Free Agency - The Long Term Outlook

 

Warning: The following contains graphic descriptions of old, injured, and ineffective baseball players violently killing their team's playoff chances.
   

Viewer discretion is advised.

We've always known that signing free agents carries an inherent level of risk, because as players get older, they face increased odds of injury that go along with a general decline in skill and physical ability.  There are outliers who can buck this trend for awhile, but eventually, even all-time greats reach the point where they have to hang up their spikes, put their bats away, and move on to other things.  It's usually not a smooth transition, and when it happens to a popular, well-known player, the past can cloud the present, and pride, egos, and an adoring fanbase can make the right baseball decision a very difficult one to make (see Ken Griffey Jr's return to the Mariners).  Even worse, sometimes this decline coincides with the end of a long-term, big money contract, and that's the stuff that horror movies are made of.

If you read Fangraphs often, you should be familiar with the concept of surplus value.  The idea is that wins have a fairly steady going rate on the free agent market - right now, it's about $5 million for 1 WAR.  If your team signs a player for $15 million per season, and he posts 4 WAR, that's $5 million of surplus value.  This is like buying items on sale rather than paying full price, and it should be every GM's goal, because having to pay every player their fair value on the open market would make it impossible to field a competitive team without spending $175+ million each year.  This is why prospects have come to be valued so greatly in today's baseball economy.  Getting fair value is a worthy consolation prize, and the forces of decline and inflation come into play beginning in the second contract season.  Maybe the player is only worth 2.7 WAR in year two, but if the cost of a win goes up to $5.5 million, the team still gets fair value for the player's salary.

Of course, in free agency, $15 million by itself is peanuts, and the best players available in any given year are likely to command six or seven times that, over just as many years.  This all leads to the (100) million dollar question - knowing what we know about how players tend to decline, how well do teams make out on long-term, big money contracts?  How often do they get surplus value, and how often do they get fair value? 

To start, here is the list of all $90+ million contracts in history that are complete or will run out in 2011:

Just off the top of your head, you can easily pick out the clear winners (Bonds, Pujols) and losers (Mike Hampton, Ken Griffey Jr.), but you may be wrong about many of the rest.  To get a better view, I created a graph that shows the median WAR by contract year for this group of players along with their team's median Return On Investment (ROI).  ROI is a measure of surplus value, for example, if the cost of 1 WAR in the fourth year of Manny Ramirez's contract was $4 million, and he produced 6 WAR, the Red Sox had an ROI of 1.20, $24 million of production for $20 million of salary.   

Here's the chart: 

Remember, these are median results.  Half of the players on the list performed better, and half performed worse, but as you can see, "good" and "bad" tend to be somewhat relative terms in the later years of these contracts.  As expected, the first few seasons are usually up to par, both in terms of WAR and ROI, but the players decline rather steadily from that point forward.  We could call it Todd Helton Syndrome. 

If you remember, Helton was spectacular in the first two seasons of his contract, averaging about 7.5 WAR and an ROI around 1.80 in both.  In year three, he regressed to 4.4 WAR and 1.13 ROI, still good, but hasn't been consistently productive (or healthy) since, and he heads into 2011, the last year of the original contract, having been worth less than 1 WAR in two of the past three season.  Ironically, his total contract has provided the Rockies with a small amount of surplus value so far, about 6%, but because his performance value on the field was so front-loaded it's still rightly viewed as a failure, and that's before we even begin to consider the havoc it's wreaked on the Rockies' team payroll and roster over the last decade.  That pretty much sums up the problem.

Here's the original list again, with their teams' total ROI over the life of the contract, as well as the number of years in which they posted at least a .70 ROI.  There's nothing magical about .70, I just figured a number that low would account for seasons where the player missed some time to an injury, or just had a down year, but was still useful.

If there's one trend you pick up from this, it's inconsistency.  Even contracts that worked out well as a whole usually included a major down year, typically due to injury, and that's part of my point.  Signing a player to a contract like this is a multi-year commitment, whereas building a competitive team is often a year-to-year proposition.  How do you reconcile the two?  How do you find a balance?  Obviously, zeroing in on the right player is a big part of it.   Most of the players on this list were already well-established, elite-level performers when they signed their contracts, with the exceptions of Mike Hampton, and possibly Kevin Brown and Jason Giambi.   Also, most of the success stories involved players who had some defensive value.  But even with a bunch of clear Hall of Famers on the list, the results are still mixed.  If you start to look at some of the more recent nine-figure deals, you'll have Carlos Lee, Barry Zito, Alfonso Soriano, and Vernon Wells to contend with.  Sometimes losing out on the player really isn't losing at all.

Right now, the Yankees have long-term contracts with Alex Rodriguez, Mark Teixeira, and CC Sabathia that are too new to include in this list.  I'd love to be wrong about this, but the odds are against all three of them even being moderately successful with the benefit of hindsight.  And that's why I'm not heartbroken that Cliff Lee is a Phillie. Sure, it hurts in 2011 and 2012, but the odds of it hurting in a different way by 2015 aren't insignificant either, and I'd hate to throw a fourth long-term contract out into the hands of the baseball gods.  Yes, yes, I know, certain players are "different", and "if they win a championship or two in the next few years nobody will care".  I can assure you that if Babe Ruth, Hank Aaron, and Willie Mays eventually lost a step, then nobody is immune.  And as far as championships go, ask Cardinals fans how they felt about Scott Rolen's contract after they won the World Series in '06, or find out what a Rockies fan thought about Todd Helton after they won the NL pennant in '07.