Felix’s Contract From Felix’s Perspective
We’ve talked about what kind of deal the M’s should offer Felix this winter to try to avoid arbitration and buy out a couple of his free agent years, coming to the conclusion that something like 4 years, $60-$70 million should be their target offer. However, let’s take a look at what Felix should do, if we assume that he’s simply interested in maximizing total future value.
He’s arbitration eligible the next two years, then hits free agency as a 25-year-old. Based on historical comparisons, I’ve estimated his arbitration payouts at $10 million and $15 million each of the next two seasons. If he stays healthy and continues to pitch well, I’d expect him to sign the biggest free agent contract for any pitcher in history. For this purpose, I’ve assumed that he’ll get an eight year, $204 million contract, giving him an average annual salary of $25.5 million per season from 2012 to 2019, though with the salaries escalating at $1 million per season throughout. That would give Felix these estimated yearly payouts for the next 10 years.
2010: $10 million
2011: $15 million
2012: $22 million
2013: $23 million
2014: $24 million
2015: $25 million
2016: $26 million
2017: $27 million
2018: $28 million
2019: $29 million
His expected earnings over the next ten years would be $229 million. If we use a 5% discount rate to calculate net present value, the NPV of those cash flows over the next ten years would be $171 million. However, the actual worth of those years to Felix is less than that, because of the risk he’s bearing over the next two seasons before the big contract kicks in.
Let’s distribute the possible outcomes by probabilities in order to recalculate actual value of those potential cash flows to Felix this winter, including assumed risk.
60% – best case scenario, $171 million NPV
25% – nagging injuries reduce value of free agent offer by 40%, $112 million NPV
15% – significant injury eliminates big offer, career derailed, $23 million NPV
This is a pretty broad overview, given that there are more than three potential outcomes, but I think we can use these generalizations to get us in the ballpark of the probabilities of the scenarios that could occur. Given the present value of those odds, we could reclassify the expected value of Felix’s next ten seasons to be worth about $134 million to him right now.
In other words, we’d suggest that Felix would be willing to take about 80% of his best case scenario NPV for eliminating the risk of injury before he hits free agency. What would a $134 million NPV offer look like in total value? About $178 million over 10 years, with annual payouts going 9/13/16/20/20/20/20/20/20/20.
If Felix is only concerned about getting set for life and is willing to negotiate away his risks for the next two years, the M’s could potentially look him up with an offer in the 10/180 range. Now, its unrealistic to think that either side would be looking for a ten year deal, so perhaps something more like 7/130 would be a deal more along the lines of what Felix is looking for – that would provide a similar NPV while still allowing him to sign another contract before he retires, if he continued to pitch well over the next decade.
From the M’s perspective, they’re going to want to do something like 4 years, $60 to $70 million. From Felix’s perspective, he’s probably going to want something like 7 years, $140 to $150 million. That’s a big gap to overcome.
I wish i could be more optimistic about this getting done, but Felix is at the point where he doesn’t need to take a short term deal anymore, and long term deals for pitchers are historically bad ideas. Trying to find middle ground is going to be a challenge.