Boston Red Sox Reportedly Reach Agreement with J.D. Martinez

The Boston Red Sox have reportedly reached an agreement with J.D. Martinez on a five year contract that guarantees Martinez $110 million and contains opt-outs after both years two and three of the deal.  The deal is front-loaded with Martinez earning $50 million through the first two seasons and $72 million through the first three seasons but only $38 million over the last two seasons.

Martinez is guaranteed a full $40 million less than mlbtraderumors.com predicted, but he gets the two opt-outs.  The effect of the deal is that it is much more future performance driven that the free agent contracts of old, as Martinez will almost certainly opt out if he has seasons in either 2019 or 2020 in which he plays in 150 game and has an OPS at the average of his last four seasons (2014-2017).

What I find interesting about this contract and to a lesser degree with Eric Hosmer‘s recently reported contract with the Padres is the degree to which the contract is front loaded.  In years past, teams always tried to push the highest paid seasons toward the end of the contract term in order to take advantage of the time value of money.  When added to the 100 year old tradition of paying superstars more as they got older, even as their performances began to decline, the time value of money was a powerful incentive for teams to back-load contracts.

What is clearly going on is that teams no longer want albatross contracts, where the teams are paying massive amounts of money for poor performance later in the contract period.  In particular, wealthy teams like the Red Sox expect to contend every year and certainly do not intend five year rebuilding periods that small market teams resign themselves to.

Teams are now obviously more concerned with paying top dollar for the years they reasonably anticipate getting top performance and paying less as the player gets older.  Teams are realizing that no matter how wealthy or poor they are, they have a certain budget for player salaries each season which increases over time at a fairly predictable rate in line with predicted future revenue increases.  If you push back free agent contract compensation to the later years, those are years in which the team is predictably resigning itself to mediocrity or worse.  Added to this are the incentives in recent collective bargaining agreements which punish teams for going over an imposed salary cap.

In the late 1980’s Bill James wrote an article about how the New York Yankees under George Steinbrenner were on what amounted to a second-place treadmill.  At that time the Yankees were building their teams largely around elite free agents, who were really good only for a year or two and then became expensive mediocrities that prevented even baseball’s richest team from building a truly great ball club.  It’s taken awhile for teams to learn the point that James was making all those years ago, but it now seems the teams have learned it.

As time passes, we will see more contracts which reject the old rules of free agent contracts.  I’m certain of this, because we’ve seen over the years the way in which free agent contracts have evolved, for example using team options, player options and opt-out clauses.

Also, I took a sports law class in law school in which the students negotiated various player contracts.  Coming into the practice negotiations with fewer preconceptions about what the contract should look like and negotiating only on the basis of the factual situations involving the player and the team, we came up with some pretty wild contracts.

In representing an imaginary football player in negotiations with an imaginary team that was hoping to win it all the next season and had the money to spend now, I negotiated a two year deal in which the player received 85 or 90% of the contract amount in the first season with most of the 85 or 90% in the form of a signing bonus, so that the money would already be paid out to the player even if he got hurt as soon as he started play for his new imaginary team, since NFL contracts are typically not guaranteed due to the frequency of serious injuries in football.  Also, I wasn’t taking into account taxation or the fact that young athletes tend to spend money as they make it and won’t necessarily be prepared to save enough in year one to handle the steep drop in compensation in year two.

In the real world, past practice tends to shape contracts in the short term, not to mention the fact that the parties involved in the negotiations are better aware of all the real world variables.  Over time, however, real world contracts will ultimately get to roughly the same place as law school experiments if the factual situations are roughly the same (and taking into account all the real world variables).

Owners would love to get back to the world before free agency, not only when players could not access a free market of teams competing for their services, but also when a player’s compensation was determined a year at a time and was thus largely linked to the immediately preceding year’s performance and thus anticipated next season performance, and could be quickly reduced if the player ultimately had a bad season the next year.

Both Martinez’ contract with the Red Sox and Yu Darvish‘s recent contract with the Cubs require the players to perform at an extremely high level in the early years of their respective deals to fully reap the potential benefits of the contract.  That is well to the advantage of their signing teams, and this year the teams have been able to impose these terms on these players.  We’ll see what happens next off-season, but I think we’ll be seeing more of the same.

 

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Explore posts in the same categories: Arizona Diamond Backs, Baseball History, Boston Red Sox, Chicago Cubs, Kansas City Royals, Los Angeles Dodgers, New York Yankees, San Diego Padres, Texas Rangers

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