disasterous, but the extensions more or less delivered fair value.
There were two major differences in how those lists were compiled. First, I compiled the list of position players essentially by starting with Cot's Baseball Contracts list of highest paid players, as well as a few other lists I found by searching, and then added a few others from memory. Of course, this ad hoc method left off a number of players - Mo Vaughn, Albert Belle, and Frank Thomas to name a few prominent players. This introduced bias (when I realized some of the contracts left off, I thought the value would look much worse, but more on this later) which I corrected on the pitcher list by starting with a list of over 300 players who had at least one season of 2 fWAR or more from 1995 to 2011, and checking contract details for each player. Second, with the position players, I established a cutoff of $70-million in total contract value for inclusion on the study. The problem is, in light of 5 to 10% annual salary inflation in baseball, compounded over 15 years, I excluded a number of older contracts that were very large when they were signed. So, for the pitching list, I adjusted the cutoff level depending on the year, so that it stayed around $50-million in real 2010 baseball dollars.
Therefore, I have updated the study to make these two changes. I started with a list of 503 players who recorded at least one season from 1995 to 2011 with 2+ fWAR. The cutoff for inclusion on the list was set to a contract of at least $75-million in 2010 baseball dollars, and I used the same 6.3% average inflation to get the following annual cutoffs:
It should be noted that I did not treat this is a completely hard constraint. In the case of extension contracts which included money for pre-free agent eligible seasons, I used the total guaranteed contract, though I only analyzed the free agent eligible years (Bobby Abreu for example). Also, I'm only looking at completely guaranteed money, but I included a couple contracts that just missed where there was sigificant bonus money or reasonable vesting years.
In the end I came up 31 free agent contracts, and 31 contract extensions. Though I thought that the results might be materially different, the results and result are largely the same. Teams lose about 25 to 28% of the value of free agent contracts (vs. 22 to 25% previously found) and about 6 to 10% of the value of contract extensions (vs. 4 to 8% previously found). Below, I had replicated the same tables found in the previous articles, and since the conclusions are largely the same, I'm not going to bother with a bunch of analysis. If you're not sure what exactly the table or graph is meant to show, check the previous articles via the links above, or here (position players) and here (pitchers). Similarly, I have explained my methodology at length in the previous articles, so there is little point in replicating it here.
Finally, this only covered the truly premium players - roughly 4 position player contracts a year and a similar number of pitching contracts. While these players are generally critical to building winning teams, teams also need players who would be considered more as solid to above average regulars, who command significant contracts, but not nearly this size. Therefore, while compiling these lists, I've also compliled lists of position players and pitchers who got contracts under the respective cutoffs for this lists ($75M and $50M in real 2010 dollars) but got more than half the cutoff value. I will be analyzing the value of contracts as well to see what we can learn about them. The hardest work is done (looking up contracts for 800 payers), so I hope to have that done later this week.
FREE AGENT CONTRACTS
Actual Value Through 2011
Actual and Projected Value
Performance of Contract against Year Signed
Performance of Contract against Contract Size
Performance of Contract against Age of Player at Beginning of Contract
One note here - though the link isn't terribly strong, it would seem that the younger the player is, the better the value received by the value. Theoretically, teams should price in aging and injury risk into their bids, but perhaps they are not doing so to the appropriate extent.
CONTRACT EXTENSIONS COVERING (LARGELY) FREE AGENT YEARS
Actual Value Through 2011
Actual and Projected Value