Thursday, December 11, 2008

Opt-Out Clauses

Point

Counterpoint

"So far as I can recall, all of the big-name players with opt-out clauses that come to mind (Alex Rodriguez, J.D. Drew, A.J. Burnett) have exercised that option when it came up because the market for annual salaries has risen faster than the general rate of inflation."

Results aside, this is EXACTLY the problem with opt-out clauses, one so glaringly obvious that I can't believe Jay Jaffe makes this point yet goes on to say, "I don't see the opt-out as a downside."

Let's take a look at what those three opt-out clauses really cost:

Alex Rodriguez
Remaining contract at time of opt-out: 3 years, $81 million
Actually signed for: 10 years, $275 million

How much would it have cost the Yankees to sign A-Rod for just three years after 2007? I think $120 million is a reasonable estimate. Remember, to sign that contract, Mr. Madonna is giving up $155MM in guaranteed money for his age 35-41 seasons.

If we accept the $120MM estimate, then this opt-out clause cost the Yankees $39 million--the difference between the $81 million Rodriguez was signed for and the $120 million the Yankees were willing to offer for those three years. (If you want to be really results-oriented, it's true that this opt-out clause cost the Rangers nothing, except maybe some negotiating leverage when they traded A-Rod.)

J.D. Drew
Remaining contract at time of opt-out: 3 years, $33 million
Actually signed for: 5 years, $70 million

To re-sign Drew for three years, the Dodgers would have had to pay perhaps $48 million. This opt-out clause cost LA $15 million.*

*You might argue that the Dodgers wouldn't have actually paid Drew $48 million for three years. That's not relevant; what matters is his market value. By having a $48 million player under contract for $33 million, they're running a $15MM surplus, and they can capitalize by trading Drew to a team that values him more highly.

A.J. Burnett
Remaining contract at time of opt-out: 2 years, $24 million
Offer currently on table: 5 years, $80 million

If a notoriously injury-prone pitcher has an offer of 5-$80MM on the table, I'd say it would take $44 million to sign him for two years. That's a $20 million surplus the Jays won't get to enjoy, thanks to the opt-out clause.

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As Dave Studeman said in the counterpoint, the Yankees are guaranteed to get the shaft in 2011 regardless of CC's decision; either they will be upset that their dominant starter is now demanding more money and more years, or they'll be stuck with a 300-pound albatross. What value would you put on the final four years of Mike Hampton's contract? Kevin Brown's? Barry Zito's?

Handing out a $92 million player option is just a really dumb idea. I'd rather give Sabathia $85 million for three years, or $175 million for seven. This is a terrible contract for the Yankees. Either they didn't realize that, or this was the only way to land CC.

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