Felix’s Contract From Felix’s Perspective

Dave · September 3, 2009 at 7:31 am · Filed Under Mariners 

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.

Comments

99 Responses to “Felix’s Contract From Felix’s Perspective”

  1. SonOfZavaras on September 3rd, 2009 7:41 am

    What about a five-year deal with a mutual option for a sixth? For the same money as above.

    Call it 5 years, $94 million. And if he/we so decides, the sixth year escalates it to $119 million.

    If he follows that deal to the letter, he’s set for life and ready for another big contract- from us or someone else- at age 29.

    I think a deal like that sells us as being committed and loyal to him, but doesn’t go too far into “really-bad-idea” amount of years.

  2. Dave on September 3rd, 2009 7:48 am

    The NPV on a 5 year, $94 million deal is just $80 million. In his best case scenario, he’s getting $94 million over the next five years, plus he’s getting the five years after that guaranteed as well.

    You’ll have to give him more money than that to get him to give up the last five guaranteed years.

  3. Chris_From_Bothell on September 3rd, 2009 7:48 am

    Can’t you load a deal with incentives so that to Felix it looks like a long-term deal, but if he misses targets due to injury or performance it ends up being that middle ground you’re talking about?

  4. mymrbig on September 3rd, 2009 7:56 am

    How about a 7-year, $130 million contract, and give Felix and opt-out after the 4th year that he has to excercise a year in advance? It basically amounts to giving him a 4-year, $65 million deal (which the M’s would love) with a 3-year, $55 million player option (which Felix would love)? Structure would be: $10 M, $15 M, $20 M, $20 M, $20 M, $18 M, $17 M.

    This would leave 2 most likely scenarios:
    (1) Felix stays relatively healthy and productive and either opts-out after 4 years (or asks for another extention);
    (2) Felix gets injured and the M’s end up with a 7-year, $135 M pitcher, but at least the contract isn’t back-loaded;

    Forcing Felix to exercise the opt-out a year in advance has a couple advantages. It preserves some trade value for the M’s during the final season. It forces Felix to accept some of the risk with the opt-out (if he gets injured after opting out). It allows the M’s to plan financially a year ahead.

  5. Dave on September 3rd, 2009 7:59 am

    It basically amounts to giving him a 4-year, $65 million deal (which the M’s would love) with a 3-year, $55 million player option (which Felix would love)?

    Too much risk, not enough reward. If you give Felix the right to opt out of the deal if he’s hurt, you’ve just taken on all of the downside and not gotten nearly enough benefit in return.

  6. Dennisss on September 3rd, 2009 8:00 am

    60% + 25% + 25% = 110%. I think you mean either 50-25-25 or 60-20-20.

  7. Dave on September 3rd, 2009 8:03 am

    Can’t you load a deal with incentives so that to Felix it looks like a long-term deal, but if he misses targets due to injury or performance it ends up being that middle ground you’re talking about?

    It might take something creative like that to get a deal done. If I was advising Zduriencik on what kind of offers to make, I’d be pitching things like 7/150 with annual buyouts on the last three years at 50% of the value of the remaining contract if he pitches less than 180 innings in the prior season.

    That way, the M’s worst case scenario would be something like $115 million over 4 years, which is bad but not franchise crippling, while Felix doesn’t leave much money on the table as long as he stays healthy, and he’s going to get paid at least $10 million a year even if he gets hurt.

  8. mymrbig on September 3rd, 2009 8:04 am

    Teams and players often have mutual options, so how about a mutual opt-out? 7-year, $130 M with a mutual opt-out after the 4th year (exercised after 3rd year).

    Because it is a mutual opt-out, both teams need to opt-out for Felix to become a free agent. However, if only 1 party opts-out, it has ramifications on the contract.
    (1) If Felix opts-out but the team doesn’t, than the last 3 years of the contract escalate (maybe $21 M, $22 M, $22 M instead of $20 M, $18 M, $17 M). This probably happens if Felix stays healthy and productive and the team wants to retain him.
    (2) If the team opts-out but Felix doesn’t, then a buy-out (maybe $5 M) kicks in. This probably happens if Felix has a pretty bad injury or becomes ineffective.
    (3) If both opt-out, then Felix doesn’t get a buyout and he becomes a free agent. This probably happens if Felix stays healthy and productive, but for whatever reason the M’s don’t want the financial committment for the last 3 years of the contract.

  9. Dave on September 3rd, 2009 8:04 am

    60% + 25% + 25% = 110%. I think you mean either 50-25-25 or 60-20-20.

    It was a typo – 60/25/15 are the numbers I used for the calculations.

  10. mymrbig on September 3rd, 2009 8:08 am

    I know some people are adverse to player opt-outs. But the rewards for the team is if a player gets injured in years 5, 6, or 7. If you accept the premise that a pitcher is more likely to get injured as each year of the contract progresses (more wear & tear, plus the guy is getting older), then to some extent you almost hope he opts-out.

    Another option to mitigate risk might be to make the 7th year a team option with a reasonable buyout.

    If I were the Yankees, I think I’d be hoping CC opts out, because its pretty unlikely he’ll survive the whole contract healthy.

  11. thurston24 on September 3rd, 2009 8:10 am

    Dave, great post. Howver, I am curious why you only utilized a 5 percent discount rate? Typically, in business, you would estimate you rate based on your weighted cost of capital, which is at least 8%. If you are not a business, the standard benchmark is the historic gain of the s&p 500. That gain is 12% historically (and that includes the great depression). I do not have the ability to calculate right now (writing this post on my iPhone (the mobile site is awesome)), but the number would decrease significantly.

  12. Safeco Hobo on September 3rd, 2009 8:10 am

    The question I have is how long do the M’s have to work out an extension before they start losing significant trade value? Ideally, they can work out some form of an extension out this winter and this issue will be water under the bridge by opening day 2010.

    But if they can’t, do they refocus their efforts on sniffing out a deal at this winter’s meetings, 2010 trade deadline, 2010 winter meetings, or go for broke and hope something falls in their lap at the very last possible minute (ie: 2011 trade deadline).

  13. mymrbig on September 3rd, 2009 8:11 am

    I should be saying “player option” instead of “opt-out”, and “mutual option” instead of “mutual opt-out”. Its still early.

  14. Dave on September 3rd, 2009 8:19 am

    Dave, great post. Howver, I am curious why you only utilized a 5 percent discount rate? Typically, in business, you would estimate you rate based on your weighted cost of capital, which is at least 8%.

    Right, but MLB is not exactly a typical business. The M’s can’t easily take the money that would otherwise go to Felix and invest it in some non-player asset in order to make a larger profit, since the team has to stay competitive in order for the money to continue coming in.

    My theory is that the cost of capital for an MLB team is lower, because there is a significant spending floor which they can’t really go under without incurring lost revenue. The question for the M’s isn’t “Felix or the S&P 500″, but more “Felix or some other baseball player”, and the ROI on players is lower than the ROI on the stock market.

  15. Mike Snow on September 3rd, 2009 8:25 am

    The gap you describe reminds me a lot of the negotiations with Alex Rodriguez as he was going to free agency.

  16. mw3 on September 3rd, 2009 8:31 am

    Great work as usual Dave.

    I have been giving this situation a great deal of thought over the past couple of years and I’d like to run a hypothetical by you that makes sense to me.

    Felix is in a unique position in that he will be a free agent before he is twenty-six and could be knocking on the door of 100 wins. Situations like this only occur once a generation or two, if ever. So a unique contract offer might get both sides what they want.

    My idea is an extremely front-loaded contract with salaries that de-escalate as Felix gets older and his arm is more worn. The contract could run like this;

    2010: $30 million
    2011: $25 million
    2012: $25 million
    2013: $20 million
    2014: $20 million team option
    2015: $20 million team option
    2016: $20 million team option

    The contract totals are 7/160 million. The NPV (if correctly calculated) would be $138 million. He would be garaunteed $100 million dollars which takes care of the set for life part. If the worst happens, and he flames out, the team is not stuck with the final three years and $60 million. And in a best case scenario the team has Felix in his age 28-30 seasons at a reasonable rate.

    I don’t know if this has ever been tried in MLB, but there are front-loaded contracts in the NFL on a regular basis(signing bonuses). It is logical in that Felix is paid the most money in the years that have the highest probability of good health.

    This will never happen, but it would be interesting to see how a player would respond to this sort of offer. I could see a clever GM offering a contract like this someday, especially to a pitcher.

  17. killer_ewok18 on September 3rd, 2009 8:32 am

    I could never hate Felix as much as I hate A-Rod.

  18. CCW on September 3rd, 2009 8:46 am

    One thing that the analysis doesn’t consider is that most people would “insure” against the 15% option – significant injury – by overpaying for certainty. If I were Felix (and granted, I’m not), I would seriously consider locking in $80M to avoid the 15% chance of only getting $20M, even though $20M is more than 15% of $80M.

  19. Dave on September 3rd, 2009 8:51 am

    Front loaded contracts make no sense in baseball. They only occur in the NFL to get around the salary cap, which is not an issue in MLB.

  20. coasty141 on September 3rd, 2009 8:55 am

    “I’d expect him to sign the biggest free agent contract for any pitcher in history”

    I’m thinking you’re on the right track. It really doesn’t help our chances seeing how Theo has a King Felix poster on his bedroom wall.

  21. Dave on September 3rd, 2009 9:03 am

    One thing that the analysis doesn’t consider is that most people would “insure” against the 15% option – significant injury – by overpaying for certainty.

    Sure – but most people aren’t looking at a $10 million salary for next year as their worst case scenario. There’s diminishing marginal value for each additional dollar at the high end, so Felix’s incentive to insure against losing those isn’t as high as it would be otherwise.

    He’s already set for life, essentially. The question now is how set – does he want to be able to buy five houses or ten? And how much is he worried about losing that ninth and tenth house?

    Probably not enough to give a significant discount beyond what we’ve already discussed.

  22. mw3 on September 3rd, 2009 9:03 am

    I would say front loaded contracts occur in the NFL because only the signing bonus and first year salary are garaunteed. The NFL does not have garaunteed contracts because of the high rate of injury. Pitchers get injured at a much higher rate than position players and that is why a front loaded contract seems logical for a pitcher. In additon, front loading the contract makes its value much higher in actual dollars because of inflation. That should be quite attractive to a player signing a contract. Whether it is attractive enough that the player accepts team only options at the end of the contract is the real question.

  23. Dave on September 3rd, 2009 9:05 am

    It’s guaranteed.

    And signing bonuses are only used to get around the salary cap, since they are weighted evenly over the length of the contract. It’s all cap manipulation.

    Front loaded contracts are pointless in baseball.

  24. mw3 on September 3rd, 2009 9:28 am

    Signing bonuses in the NFL are all about the guaranteed money at the beginning of the contract. Because that is the only money the player is guaranteed to get.

    Yes they are pro rated over the course of the contract to help teams stay under the cap. But, the primary purpose is so the player can get what they can when they can. Before their career is ended on one play.

    Those types of contracts could very well be pointless in baseball, from a team perspective. If I were a player and I could get my entire conract in year one minus the league minimum over the remaining years, I would do it in a heartbeat. Thirty million dollars in 2010 is worth almost twice as much as thirty million in 2019, adjusted for the average headline inflation over the last thirty years.

  25. mymrbig on September 3rd, 2009 9:31 am

    I disagree that front loaded contracts are pointless in baseball. Putting the Felix issue aside, if a team is signing a slugger to a long-term deal, doesn’t it make sense to pay him more for the early years when you expect him to be more productive, and less in the later years when you expect him to experience a decline? Looking at the Giambi, Helton, Teixeira, and Carlos Lee contracts, I think it would have made sense in all of them to pay slightly more in the early years when you still expect the guy to be productive, and less in the later years when you expect the guy to start falling off.

    This has a few benefits:
    (1) If the player doesn’t fall off as much as expected, his contract can be moved more easily.
    (2) If the player does fall off, his contract isn’t as bad of an albatross compared to a back-loaded contract.
    (3) Player’s salary more closely mirros his expected production.

    To me, back-loaded long-term contracts make zero sense unless they are option years. Going back to Felix, I would much rather pay him $25 M in his age 26 or 27 seasons than $25 M for his age 31 or 32 seasons. Plus, if you expect continued salary inflation, than if he does stay healthy, his contract will look that much better at the end.

  26. Evan on September 3rd, 2009 9:47 am

    The NFL does not have garaunteed contracts because of the high rate of injury.

    The NFL does not have guaranteed contracts because the NFLPA is shockingly weak.

  27. bilbo27 on September 3rd, 2009 9:52 am

    mymrbig I agree completley. There is also the fact that it is much easier to predict your revenue / salaries over the next year or two than it is four or five years (or more) from now.

    You might reasonably expect to have the 30 mill (or whatever for whatever player) right now to spend and still have your team where you want it over the next couple years. Further down the road, things are less predictable. In most of these huge deals you can also expect the player to decline near the end and thus paying them less then allows you to get other players to make up for some of the slack. Paying them more later, when they usually are declining, just means you won’t have as much later to pay someone else to makeup for that slack.

    These and the reasons listed by mymrbig, seem to indicate that in certain circumstances, front loaded contracts absolutely do make sense in baseball.

  28. Dave on September 3rd, 2009 9:52 am

    utting the Felix issue aside, if a team is signing a slugger to a long-term deal, doesn’t it make sense to pay him more for the early years when you expect him to be more productive, and less in the later years when you expect him to experience a decline?

    No. The goal isn’t to match performance to salary in each year. I’m sorry that backloaded contracts don’t make sense to you, but they’re perfect financial sense because of the time value of money.

  29. Utis on September 3rd, 2009 9:58 am

    How would you factor in the risk of a double dip recession and a not so rosy economy in the next few years?

    Also, how much will non economic considerations affect this? Does Felix want to be with Seattle long term? Does he long for the bright lights and competitive teams of the east coast like the Red Sox or Yankees? Does he want to be closer to Venezuela? Felix is going to make a lot of money over the next couple of years no matter what. How much is it worth to him to give up on non economic goals. If I am the Mariners, I would be emphasizing the benefits of Safeco for a pitching career. Unlike the Arod situation, Safeco is a plus for career legacy considerations.

  30. mw3 on September 3rd, 2009 10:13 am

    Exactly, the time value of money up front just might entice Felix to sign a long term contract with the Mariners. By the time 2019 rolls around the Yankees will have no problem paying Felix 34-38 million dollars. The Mariners will never be able to match that.

    The whole Idea of the front loading was to come up with a ground breaking contract that Felix might actually be tempted to sign.

    If Felix hits the open market in two years 8/204 won’t get it done. 10/250 will be the jumping off point, barring an injury, and the Yankees and Red Sox will gladly pay it.

  31. Dave on September 3rd, 2009 10:16 am

    No. Because the value of the money to Felix right now is significantly less than the value to the Mariners. The marginal utility of that extra $20 million to Felix in 2010 is not nearly as high as it is to the M’s. Both Felix and the team gain a significant benefit from deferring his larger salaries into the future. That’s why every major league contract on earth is backloaded.

    I’m sorry, but this isn’t an issue that all of baseball is just wrong about and you’ve found the magic key to contract wisdom.

  32. IdahoFan on September 3rd, 2009 10:16 am

    In addition to salary, would Felix want the best opportunity to achieve 300 career wins?

  33. fiftyone on September 3rd, 2009 10:17 am

    Since the post is titled “from Felix’s perspective”:
    So much depends on whether the King wants two whopping paydays or one giga-whopping payday. If he wants 5/105 right now AND another 5/125+ in after the 2014 season, then let’s sign him right now to that extension and deal with 2014 when we get there.
    But if he wants an A-Rodian deal in 2011, there is nothing we can do today about it – short of stupidly offering it to him a year or two early.
    So my fervent hope is that Zduriencik and Co. are busting their butts to find out what Felix’s mindset is. That’s just about as important as the dollar figures.

  34. hoser on September 3rd, 2009 10:18 am

    Wow Dave, some of your posts are so dense and well thought out that it’s like listening to you on the radio, where I just want to slow the speed. The abused quoted paragraph seems to me like the nub.

    The obvious middle grounds are: 4 years, significantly more money; 5 years, more money; and 6 years, slightly more money. The other issues that seem relevant are whether the mariners are going to win and proximity to free agency.

    I imagine that if the Mariners do not compete for the playoffs consistently and make the playoffs half the time, Felix wants out soon. The implications I see are as follows: Felix likes the improvement of the Z era so far, but has incentive to see more before locking up long term. He may be more willing to go for a shorter deal. The other moves that Jack makes may have an impact. I wonder about creative options like 3 years or a player option based on team performance (only on the days when he doesn’t start?)

    As free agency gets closer, I imagine Felix will just want to go ahead and see what he can get.

  35. Jake N. on September 3rd, 2009 10:21 am

    I understand the value and importants of Felix. I would love to see Felix sign a 4-5 year deal here in Seattle. But I have concerns, will this amount of money keep Seattle from adding other pieces it needs. With the 3-4 other spots that need upgrades and contracts like Silva’s, can Seattle afford it? God wouldn’t it be great to just fire Silva and hand Felix his money… I love Felix, I hope there is a way to keep him out of the pinstripes…

  36. Double Suicide Squeeze on September 3rd, 2009 10:21 am

    My question is how high can the Mariners go with their offer to Felix without crippling their budget?

  37. hoser on September 3rd, 2009 10:23 am

    Sorry, I tried to quote the following above. I also missed a period.

    … M’s perspective, … 4 years, $60 to $70 million. From Felix’s perspective, … 7 years, $140 to $150 million.

  38. TumwaterMike on September 3rd, 2009 10:25 am

    As much as I like Felix, I think paying him those numbers are outrageous. He’s one bad pitch away from being hurt and never being effective again. Does Jason Schmidt ring a bell? We won 116 games with middle of the rotation type pitchers and an extremely versatile bench. Lets focus on getting some bats in the lineup, solid pitching and defense and if that means trading Felix, then that’s what we have to do.

  39. fiftyone on September 3rd, 2009 10:26 am

    In addition to salary, would Felix want the best opportunity to achieve 300 career wins?

    Again, something Z needs to know: how important milestones/championships are to Felix, independent from total $ earned. From a purely objective standpoint, a place like Boston, NY, STL or LA makes the most sense if total amount of wins+rings is what you’re after. Comparatively, Seattle is clearly second-tier.

  40. mw3 on September 3rd, 2009 10:35 am

    Deferring dollars into the future only makes them less valuable to the player. Average headline inflation over the past thirty years is a little over four percent. Taking the money now and investing it like thurston24 suggested gets you an average yearly return of 12% and that is adjusted to core inflation(lower than headline). If long term trends hold, over a span of ten years you could take half the total value of a contract invest it and end up with considerably more than the total value of the contract paid out with modest yearly increases.

    Basicaly inflation eats the raise you recieve each year. 10 million dollars now is worth more than 15 million ten years from now in actual dollars. And it has the potential to be worth considerably more if invested wisely.

  41. mymrbig on September 3rd, 2009 10:45 am

    Dave said:

    I’m sorry that backloaded contracts don’t make sense to you, but they’re perfect financial sense because of the time value of money.

    Or are you being condescending for no reason while falsely assuming that the time value of money wouldn’t be factored into my proposal? I’m not saying the end dollar dollar amounts of the contract would be identical if you were frontloading a contract instead of backloading.

    I’m glad they make perfect sense to you, but I wonder how the Rockies feel about backloaded contracts when paying Helton $19.1 M in 2011? Or the Cubs paying Soriano $18 M annually starting in 2010 after only paying him only $9 M in 2007 and $13 M in 2008? Obviously those are bad contracts, regardless of the backload. But backloading them makes them immovable and even more crushing for a team’s future budget.

    Look, I’m not by any stretch saying that all contracts should be frontloaded, and the fact that you seem to think that is what is being argued about seems to be a rather illogical jump. But I think in some situations it would work for teams, and the fact that it NEVER happens means there is probably some efficiency to exploit for the right player.

    And the discussion doesn’t really matter when you are the Yankees or Red Sox and have money pouring out your ears. Matters a lot more to the teams outside the top 3-4 in payroll. Like the M’s. Backloading a contract too badly can kill your budget in the future. Kill.

  42. hoser on September 3rd, 2009 10:51 am

    I think the fans want interesting, fun games, a good chance to win and players for whom they feel a connection. While trading Felix like Jake N. suggests may be the best for the team, I shudder at the ticket sales implications. I think the homegrown hero story is golden for the M’s. I think the potential payoff justifies some risks.

    The possibility of having Felix be a Seattle icon like Edgar or Griffey now that he came back is useful to retain fans and players. I shudder at the thought of getting rid of Felix and watching Silva trot out there. It would be like being a Toronto fan and seeing Roy H traded while Wells stays. Blech. Growing up, I was a Mets fan, and I loved that they had Tom Seaver giving them a chance to win, no matter how bad the rest of the team was.

  43. Dave on September 3rd, 2009 10:53 am

    Backloading a contract too badly can kill your budget in the future. Kill.

    Frontloading kills it in the present. Which is why it never happens.

    This whole conversation is dumb. Back to Felix – you can live in fantasy land on your own time.

  44. mymrbig on September 3rd, 2009 11:05 am

    This whole conversation is dumb. Back to Felix – you can live in fantasy land on your own time.

    Pardon those of us commenters for trying to think outside the box a little. I’m surprised you are giving it such a cool reception. But the topic has certainly been exhausted at this point.

    Don’t know why I was going to bat for it anyway, that idea wasn’t my baby. I just don’t like the out-of-hand rejection.

    Any thoughts on my mutual option idea with escalator clauses if Felix declines/M’s exercise and a sizeable buyout if M’s decline/Felix exercises?

  45. Xteve X on September 3rd, 2009 11:08 am

    “I’m glad they make perfect sense to you, but I wonder how the Rockies feel about backloaded contracts when paying Helton $19.1 M in 2011? ”

    They’re due to pay him $16.6 mil in ’10 so not that much of an increase, they’ve been overpaying Helton for years … Now I agree Helton’s contract is stupid (and Zito’s is even worse) but since baseball contracts are fully guaranteed then you want to backload as much as you can because of the decreased value over time. Frontloading isn’t much of an enticement to the player or the team from a negotiation standpoint.

    “While trading Felix like Jake N. suggests may be the best for the team, I shudder at the ticket sales implications. I think the homegrown hero story is golden for the M’s. I think the potential payoff justifies some risks. ”

    We don’t know what the M’s could get back in a prospective trade though. As long as teams are successful they can absorb the loss of almost any individual player. No franchise should know that better than this one.

  46. coasty141 on September 3rd, 2009 11:12 am

    “baseball contracts are fully guaranteed”

    Baseball contracts are not fully guaranteed.

  47. eponymous coward on September 3rd, 2009 11:41 am

    We won 116 games with middle of the rotation type pitchers and an extremely versatile bench.

    And the Diamondbacks won a championship that year, not the team that won 116 regular season games, despite a manager making some very questionable decisions in the playoffs, because they had a great 1 and 2, even though Miguel Batista was their 3.

    Top of rotation pitchers become more important in the playoffs due to off days and rotation shortening compared to the regular season, and if your goal is to actually win playoff series, you need one.

  48. Trev on September 3rd, 2009 11:42 am

    My recollection is that pitcher contracts longer than 4 years can’t be insured. (Wasn’t this the Pedro-NYM scenario?)

    If a Felix contract could be insured, how does this affect the M’s balance sheet?

  49. BLYKMYK44 on September 3rd, 2009 11:44 am

    Regardless of some of the good points that Dave made. Aren’t backloading contracts smart cause you can always try and get someone else to pay at least part of the money in those final years if things don’t work out?

  50. Mariner Fan in CO Exile on September 3rd, 2009 12:05 pm

    I’m not feeling warm and fuzzy here, Dave. I do think some middle ground could be reached, but I agree it will take some creativity so that Felix and company feel he’s not leaving much on the table.

    I don’t actually feel better about Z getting it done over Bavasi. That’s really a comfort, though, since Bavasi might have overpaid, where Z is likely to go as long as he can to make it happen for a reasoned amount/no. of years, but trade Felix for a haul if it is clear time is up to get something done. I will weep and laugh at the same time if that happens, I suspect.

    If there is a way to make it happen for an amount/term that makes sense, I feel we are in pretty good hands. If there is not, I am pretty sure we’ll be glad we aren’t the ones giving him the contract he ends up with.

  51. Alex on September 3rd, 2009 12:07 pm

    If we were to sign Felix to a long term, $20M+ a year contract, there is a huge risk of him getting injured and us being in the hole for a long time. I’d rather sign a 5 win a year position player to that kind of deal that a 5 win a year pitcher, the risk is lower.

    I’d be happy to see the Mariners trade Felix this offseason or at next years deadline for good value, or to sign a shorter contract if they can pull it off. But the mega contract is an enormous risk.

  52. craigrow on September 3rd, 2009 12:15 pm

    Excellent work. This reasoned, rational and analytical approach you’ve laid out stands in stark contrast to the dialog I’ve heard on this subject from our local radio and newspaper outlets. Thanks for doing the math. :)

  53. Liam on September 3rd, 2009 12:18 pm

    What impact, if any, does Roy Halladay have on Felix’s trade value if they are both on the market this Winter?

  54. Soonerman22 on September 3rd, 2009 12:37 pm

    [spelling, look them up on Cot's Baseball Contracts]

  55. Breadbaker on September 3rd, 2009 1:18 pm

    Good link there. I usually looked them up on Baseball-Reference.com, but this is far better.

  56. Pine Tar on September 3rd, 2009 1:22 pm

    I am not convinced of the underlying premise that we have to get something done on Felix’s contract this winter. If GMZ is really as good we say he is, this team should be a serious contender in 2011. And if that is the case the financial picture will be substantially improved, especially our payroll. Why not wait for the 2011/12 off-season and compete with the Redsox and Yankees for his services.

  57. arbeck on September 3rd, 2009 1:39 pm

    Pine Tar,

    Because we can’t. If we allow Felix to get to free agency, he’s going to get a $200 million contract presuming he’s healthy. (and we probably don’t improve our financial picture that much if he’s not healthy and winning)

    The Mariners are not a low payroll team, but they are not the kind of team that can make a $200 million gamble on a pitcher.

    If they don’t sign Felix this off season, they are very unlikely to do it/

  58. Liam on September 3rd, 2009 1:40 pm

    Why not wait for the 2011/12 off-season and compete with the Redsox and Yankees for his services.

    One of Dave’s recent comments. Just think about what the Yankees and Red Sox would offer and then the Mariners have to beat that.

    And that’s why, if they can’t get Felix to sign a reasonable 4 or 5 year deal this winter, the M’s will need to trade him, because getting in a bidding war with Boston and New York that will result in a ~$200 million contract is a bad idea.

  59. Stunasty on September 3rd, 2009 2:21 pm

    If we can’t sign him to a 4 or 5 year deal then we have to trade him this offseason. Buster Olnley did a piece on this last week and made a some valid points. According to Onley Felix’s agent is asking for a 8yr deal worth 180 mil and if we aren’t willing to pay their are many teams lined up that will. Felix’s trade value is at an all time high right now he has 2yrs left on his contract and we could get a Bedard like deal except this time we come out on the right side. We could fill some big holes in our lineup with young prospects imagine what the Z man could bring in!!!

  60. G-Man on September 3rd, 2009 2:32 pm

    If both player and team behave logically, front loaded contracts are not always pointless. But I am asking a lot, I know.

    I am leaving out the agent, anyway, and that’s a big factor. As I understand it, an agent gets his percentage of a long-term contract even if the player wants to dump him (right? wrong?) If this is correct, this motivates agents to demand the largest dollar figure, meaning maxing the length in years.

  61. GarForever on September 3rd, 2009 2:34 pm

    Tumwater Mike said:

    We won 116 games with middle of the rotation type pitchers and an extremely versatile bench, etc….

    To which eponymous coward replied:

    Top of rotation pitchers become more important in the playoffs due to off days and rotation shortening compared to the regular season, and if your goal is to actually win playoff series, you need one.

    I agree more with eponymous coward, and it’s also worth bearing in mind that while the M’s starting rotation that year consisted of guys who over the course of their careers may have proved to be “middle-of-the-rotation” types, out of that rotation they had essentially 2-1/3 starting pitchers (including Pineiro’s 11 starts) who played as if they were front-line starters that year, by ERA, WHIP, BAA (three stats I know are out of favor here, but still), along with their FIP in 2001.

    F. Garcia 3.05/1.12/.228/3.48
    J. Moyer 3.43/1.10/.240/4.17
    Pineiro 2.03/0.94/.191/2.86 (!)

    Moyer’s numbers are somewhat inflated by a bumpy first half of the year. He was pretty dominant from the middle of July on. In addition, even Sele had a 4.31 FIP, not exactly terrible for the AL. So while Garcia, Moyer, and Pineiro may not be career-long aces, they all caught lightning in a bottle that year and all pitched like they were.

    In other words, while it’s obviously important to add more offense and continue to find defensive gems to make the team competitive overall, pretending that a dominant team can be so without a stud starter is, I think, a bit naive. And it is difficult to imagine winning a title without one, as eponymous coward indicates.

    Therefore, I think it’s worth it for the M’s to try to lock up Felix for at least a few extra years beyond his free agency eligibility. Like Dave, however, I am not optimistic about the gap between what the M’s might be willing to commit to and what Felix and his agent perceive as his market potential.

  62. G-Man on September 3rd, 2009 2:35 pm

    I long for the edit function.

    My second paragraph’s point was meant to be independent of the first’s, but I inexplicably tried to connect them.

  63. Liam on September 3rd, 2009 2:46 pm

    With Erik Bedard getting hurt, Felix should know first hand about the risks of waiting two years to cash in.

  64. Breadbaker on September 3rd, 2009 3:01 pm

    With Erik Bedard getting hurt, Felix should know first hand about the risks of waiting two years to cash in.

    Technically, that’s second hand. Bedard knows first hand. As does Ben Sheeets.

  65. Pine Tar on September 3rd, 2009 3:16 pm

    Liam, Stunasty & Arbeck:
    I just don’t see how this is so black and white for every one. Two years is a long way away. I agree that signing him for 4 or 5 years this off season in the best scenario. But, I don’t see how the only alternative is to trade him. Let me put it this way, If Felix was a free agent after this season and we signed him for a 2 year $25 million deal we would all be ecstatic.

  66. Xteve X on September 3rd, 2009 3:24 pm

    “Baseball contracts are not fully guaranteed.”

    How so … I know there’s buyouts, but what are the chances of buying out a 25-or-so year star level player after signing him to a 4-5 year deal?

    It’s definitely not like the NFL where you can sign a guy to a 7 year deal and cut him the following year.

  67. lokiforever on September 3rd, 2009 3:25 pm

    Pine Tar

    Trading him is not the only alternative, but the 2nd best alternative to signing him to a 4-5 year deal. We would be able to get all our players back from Baltimore if we traded him next year. We’d get slighly less than that if waited a year, and then just a draft choice if we let his Arb years run out.

  68. MarinerFan on September 3rd, 2009 3:50 pm

    A 4-5 year deal sounds nice, but it sounds like people are saying that he will sign if we offer him that. However, Felix makes the final decision and does he really want a deal for 4-5 years? Thoughts?

  69. fiftyone on September 3rd, 2009 4:25 pm

    If you can somehow sign Felix for 4/84 then you’re probably paying close to $4 million for every WAR, assuming Felix has 3 great years and one lousy one ravaged by injury. We should all do cartwheels if the M’s manage to pull that off.
    But again, that scenario only works if he covets the two large paydays more than the insane single payday.

  70. EricL on September 3rd, 2009 4:36 pm

    From a related “sell high” situation… [deleted, off-topic]

  71. joser on September 3rd, 2009 4:39 pm

    One way to look at this:
    In 2006, the Red Sox were willing to pay $51M just to have the right to negotiate with a pitcher who had not yet pitched in the MLB (and the day he finally had a start at Fenway, Felix out-pitched him and held the Sox to a one-hitter). Now, talent is in some ways more precious than dollars, especially for a certain couple of AL East teams, so a haul of prospects is harder to come by than a fat check (unless Bavasi is your trading partner). But if Felix was a Japanese player being posted in the offseason, is there any doubt he’d set a new record for posting fees — or that New York or Boston would be happy to pay it? Except that when that payday comes, it is Felix cashing the check, not the Seibu Lions. That’s what the M’s are up against, and I just don’t see them digging that deep… especially with Carlos “dead albatross” Silva’s contract weighing down the payroll.

    The only question, I think, is this: will the greater number of potential trading partners this offseason offer a better chance for the best possible deal vs the possible frantic desperation of one or two teams at next July’s trading deadline?

  72. 300ZXNA on September 3rd, 2009 5:39 pm

    With the opportunity cost involved with the amount of money for Felix, wouldn’t we be better off trading Felix for prospects and then using that money on other free agents? Felix is about a 5 WAR player, correct? It seems that we’d be able to add a lot more than 5 wins/yr if we received cheap talent in return and then wisely spent the money. What is the incentive to keep him vs trading?

  73. Dave on September 3rd, 2009 5:41 pm

    The assumption that we could trade him for this amazing, Bedard-style haul of players is faulty. The Blue Jays just tried to do exactly that with Roy Halladay and found that teams are not willing to overpay for pitchers anymore.

    The Bedard deal did not set the price of pitching.

  74. MKT on September 3rd, 2009 5:44 pm

    No. Because the value of the money to Felix right now is significantly less than the value to the Mariners. The marginal utility of that extra $20 million to Felix in 2010 is not nearly as high as it is to the M’s. Both Felix and the team gain a significant benefit from deferring his larger salaries into the future

    Sorry to beat the very dead horse, but although this does explain Dave’s viewpoint, I still wonder why the marginal utility (in 2010) is lower to Felix than it is to the Mariners?

    One obvious explanation is that Felix in 2010 is going to be busy playing, and won’t be able to fully spend, much less enjoy, $10M or $20M from his employer. Whereas the Mariners, as a business, would very much like to have that money in 2010 so they can do something with it, invest it if nothing else.

    But — and this is why I still have trouble understanding Dave’s argument — Felix has investment opportunities too. $20M is way more valuable to him in 2010 than it is in say 2015 for the exact same reason: the time value of money.

    If anything, Dave has offered reasons why Felix should value up-front money even MORE than the Mariners do, given his claim that the Mariners have a low return-on-investment, 5%, whereas someone else noted that just about anyone can expect to make more than that on the stock market. (However his claim of a 12% return seems too high, especially given the dis-investment that we will soon start seeing as Baby Boomers retire.)

    In other words, there’s reason to expect that Felix has an even HIGHER time value of money than the Mariners do, causing him to have a greater preference for upfront payments. A weak reason perhaps, but when I look for reasons why Felix should have a lower time value of Money than the Mariners, I don’t see what they are.

  75. fiftyone on September 3rd, 2009 5:46 pm

    Felix is about a 5 WAR player, correct?

    Felix is at 5.5 this year, with a month left. It’s reasonable to expect him to be at 6+ WAR for a while. And those guys don’t grow on trees. If they did, this whole debate would be even more pointless than it already is. :)

  76. fermorules on September 3rd, 2009 5:49 pm

    Great article, as usual.

    Felix Hernandez is a special talent, but if I’m the Mariners, nobody is worth the kind of money it would take to sign him to a long-term deal.

    Also, is it now a given that Felix has turned the corner and will be a dominant starter (if healthy) for years to come? Or is it possible that he could take one step forward (2009) and two steps back (2010-11)?

  77. Dave on September 3rd, 2009 6:20 pm

    $20M is way more valuable to him in 2010 than it is in say 2015 for the exact same reason: the time value of money.

    It isn’t the quantity of dollars that are the determinant of utility in a situation with significant diminishing returns. To any one person, including Felix, the extra dollars are significant luxuries. The difference between a $10 million and a $30 million paycheck, even when viewed as an investment vehicle, is only going to determine the amount of winter homes he can purchase or the size of his back-up yacht. There is very little actual utility gained in his life through the addition of those dollars.

    This is not true at the team level, of course. Those extra $20 million represent a significant utility to the 2010 Mariners in terms of player acquisition abilities. They are not anywhere near surplus luxury dollars – they are dollars that contribute directly to the success of the team. Which, of course, contributes to Felix’s happiness utility.

    In reality, players don’t seek the highest possible wages because they care about that extra thing they can purchase with it – they view the total contract value as a proxy for respect. It is the feeling that comes with being “paid what they are worth” that is the incentive to grab for money, not the goods they can buy with their maximized wealth. Thus, as long as Felix gets a total contract that makes him feel valued, the timeframe of the payouts of those dollars aren’t all that significant – he is not a corporation trying to maximize profit at every last opportunity.

  78. SonOfZavaras on September 3rd, 2009 6:39 pm

    Also, is it now a given that Felix has turned the corner and will be a dominant starter (if healthy) for years to come? Or is it possible that he could take one step forward (2009) and two steps back (2010-11)?

    It’s always a possibility. With any kind of talent. Just ask Cliff Lee.

    Dave, a question. It seems to me that a hidden x-factor in much of this revolves around Felix’ agent, Alan Nero.

    How likely is he to hinder the process to sign Felix to a team-friendly contract in terms of years?

    I’m going on the assumption that like any capable agent, he’s going to go in there and get as much of top dollar for his client as he can. Ergo, he won’t help the team’s best interests in any special way.

    And where’s Felix’ head?

    Does he want to be like Edgar and be the superstar talent that stayed with one team and made it his own team over the years?

    Or is his mind more like A-Rod, whom I think probably counted the days until he could sign elsewhere?

    Personally, I don’t think he’s anywhere near as shallow and disingenuous a guy as Alex Rodriguez.

    And I’d be willing to bet that the idea of being a career-#1 pitcher for one team (in an era where that just doesn’t happen) intrigues him on some level.

    But with that in mind, does any five-year deal make sense for Camp Felix?

    What about 5 years, $108 million? With an opt-out after Year Four that Felix can exercise after Year Three?

    The yearly breakdown could go something like this:

    2010: 14 mil.
    2011: 20 mil.
    2012: 22 mil. (opt-out clause here if Felix wants)
    2013: 24 mil.
    2014: 28 mil. (if Felix stays)

    Or am I smoking crack and it takes math much more complex than this to get ‘er done?

  79. terry on September 3rd, 2009 7:07 pm

    In reality, players don’t seek the highest possible wages because they care about that extra thing they can purchase with it – they view the total contract value as a proxy for respect. It is the feeling that comes with being “paid what they are worth” that is the incentive to grab for money, not the goods they can buy with their maximized wealth. Thus, as long as Felix gets a total contract that makes him feel valued, the timeframe of the payouts of those dollars aren’t all that significant – he is not a corporation trying to maximize profit at every last opportunity.

    If this is really true then players are dumb about money.

  80. Dave on September 3rd, 2009 7:16 pm

    Not really. Luxury dollars have diminished utility for everyone. They are often exchanged for lower value items that provide some kind of feeling and not real tangible value.

    That is the secondary point, though – the main issue is that the dollars are significantly more important to the Mariners in building their team than they are to Felix in doing whatever it is he will do with his money when he gets it.

  81. mw3 on September 3rd, 2009 11:36 pm

    The value of money in hand when considering marginal tax rates. Capital gains and dividend tax rates. And the biggest wealth destroyer of all, inflation rates. That money is worth significantly more than money deferred to a later date. Even if players don’t understand this, their investment managers do.

    In the beginning of the big contract era players normally received the same dollars year after year of the contract. This is still more valuable than backloading by a wide margin. Backloading contracts is just a way for the owners to make more money now and pay players less in real dollar terms.

    High profile players in the NFL have figured this out. They take signing bonus and roster bonus money in early years and reduced salaries at the end of contracts. It works well for them because when they reach the low salary years they have the contract torn up and negotiate more bonus money or they hold out. Players in baseball and basketball will be the next to realize the truth of this very old cliche;

    “A bird in hand is worth two in the bush.”

  82. mw3 on September 3rd, 2009 11:41 pm

    Excuse me it’s late;

    “A bird in hand is better than two in the bush.”

  83. hbobrien on September 3rd, 2009 11:58 pm

    Much of this talk relies on the future continually being the same as the past — that is, that the real thing to look out for is continued inflationary pressure.

    Trouble is, especially if one is looking at a 10-year timeframe, I’d guess the odds are 50-50 we may be looking at a period of deflation, a la the US in the 1930s, or Japan in the 1990s. If so, then backloaded contracts will absolutely explode.

    There’s also the strategic principle, as old as Sun Tzu, and as recent as John Boyd — “Zig where they zag.”

    I dunno. This discussion could all be David Brin’s “Dogma of Otherness,” as well.

    I, for one, would appreciate actual empirical evidence, though, and not the handwaving that’s been used up ’til now. I’d also like to see data on how Japanese clubs structured their contracts during the above-mentioned deflation.

  84. hbobrien on September 4th, 2009 12:04 am

    If this is really true then players are dumb about money.

    Why should players be different in this respect from everyday people? Or the subset of businesspeople, if it comes to that?

    Nassim Taleb’s questions to brokers come to mind: “Are you good or are you lucky? How do you know?”

    If the events of the past few years have taught us anything, it’s that a large number of people in finance who thought they were good have had their noses rubbed in the fact that they were merely lucky.

  85. Dave on September 4th, 2009 6:40 am

    That you keep referencing the NFL just tells me that you don’t really understand what’s going on.

  86. hbobrien on September 4th, 2009 8:41 am

    That you of all people keep making this argument through bald assertion and ad hominem dismissal instead of using data just tells me…

    Well, to quote a wise man:

    You can tell me all day that you believe that there’s a giant, pink, flying dragon chained up in your back yard, but if you never go in your back yard and put food and water out, I’m going to assume that you don’t actually believe that.

  87. heyoka on September 4th, 2009 9:06 am

    I want a front loaded contract. Just personally.

  88. mymrbig on September 4th, 2009 10:45 am

    By the way, all the times I mentioned a “front loaded contract” above, I am talking about something considerably less front loaded than the bad backloaded contracts we’ve seen sometimes. Dave is completely right that a severely front loaded contract would handcuff the team’s finances in the near term. Slightly front loading a contract could make some sense in some situations, but only if the player/agent took into account the time value of money and was OK with the lower salaries in the later years of the contract.

  89. mw3 on September 4th, 2009 5:27 pm

    Dave you telling me I don’t know what is going on is insulting. When you have lived through the ups and downs of a long lifetime as a poor and not so poor person, money is important. Perhaps too much so. But I chose the business of money as my second career. I suggest you talk to someone you know who lived and worked during the inflation of the 1970′s. Everything I said about having money now versus the value of money in the future is true. What someone thinks is a lot of money now, could very well not be after ten or fifteen years of double digit inflation.

    hbobrien mentioned backloaded contracts in a deflationary environment. It was a wise comment because deflationary environments would be the only time backloading a contract would mean more dollars in real tax and inflation adjusted terms.

    Does it make a difference, no. I said it will never happen in my original post. But the backloading of contracts is a way for ownership to be more profitable today, and pay less in real dollars as time goes by. You’re probably right that when dealing with these ridiculous amounts of money players just don’t care. But I am right as well. Players are not maximizing the real value of the dollars they contract for when they take a backloaded contract.

    CEO’s get paid in similar fashion to NFL stars, they take signing bonuses and stock options at the expense of salary. I have never heard of a CEO of a fortune five hundred company taking a backloaded contract. They know the cash number of the dollars in the out years has no bearing on the worth of those dollars when that day comes.

  90. snapper on September 4th, 2009 6:32 pm

    Frontloading kills it in the present. Which is why it never happens.

    This whole conversation is dumb. Back to Felix – you can live in fantasy land on your own time.

    Um, Dave. A-Rod’s current contract is frontloaded. $32M in 2009 decreasing to $20M in 2017.

    http://mlbcontracts.blogspot.com/2005/01/new-york-yankees_111398168678860040.html

    You probably should check the facts before berating your readers.

  91. mw3 on September 4th, 2009 7:18 pm

    I knew someone smart would be the first to do it someday.

  92. mw3 on September 4th, 2009 7:23 pm

    Now Arod can use the money to hedge against inflation and tax increases.

  93. mw3 on September 4th, 2009 7:24 pm

    And so could Felix if he is getting good advice.

  94. snapper on September 5th, 2009 9:28 am

    I knew someone smart would be the first to do it someday.

    If you assume both sides are smart, i.e. can do the math on discounting, the NPV of the contract should be the same front loaded or back loaded. Unless, of course the two sides have different discount rates. So, one reason for a front-loaded contract is the player has a higher discount rate than the team, and is willing to forgo more future salary for current salary, b/c he expects inflation, or whatever.

    Otherwise, the clearest reason for it is to fit a team’s budget. The Yankees seem to play with a $200M budget. Since they had room to pay A-Rod $30M+, they buy themselves more flexibility later on to add players when he is not contributing as much.

    Either front loading or back loading can make sense, depending on circumstances.

  95. mw3 on September 5th, 2009 12:28 pm

    Backloading never earns the player more money in real dollar terms unless there is deflation.

  96. DMZ on September 5th, 2009 1:03 pm

    Boy, is that not true.

  97. mw3 on September 5th, 2009 1:09 pm

    Boy is that true $200 million backloaded after adjusting for taxes and inflation = $139 million.
    (One million dollar yearly raises)

    $200 million dollars paid twenty million a year again adusting for taxes and inflation = $150 million.

    And $200 frontloaded with million dollar yearly decreases adusted in the same fashion = $174 million.

  98. mw3 on September 5th, 2009 1:14 pm

    Since a deflationary sprial has ocurred only twice in the last 150 years. I don’t think hedging for it is very wise. Hedging for inflation is wise because even in a low inflation environment there is still some inflation. For instance the the mid to late nineties had very low inflation but it still occurred.

  99. DMZ on September 5th, 2009 6:12 pm

    Seriously, you can’t think of any reason beyond “deflation” in which backloading a contract might earn a player more money?

    Really?

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