Up Next with Rich Luker From The Executive Editor Attitudes toward global sustainability Cartoon: Birds on a wire Sports Media: NFL’s streaming experiment From The Executive Editor: Innovations ‘Moneyball’ approach in marketing Cartoon: King me Athletes and issues of social justice Why the NCAA still matters
SBJ/Jan. 10-16, 2011/Opinion
New type of long-term deal could protect team and player
Published January 10, 2011, Page 33
It’s the same for other teams around baseball. Sometimes they sign players to long-term contracts that turn out to be great deals for the team, less great for the player. Think about the Rays and the deal they got with Evan Longoria, who the Rays have under a six-year contract (2008-13), with the team having an option to extend the contract through 2016. Longoria hit .281, with 33 home runs and 130 RBIs in 2009, and .294, with 22 home runs and 104 RBIs in 2010. The guaranteed value of Longoria’s contract, however, is only $17.5 million, well below the market value for a player with his statistics.
Equally often, however, a team that signs a player to a long-term contract sees the player’s performance deteriorate either for lack of motivation, advancing age, injury, or simply that the player is not as talented as the team believed him to be. These risks increase with the length of the contract, and are particularly great for pitchers. After the 2007 season, for example, the Chicago Cubs signed Carlos Zambrano, who had excellent seasons in 2006 (16-7) and 2007 (18-13), to a five-year, $91.5 million contract. Zambrano performed well in 2008 (14-6), the first year of the contract, but won a total of 20 games in 2009 and 2010 combined, and the Cubs are contractually required to pay him almost $36 million for the 2011 and 2012 seasons, regardless of his performance. The point is clear. Long-term guaranteed contracts pose significant risks for both players and team owners, particularly the latter.
That’s why there’s a better way via a new type of long-term deal that could be a winning prospect for everybody.
Under this approach, the player’s salary for the first years of the contract would be determined at the time the contract was signed, and would be guaranteed during those years. The number of years of guaranteed salary would be up to the player and the team; it could be as few as one or two years or as many as five or six years, even more if the parties wished. At the end of the guaranteed period, the player and the team would negotiate the player’s salary on an annual basis for the remaining years of the contract term. If, in one or more of those years, they could not agree, the player’s salary would be determined by an arbitration in which the central criterion would be the player’s current market value, based on the salaries of comparable players. Salary arbitration is common in Major League Baseball, and could easily be adapted to this situation.
In order to protect the player from the risk of injury, which would sharply reduce his market value, he would be assured of a minimum salary for each year of the contract in which his salary was not guaranteed. The minimum salary, which protects the player in the event of an injury, might also be used to protect the team in the event that the player’s performance deteriorated so much in a non-salary guaranteed year that the team chose to release the player in order to make room on its roster for a player who might contribute more to the team. The team would be free to release the player, but would be required to compensate him in the minimum salary amount for each of the remaining non-salary guaranteed years of the contract.
The advantage of this approach is that it provides the stability of a long-term contract to both the player and the team, while at the same time removing many of the risks of a long-term contract by replacing early on estimates of the player’s performance and appropriate salary in the later years of the contract by a market-based determination of salary in those years. Teams that are protected against these risks may be more willing to enter into long-term contracts, which substantially further the interests of players.
Carl Pavano, who earned $7 million plus performance bonuses last year, had not signed with a team for the coming season at press time.
The type of contract envisioned here would clearly not be appealing to all players or all teams. The superstar players who have great bargaining power, like Alex Rodriguez, CC Sabathia or Johan Santana, can successfully insist on a fully guaranteed multiyear contract in which the entire risk of diminished performance and injury is borne by the team. Those players would presumably spurn a multiyear contract in which the salary was not guaranteed for all contract years.
This type of contract would also be rejected by those teams that would prefer knowing exactly how much a long-term contract was going to cost them, even if that amount risked being far above the value it received for that cost, rather than be subject to the cost uncertainty of salary negotiation and perhaps arbitration in the latter years of the contract.
For many players and teams, however, a multiyear contract with salary guaranteed for some of those years, a neutral, market-based mechanism for determining salaries in the remaining years if the parties cannot do so, and salary protection in the event of injury or release in a non-salary guaranteed year, may be a good idea.
Here’s a good test for this idea: Pavano, who won only nine games for the Yankees during his four-year, $40 million guaranteed contract, then won 14 games for the Indians and the Twins in 2009, earning $4.35 million. In 2010, he won 17 games for the Twins, earning $7 million (plus performance bonuses). If you were a major league general manager, and Pavano wanted a four-year guaranteed contract at a fixed salary with your team, would you rather:
• Say no because his future performance is too uncertain?
• Say yes because his performance the last two years shows that he has turned a corner?
• Or say yes to a guaranteed contract, but with the salary fixed only for the first year or two, and the salaries for the last two years based on his performance?
Stephen Goldberg (email@example.com) is a professor of law at Northwestern University and a former Major League Baseball salary arbitrator from 1982 to 2009.