Opt out clauses have become the baseball equivalent of a pre-nuptial agreement. Before committing to a team, high profile free agents are increasingly using their leverage to negotiate favorable terms for a potential early divorce. But, are these contractual caveats as one-sided as often portrayed?
The criticism of opt outs has ratcheted up as the practice has become more prevalent. Even the MLB commissioner is scratching his head over the increasing use of these agreements. In an interview with Ken Rosenthal, Rob Manfred wondered aloud about why teams would be willing to extend such uneven terms. “The logic of opt-out clauses for the club escapes me,” Manfred confessed, but is the commissioner really that confounded?
If Manfred really wanted to know why his bosses were engaging in such a counterproductive practice, he could easily ask them. So, why did he take his concerns to the media instead? Probably because he already knows the answer. The teams offering opt outs are doing so because it’s in their best interest.
All baseball contracts are guaranteed, so whenever a long-term deal is signed, an inordinate amount of risk is heaped upon the team. This imbalance isn’t unfair; it’s by design. In exchange for years of team control, owners have agreed to a free agent system the eventually shifts the burden to them. The question for clubs then becomes how best to mitigate the risk associated with long-term contracts. Deferred money, back-loaded contracts, and insurance policies have traditionally been some of the most common ways to manage risk, but, now, opt outs have been added to the owners’ arsenal.
Opt outs provide obvious benefits to the player. If, for example, David Price were to excel in the first three seasons of his new deal with the Red Sox, he could opt out and hit the free agent market again in 2018, when, presumably, a new bidding frenzy would drive his salary even higher. On the other hand, if Price were to flop, or suffer an injury, he could simply remain under the terms of his current deal and live happily ever after in Boston. Because this contrast is so stark, it’s easy to see why so many believe the benefit is one-sided.
In a much more subtle way, teams also benefit from opt outs. Because opt outs are negotiated (as opposed to being a part of the uniform player contract), it stands to reason that players who demand them must offer up something in return. Whether it’s a shorter duration, a lower annual salary, or some other form of consideration, teams that grant opt outs are getting a benefit of their own. However, more than just providing value as a bargaining chip, opt outs, if exercised, can also work to the advantage of the signing club.
For an illustration, let’s reconsider the case of Price. If the lefty performs well and decides to opt out in 2018, the Red Sox would have ended up signing him to a three-year deal worth $90 million. Now, ask yourself this question: if given the choice between 3/$90 million and 7/$217 million, which deal would the Red Sox have preferred in the first place? The answer is obvious. Because risk grows as long-term deals age, teams are always eager to limit contract length. Should it matter if this is accomplished by the player’s actions as opposed to the team’s negotiation skill? Either way, the signing team is benefitting from the prime years of the player without having to pay for his decline.
What about if a player with an opt out gets injured or performs poorly? That’s the question that causes many to get sidetracked, but it’s really irrelevant. After all, if the opt out isn’t exercised, the contract remains just as guaranteed as it would have been had there never been an opt out in the first place. What’s more, because the player presumably sacrificed some other form of compensation to receive the opt out, his failure to use it results in a net benefit to the team.
In summary, when a player doesn’t exercise the opt out, teams always come out ahead. If he does exercise the opt out (presumably because he has done very well), the player gets a new contract and the team locks in a substantial value surplus from the deal that was just terminated. The team also recovers payroll flexibility that could be used to acquire a better player. In this case, everyone wins…except the team that signs the player to a new deal. And, therein lies the cause of Manfred’s concern.
If opt outs have so many potential benefits to individual teams, why is the commissioner against them? Because he probably realizes that what might be good for individual teams, doesn’t necessarily work in the best interest of the owners as a group.
Opt outs help clubs escape the decline years of a long-term deal, but for each beneficiary there is another team that compounds the avoided risk into a new commitment. And, sometimes, it’s the same team involved in both sides of the risk equation. The Yankees relationship with CC Sabathia is a perfect example of this dynamic. Under the terms of his original deal, the big lefty was scheduled to receive $161 million for seven season through 2015. Needless to say, if Sabathia had been a free agent this offseason, he’d probably have signed a make-good deal. Instead, he exercised an opt out in 2011 and now enjoys two extra years at a potential $50 million. Clearly, if the Yankees had parted company with Sabathia when he opted out, they’d have come out ahead in their relationship. Of course, the risk would have likely shifted to another team. So, from an ownership perspective, the benefit cancels out.
Opts out also work against the owners by creating an older class of free agents, which leads to inflated contracts at older ages and helps fuel salary inflation. Let’s use Jason Heyward as the example this time. Had the Cubs not given Heyward an opt out, he’d have remained under wraps until age-33, at which point, his earning potential would be diminished. With the opt out, however, Heyward can hit the market again while still in his prime, creating the potential for another long-term, high-value deal (think Alex Rodriguez). And, if Heyward does increase his salary in 2018, it will have ripple effects throughout the game. So, not only will another team (or perhaps the Cubs again) end up with a riskier deal, but every other team will also indirectly pay a higher price.
Rob Manfred is neither ignorant nor naïve, and most certainly not a man of random action. He knows exactly why teams are agreeing to opt outs, but likely realizes what might be singularly beneficial could be detrimental to his bosses as a whole. Manfred is basically trying to save the owners from themselves. And, that’s a responsibility from which no baseball commissioner can opt out.
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