(In addition to appearing at The Captain’s Blog, this post is also being syndicated at TheYankeeU.)
Cliff Lee probably wanted to return to Philadelphia all along, but he did not leave a lot of money on the table to do so. Contrary to the prevailing wisdom, the five-year, $120 million deal that Lee signed is not worth much less than what Jerry Crasnick reported was the Yankees final offer of six years at $132 million plus a $16 million player option. In fact, it might actually be worth more. The devil is really in the details, particularly the vesting sixth year option (see comments section for an updated calculation) and incentives that exist in the Phillies’ offer, but even with those blanks left unfilled, we can still get a pretty good idea about how the two deals compare.
Comparison of Yankees’ and Phillies’ Reported Offers to Cliff Lee
| Phillies: 5 Years, $120 million | Yankees: 7 years, $148 million | ||||
| Year | Salary | Present Value | Salary | Present Value | |
| 1 | $24,000,000 | $24,000,000 | $22,000,000 | $22,000,000 | |
| 2 | $24,000,000 | $22,605,728 | $22,000,000 | $20,721,917 | |
| 3 | $24,000,000 | $21,292,456 | $22,000,000 | $19,518,085 | |
| 4 | $24,000,000 | $20,055,478 | $22,000,000 | $18,384,188 | |
| 5 | $24,000,000 | $18,890,362 | $22,000,000 | $17,316,165 | |
| 6 | $22,000,000 | $16,310,188 | |||
| 7 | $16,000,000 | $11,172,839 | |||
| Total | $120,000,000 | $106,844,024 | $148,000,000 | $125,423,383 | |
Note: Based on a nominal interest rate of 6% compounded monthly. Assumes salary paid in full each year (which favors shorter-term deal).
Source: zenwealth.com
Without factoring in the sixth year option, Lee left about $19 million in present value on the table, but that amount can be whittled down by about $1 million if you assume the extra $2 million in annual salary from the Phillies’ offer is invested at about 6% over the life of the deal. Furthermore, when you factor in New York State’s 6.85% top tax rate, which is more than twice that of Pennsylvania’s, the difference is mitigated further.
Even putting more nebulous variables like interest and tax rates aside, it’s still easy to narrow the gap between the two offers. For example, if the sixth year option is worth $16 million, as in the Yankees’ offer, the difference between the two deals would be narrowed to about $6.5 million. Of course, just because he won’t be under contract to Philadelphia in 2017 doesn’t mean Lee won’t be pitching somewhere. In other words, if he is able to negotiate a salary with a present value of $6.5 million (about $9.3 million) in that season, he’d actually wind up coming out ahead.
The bottom line is Cliff Lee did very well by his bottom line. He may have taken less guaranteed money, but in the long run negotiated a deal with the Phillies that is at least on par with the offer he had from the Yankees (and likely the Rangers as well). There’s no need to laud the Phillies’ stealthy maneuvering or applaud Lee for taking a discount because neither is appropriate (at least not until the final details are confirmed and suggest otherwise). Besides, what does it matter anyway? Lee is back where he wants to be and the Phillies are holding four aces. Now, it’s up to the rest of baseball to come up with a straight flush.
Update: If Jerry Crasnick is correct, and he has been so far, the sixth year action is worth a whopping $27.5 million and kicks in with 200 innings in 2015 or 400 innings over 2014/15. If that’s the case, the PV analysis tilts in favor of the Phillies’ offer ($127mn to $125mn) and the total value of the six year deal comes right up to the Yankees’s seven year offer. What’s more, there is a $12.5 million buyout, which itself draws the offers even closer (unless it is included in the reported $120 million guaranteed).
I’m no accountant, but isn’t 6% a highly inflated figure in these times? Someone more qualified should comment, but I would think a figure of just 2% or 3% would be more appropriate…
It’s not really a question of appropriate…that can only be determined by the individual making the decision. For perspective, the historical CAGR for the S&P500 is about 12%, so 6% would be half that amount. We are coming out of a recession, so if one was bullish on the rebound, a CAGR of 6% would be peanuts.