Contract Extensions and Risk Shifting

Just about two months into the season, Albert Pujols is putting up a thoroughly disappointing .257/.326/.395 batting line.  Fangraphs has him at only .8 WAR on the season to go along with a negative WPA (-.41).  Some of this is BAbip related, but he’s also hitting almost 50% groundballs, which doesn’t do any favors for a guy not known for his speed.  It’s ugly.

I expect Pujols will rebound.  Or perhaps that he’s injured and refuses to acknowledge it in a contract year.  Either way, I highly doubt we’re seeing the real Albert Pujols.  But this gives me a good opportunity to write about something that I thought a lot about during the Pujols contract extension talks, as well as after the recent extension given to Ryan Braun.  That is the risk-shifting function of long term extensions and how little that seems to affect certain negotiations.

There’s no way to really know what Albert Pujols and his agent asked for at the beginning of their dialog with the Cardinals front office this winter.  However, what little we do know indicates that he was looking for a contract in the range of Alex Rodriguez’s 10 year/$275 million deal from 2007.  The reasoning was solid.  Albert Pujols is the best player in baseball.  By pure OPS, he’s been the best right handed hitter of all time.  He believed he deserved to be paid like it.

Alex Rodriguez’s deal, however, was not an extension.  In the unlikely event that talks broke down between him and the Yankees, he could have chosen to sign with another team.  That wasn’t the case with the Cardinals and Pujols last winter.  No matter what happened between the parties, Albert Pujols would play in STL in 2011.  And no matter what happened, the Cardinals would pay Pujols $16 million for his services.

With that in mind, the Cardinals should have never topped Alex Rodriguez’s record contract.  And Pujols’s agent shouldn’t have expected them to, although baseball teams have done stranger things.  A pre-2011 extension shifted the risk of the 2011 season from Pujols to the team.  And, even with the best player in baseball, that is a significant risk.

I’m not talking about decline.  There’s a fair amount of historical precedent that the best players age slowly and Pujols could be expected to produce fantastic numbers for at least 5-6 more years.  (On the other hand, there is Jimmie Foxx, whose career was fairly similar to Pujols).  Injury is also a factor.  A hip injury or disorder could sap Pujols’s power (see Albert Belle).  A freak accident and broken leg could put him out for a year and call his career value into question (see Kendry Morales, perhaps Buster Posey).  A foul ball could injure his eye, or his elbow could finally explode, or he could cut his hand with a hunting knife.  All of this is exceptionally unlikely, and it only happens to a few players a year, but it happens.  And so does a bad streak of luck, an unprecedented GB%, and a possible sudden drop in interest from certain money-conscious team.  If Pujols ends the season with an OPS under .800, how many GMs will line up to give him a record 10 year contract?

All of this risk moves to the team with an extension.  If Pujols’s career takes a downturn for any reason, he still gets the ridiculous amount of money he’s promised on his new contract.  And the Cardinals, or perhaps an insurer (in the case of unexpected catastrophic injury) still has to pay him.

I’m not saying the Cardinals did the right thing.  I have no idea what happened between them.  I still think both sides could have found a reasonable, agreeable contract.  And I think both sides would have been smart to consider the risk of the 2011 season.  Right now, we’re seeing what that risk means.  Right now, the Cardinals are probably breathing a huge sigh of relief that Pujols didn’t accept their offer–whatever it was.  If he did, they’d be facing down 7+ uncertain years and hundreds of millions of dollars on a 1b who can’t put up a positive WPA.   But by the end of the year that might change.  Probably will.  Pujols is too good to keep hitting this bad.

Maybe the strangest example of a team failing to take risk into consideration is the Ryan Braun extension, signed earlier this season.  The extension covers the 2016-2020 seasons.  Braun wasn’t just committed to the Brewers next season.  He was committed to them until 2015.  Any number of things could happen between now and then, and yet the Brewers still agreed to give Braun more than Holliday makes per year.

To me, that’s completely bizarre.  I understand that inflation and proper accounting practices makes the ~19 million he will make per year at the end of the decade considerably smaller than it seems.  But baseball can’t be predicted that far in the future, and there was no reason for the Brewers to take this risk.  They don’t know where the team will be in 2016.  They certainly don’t know where Ryan Braun will be then.  Unlike Pujols, he’s having a fantastic season in 2011.  But Braun could have an entire 4 year slow decline phase between now and then.  The team took on all of the risk for everything that might happen to Braun in those four years.  I understand a team being willing to bet against a sharp drop-off or freak injury.  But wagering ~100 million dollars against potential decline along with all of those other things?  When the team already has Braun under contract well into the future?  No way.


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