Performance Incentives and Contract Negotiating Inertia

Years ago before I started this blog in April 2009 I wondered why you didn’t see major league contracts that contained as much or more incentive money than guaranteed money.  It seemed fairly obvious to me that for players over 29 or 30 coming off a bad year following at least some very good years in the not too distant past, they would be ideal candidates for contracts that didn’t guarantee much up front but could pay the player generously if he was able to recapture a some portion of his old magic.

At the time, I more or less assumed that there were limitations set by the collective bargaining agreement regarding just how much of a major league contract would be in the form of incentives.  However, since starting this blog, I’ve looked through the collective bargaining agreements and never seen anything that limits the amount or percentage of the contract that can be payable as performance incentives that have to be earned.

Instead, I do believe there are written or unwritten limits on the nature of performance incentives.  You can’t get a performance incentive for winning 20 games or hitting 30 home runs, but you can get an incentive based on playing in a certain number of games, accumulating a certain number of plate appearances or pitching a certain number of innings.  You can also get performance incentives for winning or finishing in the top five of Cy Young or MVP voting or by making the All-Star team.

In the last few years, we’ve seen all kinds of contracts which are mostly performance incentives.  Today, Chris Tillman finalized a deal with the Orioles that guarantees him $3 million, but contains an additional $7 million in innings pitched incentives.  Two off-seasons ago, the Dodgers signed Japanese hurler Kenta Maeda to a deal that guaranteed Maeda $25 million over eight seasons but could be worth a potential $105 million if all of the many, many different performance incentives were achieved.

Assuming that there were in fact no collectively bargained limitations on contracts for which 70% to 80% of the value of the contract was in the form of performance incentives, why did it take so long for teams and players to reach the kinds of deals that we see routinely now?  It is particularly strange when you consider that for a very long time minor league contracts for veteran players have routinely provided the player 7 to 10 times as much money for major league roster time as for minor league roster time.

I think that a lot of it has to do with the inertia of past contract negotiating practice, as I suggested in one of yesterday’s posts.  In the past, a player worth a guaranteed major league contract (and his agent) expected that most of the money of the contract would in fact be guaranteed.  That was the whole purpose of collectively negotiating for guaranteed annual contracts.  Everyone in MLB was a little suspicious of the idea of major league contracts that provided more than t0% or 20% of the potential contract amount as unguaranteed performance incentives.  So long as both players and managers took for granted certain salary structures, there wasn’t much reason to adopt a different form of contract, even if it would have made a great deal of sense to do so.

Why have things changed in recent years?  I think Maeda’s contract really changed the way everyone in MLB viewed MLB contracts, and his contract was based on certain somewhat unique circumstances that at the time seemingly applied only to him.  As a Japanese star, Maeda was basically guaranteed a four-year $20 million contract in NPB when he became a free agent.  NPB limits free agent contracts to a maximum of four years and has a de facto salary scale that made Maeda’s future NPB earnings highly predictable.

The Dodgers eight year $25 million offer beat any guarantee Maeda was likely to get from an NPB team (plus, of course, Maeda was determined to test himself against the best in MLB).  Also, Maeda is a small right-hander who had thrown a lot of NPB innings.  MLB has had a long-standing prejudice against small right-handed pitchers, particularly when they’ve already thrown a lot of innings.

I think Maeda’s contract was something of a revelation for MLB teams.  Reliable MLB 4th and 5th starters now command $6M to $10M a season (see e.g., Jhoulys Chacin), and the Dodgers were getting someone potentially better than that for a guarantee of less than $4 million a season.

Meanwhile, the contract has worked out for Maeda, who has pitched well enough and often enough to make far more money pitching for the Dodgers than he could have made in Japan.  In fact, I suspect that the Dodgers in 2017 made it a point to get Maeda his 25th start, when another performance incentive kicked in, because Maeda was clearly worth the extra money and the contract hadn’t taken into account that Maeda might be highly valuable to the the team as a sometime relief pitcher.

The other big factor is how much starting pitchers are now worth.  Chris Tillman was really good from 2013 through 2016, but was pretty awful in 2017.  He isn’t worth more than a $3 million guarantee based on his age (30 in 2018) and his 2017 performance, but if he returns to his 2013-2016 form in 2018, a reasonable possibility, he could easily be worth $10 million.  He’s going to have to be pretty good to pitch 200 innings, when the last of the incentives kicks in, in a season in today’s game.

Once one team and player do something obvious but contrary to prior practice, then all the other teams quickly jump in.  You could say the same, for example, for the Dodgers signing Jackie Robinson in 1946.  However, until that first team and player do it, everyone is worried about the possibility that a dramatic change will upset the apple cart.

Teams have always wanted to pay players based on their immediate past performance and anticipated immediate future performance.  It’s just taken awhile for the contract negotiators to catch up.

 

Advertisements
Explore posts in the same categories: Baltimore Orioles, Baseball History, Los Angeles Dodgers

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: