A Limited Guide to Baseball Contract Analysis
In an era of long-term commitments and ever-expanding mega-deals in baseball, the ability to properly analyze the merit of a contract is extremely important. There are many different approaches to doing such a task, although lots of methodologies have several common themes. While analyzing Xander Bogaert’s recent signing with the Padres in-depth for Pitcher List (article linked here), I hinted at the thought processes and methodologies I use to differentiate between deals. While there is a place for such analysis, the primary goal of The Drummey Angle is to educate the reader so that they can conduct such analysis for themselves, using the axioms of sabermetrics to come to thoughtful conclusions. The difficult part lies in where to start. This article attempts to solve that issue by providing various frameworks to think about problems in contract analysis. The reader will hopefully be able to better understand and evaluate the massive contracts being handed out to stars across the MLB.
Defining the Objective
Understanding the key objective of a contract is crucial in deciding whether the deal can be considered successful. Different teams play to different standards, and such differentiation is necessary for an analysis of contracts. Is the team trying to win now or later? When teams are in different cycles of their building, different contracts are more justified than others based on their approach to winning. These approaches are oftentimes relevant to the extent of their probability of making the playoffs. Ergo, three team types will be established for these objectives - the shoo-ins, the fringes, and the lost causes. They are to be defined as follows:
Shoo-Ins - These teams are almost guaranteed to make the playoffs, regardless of any further signings. The acquisition of a player is only to enhance their already great odds, as well as possibly help establish a base for their future.
Fringes - These teams are not a guarantee to make the playoffs, although such a run is within their grasp. The right move could put them into the postseason. Thus, these teams are willing to sacrifice the future for gains in the present.
Lost Causes - These teams will likely not make the playoffs, even if they made a decent move. Any signing will likely be designated for their potential future success but serves to add little to no extra value now.
Different types of signings make sense for the different types of groups. Some make more sense than others, but the majority of teams aim to be optimal in their approach. Ergo, the need for an explanation regarding what types of deals suit what category.
In considering free agent contracts, the dynamics are somewhat straightforward. The Fringes group can face a potential windfall of cash if they do happen to make the playoffs. If the signing pushes them into October, then the team stands to inherently gain from that deal. Shoo-Ins wouldn’t gain as much, but peace of mind within a club is valuable. The knowledge that the playoffs are assured could yield a slight premium, but not quite as much from the Fringes that stand to gain the most. Lost Causes stand to gain almost nothing from these free agent deals, as the player is likely on the decline anyhow and such immediate extra value serves to almost no benefit to them. Hence, the order in which teams stand to gain from a potential free agent signing is as follows: Fringes, Shoo-Ins, and Lost Causes. Of course, this is solely in regard to free agent contracts - an early extension with consideration to the arbitration process is completely different.
Value of Free-Agent Signing to Team Types: 1. Fringes, 2. Shoo-Ins, and 3. Lost Causes
When extensions are signed, the player is generally up-and-coming and likely has not reached his peak yet. A team can take advantage of this and sign him for less than his free agent market value in exchange for the player’s future financial security in case something goes awry. It is therefore easy to come to the thought that such signings are future-oriented rather than present-oriented. So, how does this switch the value structure? While the value of a free-agent deal is the highest for Fringes, the value of a long-term extension is the lowest. Fringes are specifically focused on the now, and such a future-oriented transaction serves them little, as they are not specifically adding production now and likely locked up a bit of extra cash that could be otherwise spent on the free agent market. Next comes the Shoo-Ins, whose slightly increased view toward the future puts them above the Fringes. Shoo-Ins generally care about the present more than the future due to their current status, but they can afford to delegate some of their funds to secure success in later years. An extension will ensure that an up-and-coming player will continually add value to the team, leading to a better probability of making the playoffs in the case that the team breaks down to the Fringe level. Such a bet provides insurance - if the team can’t make the playoffs now, they still may be able to in the future. Out of everyone, Lost Causes stand to gain the most from the signing of an extension. Being completely future-oriented, an extension ensures a valuable player will be on their roster for years to come. As Lost Causes generally become Fringes in the future, adding value down the road will be tremendously beneficial when a competitive window opens up. The order of value to teams completely switches for extensions:
Value of Extension to Team Types: 1. Lost Causes, 2. Shoo-Ins, and 3. Fringes
Of course, there are other types of deals (such as Minor League Contracts and One-Year Deals) that generally don’t follow the above frameworks in terms of judging value to a given team. These situations are arguably less clear-cut than the prior types mentioned, making the potential benefits to each team type more subject to special situations that go beyond the point of this article for the reader. In wanting a basic understanding of the topic, considering such objectives above should help evaluate the majority of noteworthy signings.
Measures of Evaluation
The origin of sabermetrics can be owed to great minds trying to evaluate the worth of a player correctly. The current state of sabermetrics is using incredible amounts of intellect to attempt to predict the future worth of a player. And while both problems are still being worked on and improved every day, perfection is likely somewhat far (if even possible). For now, barring that the reader has not invented their own ultra-advanced value and predictor system, one will have to settle for the current best guesses of a player’s value and potential value.
To start with value, the primary method of assigning actual win value has been through the statistic WAR (Wins Above Replacement), which assigns value to a player based upon the number of wins they added in comparison to a given fringe Triple-A/Major League player. One win is said to equate to 10 runs, so a player produces 1 WAR for every 10 RAR (Runs Above Replacement) he produces. Major League teams are said to have their own internal system of player value assignment, although WAR serves as a suitable public replacement.
In relation to WAR, the ability to assign a dollar value of an additional Win is crucial in setting the standard for what teams should pay players. Fangraphs has established a basis for valuing a player’s dollar worth through the average free agent spending cost of WAR, as specified in this linked piece. It provides a good guideline to follow, but, as specified earlier, a player is worth a different amount to all teams. A measure could be established to account for distinct team qualities to more accurately specify the value to a given team, although no such measure has really gained widespread acceptance. Ergo, the usage of Dollars per WAR is a safe bet, as it is generally accepted in the sabermetrics community as a sound way of evaluation and can be used for most contract analyses. The basis of the evaluation lies in the idea of whether the team over or underpaid the market value of the projected production of WAR. A contract that pays more than the projected dollar value is considered player-friendly, while a contract that pays less than the projected dollar value is considered team-friendly.
Comparing present transactions to past transactions is another way to assign merit to deals. While something is only worth what one is willing to pay for it, this is often dictated by the matter of what someone else paid. Past deals are often cited in a wide arrangement of dealmaking that spans from eBay bidding to house buying, which makes an application of such logic to the baseball world unsurprising. In applying this, there would need to be similar deals within the past 2-3 years (the more recent, the better) that have similar lengths in contract, similar past production, and, ideally, the same position. If a prior deal fulfills all of these requirements, then it can rightfully be considered comparable and can be used as a precedent to analyze a deal. In using this, one evaluates whether a player was under or overpaid relative to a recent precedent. If Player A and Player B are similar in almost every way in terms of projected production, but Player B is set to earn $50 million less, then one could say that Player B’s deal is team-friendly relative to Player A. To that point, Player A’s deal would be considered player-friendly relative to Player B’s.
Both of these examples serve as a possible method to measure value. They should coincidentally serve as guidelines but not be limited by or necessarily be adhered towards. These methods are dependent on lots of other contract evaluation factors, which makes the consideration of other points of this process so crucial.
The Upside vs The Downside
Any type of contract for baseball players should be thought of as an educated investment. A team is spending on a player (asset) in hopes of the player producing runs for their team (return value). Like any investment, the investors are not entirely certain of the future outcome. A probability distribution represents the possible gains or losses that could be incurred. In a baseball sense, teams commit an “x” amount of dollars to a player in exchange for a set of probabilities that a player will produce a given amount. Most common fans often overlook this point, screaming the age-old insult that “he should at least be able to hit (insert stat of your choosing) if he is getting paid (this much money).” I encourage fans to distance themselves from such a thought - a player is getting paid for the chances that he may hit a certain amount, with the probability of the performance he displays likely factored into the contract. To give a clear visual, a contract should appear like this.
Player A = 4 fWAR