FanPost

Free Agent & Extension Contracts for Position Players and Pitchers: A Final Look

Over the last couple months, I've been looking at the value teams receive when they give out large contracts to free agent players, and comparing that to the value received when teams give out similarly large contract extensions covering, or largely covering, free agent eligible years (and any arb years included in the extensions were excluded from the analysis). Part I covered pitchers (and includes a detailed explanation of the methodology) and Part II (updated) covered position players.

Due to the nature of the cutoff - total guaranteed contract value of $70-million in 2010 inflation-adjusted dollars for position players and $50-million for pitchers - generally the only contracts included were those of star players who were signing a contract covering their prime years. In other words, it represented only a very small subset of the total players. While putting together that list, which involved checking the contract details for over 850 players, I also compiled a second list of players who signed smaller contracts in order to compare the value received from the largest contracts to the value received from smaller, though still substantial contracts. I refer to these contracts as Tier 2 contracts, and the largest group as Tier 1.

Contracts were included on this list if the total value was less than the initial threshold value, but more than half of that value. Therefore, for position players the Tier 2 contracts range from $35-70 million in 2010 constant dollars, and for pitchers they range from $25-50 million. While the other players were stars, these players generally fall into two categories - solid to above average regulars signing contracts in their primes, and older players who are still star performers, but who no longer command the years needed to get above the $50 million or $70 million thresholds (though the AAV is still substantial). I expected to see similar trends, if not quite the same results in this group of players and contracts, but there were some surprises. Rather than just throwing the detailed tables with totals as I did previously (which are below), I have summarized the new data and old data to allow for easier and more meaningful comparisons:

Summary1_large

For greater clarity, the six numbers reported for each type of contract are (1) the total number of contracts meeting the criteria; (2) the total nominal (unadjusted for inflation) salary of those contracts; (3) the value the teams realized on those contracts, expressed as the dollar value of on-field production divided by nominal salary, weighted by nominal salary; (4) the standard deviation of the return on the contract, a measure of risk; (5) the total salary of the contracts, in constant 2010 dollars (that is, adjusted for inflation); (6) the value realized by teams on the contract, weighted using the constant 2010 salary rather than the nominal salary. The "Actual" and "Proj" columns account for the fact there are some incomplete contracts - the actual columns only record performance through 2011, whereas the projected columns include the duration of the contract by projecting future performance based on the three previous years.

I was pretty surprised by the results of the Tier 2 players. In terms of position players, the free agent return was similar for Tier 1 as for Tier 2, although th standard deviation was higher. Interesting, this suggests that in terms of the range of possible returns, larger contracts are actually less risky (of course, there's still the risk of concentrating a larger percentage of the payroll. Normally, of course, one should want a higher return for assuming more risk (though again, this probably doesn't accurately represent all total contractual risk). However, the contract extensions performed for Tier 2 players performed much worse than the Tier 1 players - basically in line with the free agent contracts, whereas there was a large gap in contract performance among Tier 1 players that favoured extensions. Why is this? Anecdotally, it appears teams have a terrible, terrible tendency to reward solid but unspectacular players with extensions around a year before they hit free agency. Usually, this coincides with a good season from the player around age 30. This seems like a bias to be avoided - keeping a solid player too long and paying for past glories rather than future likelihoods.

In terms of the pitchers, there is a similar pattern. The Tier 2 contracts actually deliver a little better value, but they also appear to be slightly less risky, so this makes sense. Again, however, we see that the valuation gap between free agents and contract extensions is much smaller (though still existant, unlike for position players). There's a similar story here - solid players on the wrong side of their primes being rewarded for past solid performances, rather than what they are likely to contribute in the future.

A few random thoughts. First, there's nothing as valuable as a superstar player willing to sign a contract extension covering free agent years without testing free agency. The Jays' experience with Vernon Wells (and to a lesser extent, Alex Rios) aside, these tend to work out the best in securing baseball production at a reasonable price, nevermind the effect of keeping franchise players. Second, the number of pitchers signing Tier 2 contracts has slowed to a trickle in recent years. Maybe it's just a cyclical trend (it happened earlier in the decade, only to be followed by a deluge of [largely irrational] signings from 2005-07), but maybe it's indicative of the changing thinking of front offices. Edwin Jackson seemed to be a slam dunk to sign a contract in this range, but in the end his multiyear contract market was poor. Third, the old adage that you can never have enough pitching is true - and having to go find it in the free agent market is setting yourself up to receive poor value. Look at the Rays - their success has been built on having a plethora of young starting pitching, and not needing to buy any on the market. The Jays' pitching heavy drafts seem especially smart in terms of replicate that model and maximizing budget space. But there's also a second part - knowing when to let guys go, even if they've been solid contributors in the past. The Jays could face a difficult decision in this respect with Dustin McGowan at the end of the season.

Finally, I had one other thought. I originally decided to average fWAR (Fangraphs) and rWAR (Baseball Reference) since they sometimes has very different views of individual players. However, the valuation of the on-field performance (and inflation adjustments) were based off the linear $/WAR numbers calculated by Fangraphs, which are presumably based off fWAR. As jessef examined, fWAR and rWAR have different replacement levels (rWAR is higher), which could significantly affect the valuation. While I wanted to smooth out differences for individual player contracts by averaging both, that's not really necessary when aggregating a pile of contract. Therefore, I reproduce the same table, however the calculations are only based off the fWAR accumulated by players:

Summary2_large

Basically, the trends and relative valuations are generally similar, but the Tier 2 player contracts return significantly better value using just fWAR, and this makes sense. Consider a league average player making $10 million in 2011 ($4.5M/fWAR). He would be worth 2.5 fWAR, but only about 2 rWAR. Using just fWAR, that production is worth $11.25 million, but only about $10 million using an average of the two - a difference of around 10%, similar to what we observe generally for Tier 2 players between the two tables. My guess would be the difference is not as stark for Tier 1 players simply because the lower replacement level is relatively less important. Therefore, my thoughts are that if evaluating an individual contract or player, an average of fWAR and rWAR is better to smooth out differences between them (spliting the difference on FIP vs. Runs Allowed for pitchers), but when considering aggregate value of different classes of players and contract types, most of this idiosyncratic noise is eliminated and it's best to just use fWAR since the valuation is just based on $/fWAR.

Below, I present detailed tables listing all the players and contracts, as done previously. The one difference is that for the tables projecting performance for uncompleted contracts, I didn't show all the completed contracts since it's redundant as the numbers don't change - but the totals include all contracts. So the good, bad and ugly contracts can all be seen - and there's plenty of red ink. One last thought - while compiling these two tiers of contract, I've sort of made a third list of what I would deem Tier 3 contracts - between 25-50% of the Tier 1 cutoff, essentially the next step down. It's not comprehensive but there's enough contracts that it wouldn't need to be (to the extent there's no selection bias, and I can't think there is - if I came across a contract while digging through to compile the others, I added it, I just didn't dig deep for every possibility as I did for the other two tiers). Also, there's greater variation in the types of contracts included. I don't intend to run those numbers at this point (frankly, I'm tired of digging for contract details), but I may at some point or if enough people were interested in the results or thought they would be significant. It's really not that much more work, compared to what I've done to this point.

FREE AGENT CONTRACTS - POSITION PLAYERS

Actual Value Through 2011

Fa_pp_actual_large

Projected Value for Uncompleted Contracts (Actual and Projected Totals)

Fa_pp_projected_large
CONTRACT EXTENSIONS COVERING FA YEARS - POSITION PLAYERS

Actual Value Through 2011

Extension_pp_actual_large

Projected Value for Uncompleted Contracts (Actual and Projected Totals)

Extension_pp_projected_large

FREE AGENT CONTRACTS - PITCHERS

Actual Value Through 2011

Fa_pitchers_actual_large

Projected Value for Uncompleted Contracts (Actual and Projected Totals)

Fa_pitchers_projected_large

CONTRACT EXTENSIONS COVERING FA YEARS - PITCHERS

Actual Value Through 2011

Extension_pitchers_actual_large
Projected Value for Uncompleted Contracts (Actual and Projected Totals)

Extension_pitchers_projected_large

X
Log In Sign Up

forgot?
Log In Sign Up

Forgot password?

We'll email you a reset link.

If you signed up using a 3rd party account like Facebook or Twitter, please login with it instead.

Forgot password?

Try another email?

Almost done,

Join Bluebird Banter

You must be a member of Bluebird Banter to participate.

We have our own Community Guidelines at Bluebird Banter. You should read them.

Join Bluebird Banter

You must be a member of Bluebird Banter to participate.

We have our own Community Guidelines at Bluebird Banter. You should read them.

Spinner

Authenticating

Great!

Choose an available username to complete sign up.

In order to provide our users with a better overall experience, we ask for more information from Facebook when using it to login so that we can learn more about our audience and provide you with the best possible experience. We do not store specific user data and the sharing of it is not required to login with Facebook.

tracking_pixel_9351_tracker