It's money that matters

Bryce Harper could bring Cards' fans a great present this Christmas or he could end up being a grinch.

The purpose of this piece isn’t meant to be specifically about the Cards’ attempt to sign Bryce Harper this offseason but is more meant to be a general comment about fans’ perceptions about similar long-term contracts. Fans often make 2 mistakes when attempting to evaluate the merits of long-term contracts signed by various teams and I want to spend the next few minutes explaining why many of them evaluate them poorly.

I would add a couple of caveats here. First, I’m not speaking specifically about Cardinals’ fans. My guess is that they are neither better nor worse than any other fanbase in evaluating long-term deals. Second, though I am referring to fans, they’re not the only ones guilty of this. The media is often at least as bad as fans are and, though I’m sure it’s less common today than it has been in the past, even front office executives can do a terrible job at this. You’ll recall just a few years ago D-backs’ GM Dave Stewart traded a ton of talent to the Braves in exchange for Shelby Miller and was widely panned for misevaluating Miller’s value. His rationalization for giving up so much for Miller was the bizarre claim that “a year ago Miller was traded for outfielder Jason Heyward, and right now Jason Heyward is looking for $200 million. So we got a guy, quite frankly, if you value it that way, we got great value.” In other words, because Miller was traded for Heyward and Heyward ended up signing a $200 million deal in free agency, Miller was worth $200 million. The point is that fans aren’t the only ones who do a poor job evaluating what players are worth.

The biggest mistakes that fans (and the media) often make are that 1. More years on the contract are always worse for the team than fewer years (sometimes that’s true, but not always) and 2. It is inherently a bad thing for the team if players are not worth the average annual values of the last couple of years of the contract.

Now, these 2 things are related because in general, the complaint is often that teams shouldn’t give player X that 5th year (for example) because he won’t be that good in year 5. For Cardinals’ fans this may become relevant as the team (if expected) chases Bryce Harper and at some point has to decide how many years to offer in the contract. So, in Harper’s case, the complaint may be that the team shouldn’t offer Harper more than 10 years because he won’t be that good in years 11 and 12 since he’ll be 36 and 37 years old, respectively.

Let’s address the concerns one at a time.

First – “Extra years added to the end of the contract are inherently bad for the team.” So, 5 year contracts are worse than 4 year contracts. 10 year contracts are worse than 8 year contracts. And 12 year contracts are worse than 10 year contracts. This is sometimes true but is not necessarily true. It’s not particularly profound to say that the extra years on a contract are often an inducement to the player to sign with the team in the first place but it’s true. As a result, the extra year(s) offered to the player may be the reason the player signs in the first place and the team is very often better with the player on the team even with the extra year on the contract than it is without the player on the team. Is the team really better off allowing the player to sign with a competitor than it would have been offering the player the extra year? Maybe sometimes, but often the answer is no.

The other thing that the extra year often offers is the ability to reduce the average annual value (AAV) of the contract. Sometimes a team can get away with fewer years on the contract but it costs them more money per year. Think something like a 4 year, $80 million contract ($20 M per year) or a 5 year, $90 million contract ($18 M per year). The extra year not only may be the edge the team needs in signing the player but it also, by freeing up $2 million per year, may allow the team to add some other piece that it needs while still remaining under the luxury tax threshold. The team may pay for that with the extra year at the end, but maybe the extra money added in years 1-4 allows the team to add that reliever or spare part at the trade deadline that ends up being the difference between making the playoffs and not. Extra years can be bad for the team but extra years are not NECESSARILY bad for the team.

Second – “player X won’t be worth the AAV on his contract during the last year or 2 of the contract.” So, Bryce Harper may be a $35 million player as a 26-year old in 2019 but he won’t be as a 37-year old in 2030. Thus, the team shouldn’t offer him a contract that includes 2030.

False. There are 2 reasons why this concern is misguided. The first is the fallacious reasoning that it seems to exclude the fact that Harper (or any free agent) is expected to be worth MORE than his AAV in the first few years of his contract. Teams that enter into these long-term contracts with players do so with the expectation that the player will be overpaid at the end of the contract but will actually be underpaid at the beginning of the contract. The point is for the contract value to even out over the course of the contract – not for the player to be paid exactly what he’s worth every year of the contract.

Consider 2 examples for a player we’ll call Hyce Brarper who is going to receive $350 million over 10 years. In the first example, he’s going to receive exactly $35 million each year for 10 years. In the second, Mr. Brarper will receive a contract designed to pay him exactly what he’s worth each year for 10 years. He’ll get $55 million in years 1 and 2, $45 million in years 3 and 4, $35 million in years 5 and 6, $25 million in years 7 and 8, and $15 million in years 9 and 10 -- $350 million total.

From the team’s perspective, there are a couple of problems with the 2nd contract relative to the first. First, you run into the same issues you have from the first concern. The higher AAV in the first few years makes it much more difficult to build a team around Mr. Brarper that helps the team win since it costs the team an additional $20 million in the first 2 years. The second problem from the team’s perspective deals with the time value of money. This isn’t going to be a basic economics lecture but the idea is that present dollars are more valuable than future dollars due to inflation. This article from Fangraphs back in 2017 (h/t to @patrickb2315) shows that MLB contracts have increased in value by an average of 8% per year over the last 10 years and Mr. Swartz estimates that will continue at about 6% per year over the next several. So not only will frontloading the contract make it harder to build a team around the player the team is signing, but it will also cost the team more money in the long run. Now, the team may have to frontload the contract in order to sign the player (as the Cubs did with Heyward) but it’s not to the team’s advantage to do so – even though it also means the player won’t be worth his AAV at the end of the contract.

The bottom line is this: the years don’t matter (well, they do…but not as much as fans and many in the media seem to think). What matters is the money, the total dollar value of the contract. Let’s talk about some examples to illustrate.

One is the example of Josh Donaldson, who recently signed a 1 year, $23 million contract with the Braves. I am one of many who have commented on what a great contract this is for the Braves. Yes, the 1 year is great from the team’s perspective but the $23 million is really the benefit from the Braves’ perspective. Think about it this way. Would the team be worse off if it was a 2 or 3 year, $23 million deal? Of course not. They’d be much better off. They’d save on the AAV each year and, if he stinks in year 2 or 3, they can always release him since it’s a guaranteed contract anyway. The extra years would make that contract better, not worse.

One of the worst contracts the Cardinals have signed in recent years has been Brett Cecil’s 4 year, $33 million contract and most critics point to the additional years as the problem. Again, since the team has to pay him the total amount anyway, there’s no necessity that they keep him on the roster the full 4 years if he continues to stink. On the other hand, if he’s able to turn it around and becomes good again, the team gets the advantage of being able to reduce the AAV of the contract by spreading it out over the 4 years. It’s not the 4th year that’s the problem. It’s the fact that they decided Cecil was worth $33 million.

So let’s extrapolate this to discuss a potential Bryce Harper contract. It’s been estimated that the bidding is going to start at 10 years and $350 million. I think that he will definitely receive at least 10 years and probably will end up in the $360 - $380 million area when all is said and done. Let’s compare a couple of possible contracts. Which of the following is better from the team’s perspective?

Contract 1 -- 10 years, $360 million

Contract 2 – 12 years, $360 million

Definitely #2, right? Even though the contract is longer, the team spends the same amount of money either way but the AAV is lower for contract 2 than for contract 1. This would free up a couple million dollars each of the 1st 10 years to spend on something to help the team win. Now, of course, it appears the last 2 years are free and there’s no way a team could get away with signing a player to contract 2 when another one is offering contract 1. At the same time, however, a team offering those 2 additional years wouldn’t probably have to match the AAV from the team offering contract 1.

So what’s the point as it relates to Harper? The Cardinals should not be afraid to offer an 11th and even a 12th year in order to sign Harper. Contrary to popular belief, those extra years can actually add some real value to the team and may be essential in the team’s effort to sign him. Finally, when evaluating a long-term contract whether it be for Harper, Manny Machado, or anyone else, the assessment as to whether the team “overpaid” or shouldn’t have signed the contract should be based on the money they’ve guaranteed, not the years that they’ve offered. Brett Cecil’s contract is a bad one because of the $33 million they guaranteed him, not the years. If some team – the Cardinals, the Phillies, or someone else – pays too much for Harper it will be because they gave him too much money, not because they gave him too many years.

Thanks to @cardinalsgifs for the great and festive Bryce Harper cover art.

Thanks to all of you for reading.