What’s Behind MLB’s Bizarre Spike In Contract Extensions?

On Feb. 13, 25-year-old ace Aaron Nola agreed to a four-year contract extension with the Phillies. A day later, 26-year-old Max Kepler and 25-year-old Jorge Polanco agreed to five-year extensions with the Twins. The following day, Yankees ace Luis Severino, who turned 25 a few days later, signed a pact with the Yankees. The deals marked the beginning of a historic spree of extensions.

From mid-February through Thursday, 27 players had agreed to extensions worth a total of 132 years and $2.045 billion, according to data from the MLBTradeRumors.com extension database analyzed by FiveThirtyEight. There has never been a flurry of activity like this: March represented the most dollars ($1.126 billion) and years (58) awarded in contract extensions in a one-month period that we’ve seen.

While veteran stars including Nolan Arenado, Chris Sale and Mike Trout all signed massive extensions this spring, players with little major league experience made up the majority of the deals. Fourteen of the players — including reigning NL Rookie of the Year Ronald Acuna, who signed a $100 million extension last week, and fellow Brave Ozzie Albies, who signed a much-discussed extension Thursday — were so early in their careers that they were not yet eligible for salary arbitration, which generally requires a player to accrue three years of major league experience before becoming eligible to negotiate for significant raises. Eight others were at least a year shy of six years of service time, the amount required to become a free agent. In 2019 to date, players signing extensions have forfeited 51 combined arbitration-eligible seasons and 69 future free-agent years. The deals also include club options covering 25 seasons.

Buying out the arbitration and free agency years of younger stars for the purpose of controlling and reducing payroll costs was a practice pioneered in the early 1990s by John Hart, then general manager of the Cleveland Indians, who watched great Pittsburgh Pirates teams broken up prematurely because of escalating player costs. While extensions had since become common practice, the activity had slowed in recent seasons as young stars like Bryce Harper and Manny Machado seemed intent on hitting the open market as soon as possible.

So what’s behind the extension surge this spring? Why are MLB teams intent on avoiding arbitration and locking up young stars? It may be because arbitration wasn’t working to begin with — at least from the perspective of the teams.

Under arbitration, a player and a team each puts forth a salary amount to a panel of arbitrators, who then must decide on one of the two figures. In the past two offseasons, players have totaled more wins than losses in arbitration cases against the owners — the first time that’s happened in back-to-back years since 1989-90. Through 2015, owners had won 58 percent of all arbitration cases, according to Forbes.

This winter, Gerrit Cole ($13.5 million) and Trevor Bauer ($13 million) were among the six players to win their cases against their clubs. Arenado and the Rockies avoided a hearing, which is common practice, by signing a one-year, $26 million deal — a record for a player eligible for arbitration.

“We’re going to be seeing $20 [million] and $30 million salaries regularly in arbitration,” one agent told us. “They [MLB teams] are going to try and push back on that. How do you do it? You pull those guys out of the system.

“Every time the teams see a seam in the defense, they exploit the shit out of it and they are really good at it,” the agent said. “They are capitalizing on good players they have been watching through the draft, through the minor leagues, and who are represented largely by unqualified or under-qualified agents. The teams have scouting reports on agents the very same way they have on opposing hitters and pitchers. They have heat maps. They know our tendencies, they know who will go to arbitration, who won’t, whose business is failing and they need to vest their fees.”

The agent noted that teams look at arbitration as an important battleground and have scores of analysts that compile data for these cases. By taking players out of the arbitration system, the teams not only cap earning potential for those players, but they also reduce salary comps for other players. Agent Scott Boras described the MLB’s aggressive approach with young players and extensions this spring as “snuff contracts” — or an attempt to snuff out future markets.

Greg Dreyfuss, an associate general counsel for the union and the MLBPA’s director of analytics and baseball operations, also sees a link between the wave of extensions and players’ recent arbitration wins. The union and players have closed the data gap between clubs in making their cases. Dreyfuss says agents and players are educated on the market. While MLB payrolls remain stagnant, the records for largest arbitration salaries have been set in the past two years. The average salary of an arbitration-eligible player in 2011 was $2.73 million; that increased to $3.97 million this year, a 45 percent jump, according to analysis of MLBTradeRumors.com data.

The total dollars and players in the arbitration system has jumped from $393.6 million and 144 players in 2011 to $789.6 million spread among 199 players this last offseason, growth in part due to the game trending younger — meaning that there will be more 20-somethings entering arbitration.

“Nine of the 10 largest one-year contracts in the history of salary arbitration have come in the past two years, and overall, arbitration salaries have kept pace with the rise in industry revenue over a 10-year period,” Dreyfuss told FiveThirtyEight. “Recently a lot of really good players in that process have stood up and said, ‘No, I’m not just going to take what you give me,’ and they’ve fought for what they consider a fair salary. So, I do think there’s some correlation between players succeeding in arbitration and clubs wanting to take players out of that process.”

While spending efficiently is always a goal for teams, how these clubs have handled free agency in recent winters may be a motivating factor in some players’ decision-making. Even Trout, the game’s best player, expressed reservations about entering the open market when he signed a record extension (which is also a bargain for the Angels) this spring.

“I kind of saw what Bryce and Manny went through and it drew a red flag for me,” Trout said. “I talked to Manny and Bryce. It was a tough couple months in the offseason. They put it perspective in my mind.”

Not all extensions are club-friendly. Drefyuss notes that there have also been a number of veteran players who have agreed to extensions that will pay them lucratively into their mid-30s.

“Players agree to extensions for a variety of valid reasons, and there are any number of factors involved in their decisions,” he said

One key decision a player must make when considering an extension is how much financial upside to concede for the sake of job and financial security. In dealing with future risk, teams face less downside than individual players do. While a team can absorb a poor contract, a player is one injury or decline in performance away from having his career trajectory significantly altered.

Acuna and Albies look like future superstars, yet they signed deals that could potentially cost them nine figures in future earnings. White Sox top prospect Eloy Jimenez signed a six-year deal with two club options before he ever took a major league at-bat, limiting his financial upside. Those are the types of club-friendly deals that some on the players’ side have criticized. There is also an argument that individual players ought to consider not just themselves but their peers and future major leaguers when considering a long-term deal — and that they should wait until they are at least arbitration-eligible.

“If guys aren’t going through the system, if all the young [stars] are signing before they get there, then we are not going to have those posts to hold on to,” the agent said of salary comps. “I don’t think this is teams trying to screw with the free agent market. They are trying to take the best young players out of the arbitration system.”

Toronto outfielder Randal Grichuk, 27, said the Blue Jays began negotiating with him last month during spring training in the midst of the extension spree. He eventually signed a five-year, $52 million extension.

“The way I looked at it was taking guaranteed money, setting my family up for life, it’s hard to turn down,” Grichuk said. “If I leave a few dollars on the table now, I’m going to just be finishing my 31 season [after his deal expires] going into free agency. If I produce well, I’m going to be young enough to make some more. And if I’m not able to, whether due to injuries, failures, anything happens, I’m still set for life.”

Grichuk was into his arbitration years when he signed his extension, but he didn’t take issue with young stars like Acuna opting for financial security earlier along in the process.

“He could have probably waited and got more, but it’s tough to talk negatively about a guy who just got $100 million and is set for life,” Grichuk said. “What’s the difference between $100 [million] and $200 [million]? His kids’ kids’ kids won’t have to work? … I think it’s one of those things where his life changes completely.”

Neil Paine contributed research

Mike Trout Is A $430 Million Bargain

As reported by ESPN’s Jeff Passan on Tuesday, the Los Angeles Angels are closing in on a 12-year contract extension worth at least $430 million with outfielder Mike Trout, setting the all-time mark for both the largest contract (passing Bryce Harper’s $330 million deal from a few weeks ago) and the greatest average annual contract value in baseball history. Trout is a longtime object of fascination for us here at FiveThirtyEight; we’ve frequently extolled his virtues as baseball’s best and most consistent star. Now he has the record-breaking contract to match his talent — but one that might still represent a big bargain for the Angels. And the deal’s long-term nature only renews questions about Trout’s ability to win in L.A., as well as his potential to break through as a star off the field.

At first glance, about $36 million per year seems like a tremendous deal for the Angels. According to FanGraphs’ estimated market values based on wins above replacement (WAR), a player with Trout’s 2018 production should have been worth about $79 million last season. That’s nothing new for Trout: FanGraphs estimates that he was worth $55 million (in 70 percent of a full season) in 2017, $78 million in 2016 and $74 million in 2016. So if Trout continues his recent pace, the Angels will basically be paying him half of what he’d be worth on the open market over the next few seasons.

Of course, Trout is also 27 this year, traditionally the age at which baseball players peak. Trout’s new deal will take him through 2030, his age-38 season. Even though no player in baseball history has posted more career WAR through their age-26 season than Trout,1 it’s probably safe to assume that Trout won’t continue to be a 10-WAR-per-season machine throughout the entire life of this contract.

The old saying that “Father Time is undefeated” remains true — perhaps truer now than ever. And even star-level players peak more quickly than you might expect. While Willie Mays and Hank Aaron were superstars late into their careers, other outfielders similar to Trout — such as Ken Griffey Jr. and Andruw Jones — fell off a performance cliff after age 30 and never recovered.

Here’s a plot of the 10 retired outfielders most similar to Trout through age 26 (according to The Baseball Gauge), along with the arcs of their seasonal WAR as aging took hold:

Trout’s most similar group averaged just fewer than 1.0 WAR by age 38. And that group contains eight Hall of Famers, including Griffey, Aaron, Mickey Mantle, Frank Robinson and Mel Ott. To further complicate matters, the quality of competition in MLB continues to improve over time, and the game is getting younger, making it more difficult to age well.

However, if 1 WAR is worth $8 million in 2019, and that value inflates by 3 percent per season (for the first five seasons),2 the average of Trout’s comparable group would be worth about $450 million from age 27 through age 38. And it bears mentioning that Trout has accumulated 48 percent more WAR through age 26 than his comparable group of all-time legends. (Yes, Trout is good.)

So Trout seems like a very good bet to deliver more value to the Angels than they’re paying him for in this contract, even if some of the assumptions above are more player-friendly than the current state of baseball’s economics. While many MLB mega-contracts end up looking bad in retrospect, this Trout deal might be the rare one that delivers positive surplus value for the team.

Either way, with no opt-outs in the deal and a full no-trade clause, Trout and the Angels are committed to each other for the long haul. If Trout is interested in winning World Series rings, he took a risk in remaining in Anaheim: He has never won a playoff game with the Angels even while establishing himself at the game’s best player. As great as Trout has been, even the best player cannot do it alone — particularly not in baseball, which is a weak-link sport that is less dependent on star talent than other sports.

But in some ways, the Angels’ outlook is improving for the second act of the Trout era. Albert Pujols’s albatross of a contract is coming off the books after the 2021 season — $28 million in present-day dead money the Angels can allocate elsewhere.

The Angels entered Tuesday with $28 million committed in 2022 salaries, ranking 18th in baseball despite playing in the sport’s No. 2 market in Los Angeles. (The MLB average is $35.2 million committed in 2022, according to Spotrac.) So should the Angels want to compete in the market for high-end free-agent talent in coming years — like, say, Mookie Betts (free agency ETA 2021) or Francisco Lindor (free agency ETA 2022)3 — they will have the flexibility and purchasing power to do so.


Baseball's Mike Trout is a god of WAR


Perhaps most important for the club’s long-term prospects is the productivity of its farm system. For much of Trout’s tenure with the Angels, the club had one of the worst farm systems in baseball. The Angels’ system ranked last in baseball in 2014, 2016 and 2017, according to Baseball America. That’s begun to change. The Angels hired Billy Eppler to lead their front office after the 2015 season; they improved to 14th in the rankings in 2018 and 13th this spring.

Outfielder Jo Adell, L.A.’s first-round pick in 2017, has quickly become one of the game’s elite prospects, while starter Griffin Canning, a second-round pick in 2017, gives the Angels a second top-100 prospect. And help from the farm is not too far away: Eight of the top 10 Angels prospects are expected to open in Double-A or higher this spring. Moreover, if the Angels’ top prospect from a year ago, Shohei Ohtani, can become a consistent impact performer as a pitcher and hitter, L.A. could have two star caliber players in one roster spot.

The Angels’ biggest long-term issue is that they are in the same division as the Houston Astros, who are on the cutting edge of evaluation and player development. The Astros took home the 2017 World Series trophy, won 103 games a year ago project to win 99 games again this season according to the FiveThirtyEight model, all while maintaining a farm system that has ranked fifth or better in three of the past four years. Baseball America ranks the Astros’ farm system No. 5 in the game entering 2019.

It will be no easy task to supplant the Astros as kings of the AL West. And if Trout and the Angels can’t do that, it will be more difficult for Trout to raise his own profile, which lags well behind what his talent would suggest. Only one baseball player made ESPN’s list of the 100 most famous athletes in the world, and it wasn’t Trout — it was Bryce Harper at No. 99. This contract extension makes Trout very rich, but it also forces him to forfeit the chance to join a more likely World Series contender — and he’ll miss out on the spotlight that would have shown on him during his own free agency after the 2020 season.

So now the pressure is even greater for the Angels to surround Trout with better talent and build a winner around him. By the end of this contract, he’ll have spent two full decades with the franchise. It would be a true shame if Trout’s next 12 seasons contain as little team success as his first eight did.