Wednesday, June 4, 2014

Pre-Arbitration Buyouts or: How Players Gained Momentum

Pre-Arbitration Buyouts or: How Players Gained Momentum

Mike Trout is a terrific player, once in a century-type guy really, but he is unlike other prospects. Trout signed a one year deal for 2014 for one million dollars, nearly double his 2013 salary, and significantly higher than what his 2014 salary would have been otherwise. Keep in mind Trout would become eligible for arbitration in next year, in 2015. Trout essentially got a raise when the Los Angeles Angels organization did not have to give it to him. Following that 2014 raise, the Angels and Trout agreed to a six year, $144.5 Million deal, buying out three of his free agency years. This is the most equally beneficial prospect deals, largely due to Trout being an absolute great so far. With an average annual value of over $24 Million a year, Trout is being handsomely rewarded before becoming a free agent in what most expect to be the prime of his career, in addition to the pre-arbitration raise he got this year. Trout almost certainly deserved the raise, but this trend is not limited to generational talents like Trout.

            Back in March, top Pittsburgh Pirates prospect Gregory Polanco, who had zero service time in the majors was offered a seven year deal, in which three years at the end of the deal had team options, for $50-60 Million, $25 Million of which was guaranteed. Keep in mind that Polanco is 22 and has no service time. Pre-arbitration salaries vary slightly from player to player, but range from about $500k to $520k.

Let’s take out the team option from the deal for a minute to examine why Gregory Polanco made a massive mistake in turning down the deal. $25 Million for three pre-arbitration years and an arbitration year if he doesn’t qualify for super two. That’s an annual average value of $6.25 million dollars, three of which are during pre-arbitration years. That’s roughly a $5.5 million dollar raise on those pre-arbitration years. If Polanco signs no deal prior to free agency and wishes to ride there through pre-arbitration and arbitration, he stands to make roughly $18.5 Million, far less than the deal offered to him. What kind of number does Polanco expect in years two and three in arbitration? Even if he were Mike Trout, which he’s certainly not, he’s still stuck around that $18.5 Million figure if he were to become a good major leaguer.

There are no guarantees when it comes to prospects in baseball. For every Bryce Harper, there’s at least two dozen Felix Pies’. I don’t think Gregory Polanco will turn into Dave Kelton, but there’s the off chance he does and loses out on a phenomenal amount of money.

This past week, Astros 1B prospect Jonathan Singleton signed a five year contract with a three year team option that could push the deal up to $35 Million. $20.5 Million of that deal is for the three team options, so that is a bit less than $10 Million guaranteed for five years of a first baseman prospect that’s has his issues in the minors and is 22. If not for this deal, Singleton would have been called up later this year to avoid arbitration until 2018 because teams work that way. The $500k-$520k Singleton would have received during those four pre-arbitration years is bumped up to $1.5 Million the first year and $2 Million the second, third, and fourth pre-arbitration years, respectively. That is a bit more than a $5.5 Million increase in salary that the Houston Astros did not need to give him. The three arbitration years are set now at $2 Million, $2.5 Million, and $5 Million (the last two arbitration years on the contract are team options for note). Keep in mind, we have no clue if Singleton will succeed at the major league level, but his arbitration years can be expected to be $3-7 Million a year without a contract if he's average to very good. Let's add this up. $7.5 Million in pre-arbitration, then the $9.5 Million in arbitration years for a total of $17 Million. Had he not had the contract let's assume he makes $1.3 Million total during the pre-arbitration years, then $3 Million, $4 Million, and $6 Million during the arbitration years, to give his non-contract salary a total of $14.3 Million. The Astros gave a $2.7 Million raise for an unproven first baseman that struggles to maintain a .300 batting average in AAA and has plate discipline issues. Singleton and his agent are very wise to agree to that deal, even with the last year being a $13 Million dollar team option. If Singleton flames out and is released and spends the rest of his career stuck in AAA and the team option wasn't picked up for the free agency year of $13 Million, then he got about $4 Million extra than he should have (the arbitration salary would be on the lesser end of that $3-7 Million range). On the off-chance he's good, let alone great, he's only giving up one free agency year at $13 Million (a team option), and can enter free agency for a big money deal. If Singleton is bad to mediocre, this is a great deal for him, but if Singleton turns out to be great somehow, then it is still a good deal for him.

These types of deals didn’t begin with Trout, as Chicago Cubs 1B Anthony Rizzo signed a seven year deal, two years being team options, for $41 Million back in May of 2013. Rizzo wasn’t nearly as hyped as Polanco, or even Singleton, yet he still got a raise for no real reason. Rizzo showed little potential, if any, during his short stint with the San Diego Padres, with an OPS of .523 in 128 plate appearances. Rizzo made $750,000 in his first full season, which was pre-arbitration, a modest increase from what he would have made had he not signed the deal. This year Rizzo is due to make $1.25 Million, more than double of any recorded pre-arbitration salary. This escalates with $5 Million the next year eventually reaching $11 Million before the two $14.5 Million team options. Rizzo’s having an okay year for the most part, but coming into last season he was nothing. One must also keep in mind that he has had a good third of a season, so it is too small to really judge Rizzo in terms of being worth it. The deal could turn out to be decent for the Chicago Cubs or it could turn out to be wasted money, but it continues the trend of paying the unproven player.

Remember Gregg Jefferies? Remember David Clyde? Remember Corey Patterson? Remember Todd Van Poppel? Remember Brien Taylor? Remember Ben Davis? Remember Andy Marte? The point of that is this, prospects are just that, prospects. Prospects are not sure fire things. Organizations have seemed to lose sight of this since the Mike Trout explosion. Front offices wonder if they have the next Mike Trout on their hands and decide to offer them a deal so that organizations have a year or two of free agency bought out. While a player might be underpaid during that last year or two, the player might also turn out to be a bust, being worth even less, and the player gets a massive increase in arbitration years, and especially pre-arbitration years.

Other articles exclusively praise organizations for giving out these deals while questioning if it was a smart move by a player. The exact opposite is true in this instance. When a player with no experience, no track record, and who has prospect hype behind him signs a deal, they are making the right move, as Jonathan Singleton, Anthony Rizzo, and Mike Trout even did. These men will have their contracts expire in the prime of their playing career so if they turn out well, they are due for big money. If they turn out to be a replacement player at best, at least they made significant money early in their career.

I am not quite sure what Gregory Polanco was thinking when he turned down that deal in spring training. Even if Polanco turns out to be a Babe Ruth, Barry Bonds, Mickey Mantle-type great, he’s still losing money by turning down that arbitration deal. One might ask, but what about that year of free agency he’s being underpaid for? The answer really is the increase in the pre-arbitration and arbitration years more than makes up for it. If we were to also assume Polanco were an all-time great, he would enter free agency in the prime of his career, almost assuring him a massive contract to go with the more than generous one the Pirates offered.

The point really is that this prospect hype that has infected Major League Baseball is one of the best things to happen to players in a long time. Prospects should take any Polanco or Rizzo-esque deal they are offered right when it is offered to them. The math works out better in the long run, regardless of if they are a terrible player or an all-time great. On the other hand, organizations are making poor decisions giving out these contracts when it comes to the team bottom-line. Like mentioned, we have no clue how prospects like Singleton or Polanco are going to turn out. They could be Todd Van Poppel and Corey Patterson, eventually striding the line between bench player and AAA player. Why offer a humongous deal when they are under team control for those years? I can’t provide an answer other than the aforementioned prospect hype.

In short, take the money while you can, prospects.

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