The Morning Report
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The Padres just gave a lot of money to a young player. That’s exactly what should have happened.
Three years ago, the Padres gave out a handful of contract extensions to young, promising players long before they were approaching free agency and the right to get big money from another team.
None worked out very well, but they were a still good idea and the right course for a team of modest means.
Luckily, that experience didn’t keep the Padres from pursuing the strategy again. Monday, they announced a six-year, $35 million contract extension for second baseman Jedd Gyorko, a 25-year-old who last year led all National League rookies in home runs.
Now the Padres need to do the same thing with guys like short stop Everth Cabrera and pitcher Andrew Cashner.
The idea underpinning these deals is simple, and has grown so prevalent that teams of all income levels are pursuing them, leading to what Grantland called “the death of free agency“: Good players are increasingly signing with their own teams before they reach the point where they can sign anywhere (and for much more money).
Generally speaking, players play for much below their market value for their first six years in the league because of the collective bargaining agreement negotiated by the players union and the league’s owners.
During those six years, players can do one of two things. They can wait patiently, hoping for a chance to reach free agency around age 30, at which point they will make a lot of money. The trick is staying healthy up until that point.
Or, they can negotiate a new contract before then that will net them less money, but more than they’d make from their rookie contract.
A pre-emptive extension is a risk-reward proposition for both parties.
In a player’s first three years in the league, his team determines his salary and it’s lower than more experienced players’. Gyorko, for instance, made $490,000 last year. He received a small bump to $510,000 this year.
In the following three years, the player enters a process called salary arbitration. Teams make a case for how much they think a player is worth, a player’s agent makes a similar case and a third-party arbitration panel can make a final decision. Usually, though, the team and player settle somewhere in the middle before going before the panel.
For the teams, offering a pre-emptive extension is worthwhile for two reasons. One is that they’re trading guaranteed money when they aren’t in danger of losing a player in exchange for additional years of team control before the player reaches free agency. They get to hang on to the player longer.
But not all contracts buy out years of free agency. A team might simply want to lock in a player at a manageable price before he reaches arbitration, as a hedge against the possibility that he becomes a superstar and gets expensive. Arbitration is designed to suppress a player’s salary, but for great players it can still get pricey, especially on the back end.
Gyorko’s new contract buys out his last year before reaching arbitration, all three years of arbitration and one year of free agency. At $35 million over six years, it’ll pay him an average of $5.8 million a year.
But this year-to-year arrangement is risky for the player. A pitcher might throw a slider and feel something pop in his elbow. An enigmatic outfielder may argue with an umpire, get thrown down by his coach and tear his ACL.
So players have ample incentive to sign contracts that pay massive sums but are nonetheless team-friendly because they are so much less than that same player would receive under other circumstances.
That’s what happened for Gyorko.
Last year, the Padres won roughly 2.5 more games thanks to Gyorko’s presence than they would have if he had been replaced by a hypothetical player from the minor leagues.
So how much does that make him worth, under this new contract, to the Padres?
That can be a pretty complicated question. The baseball analytics website Fangraphs took a look at the question based on the salaries received by 83 free agents who signed contracts in the offseason.
It found that the going rate for a single win in free agency this past offseason was either $5.9 million or $7 million, depending on whether you look at the median or the average.
Gyorko’s deal, according to Fangraphs’ equation, represents quite a steal for the Padres.
He would be expected to produce nearly 13 wins over the course of the deal. The deal, remember, is worth on average $5.8 million per year.
In all, that would mean he’ll be paid $2.74 million for each win he’s expected to produce over the next six years, even though the going rate league-wide is around $6 million per win.
That’s why it’s good strategy for the Padres to pursue these deals: They can find surplus value to mitigate their inability to compete on the free agent market.
There are a few caveats. For one, the baseline used here to determine the going rate for a win came from free agent contracts, which are by definition more expensive than extensions signed by players under team control. If Gyorko’s deal paid him close to what free agents received this winter, it would mean the Padres overpaid.
But Fangraphs’ equation accounts for the fact that players get worse as they get older. It assumes they’ll get about 10 percent worse each season, or 15 percent worse once they turn 30. That makes sense for free agents, who are generally older and have already reached their peak performance.
That might not be the case with Gyorko. He’s 25 and in his second season in the league. It’s possible he’ll improve for a few more years before the typical aging curve starts to take its toll. The Fangraphs model — meant to evaluate contracts for older players — could be discounting how much productivity he’ll provide over the life of the deal.
Gyorko’s new deal isn’t without risk, as the Padres saw the last time they dipped their toes in these waters. But it’s still a team-friendly deal.