The value of extensions are often distorted by unfair comparisons to free agency. When a guy signs a pre-free agency extension, the reaction is usually that the team got a huge deal, due to the low cost in comparison to the outrageous free agent contracts.
Take Andrew McCutchen as an example. That extension — $51.5 M for six years — is seen as a massive value, especially when guys like Jacoby Ellsbury are getting $150 M contracts. McCutchen’s deal is a value, but only because he’s living up to the deal and exceeding the deal. At the time he signed the deal, it just looked like it was market rate for a guy with his service time and his production. The reason $51.5 M was considered market rate for guys like McCutchen, and others who signed similar deals (Jay Bruce, for one), is because of the risk involved.
Teams control a player’s rights until that player has six years of service time. In most cases, the team will get a player for six full seasons, plus one partial season. Until a player gets three years of service time, he is limited to making the league minimum. From there, a player will have three years of arbitration, where he receives a percentage of his free agent market value.
When an extension offer is made, it is made with the knowledge that the player is looking at a reduced salary for his first six seasons in the majors. Then you add in the risk factor, with the possibility that the player might not live up to expectations (SEE: Tabata, Jose), and the cost gets lower.
The result is that there are two markets. There’s the free agent market, which usually reflects a player’s full value. Then there’s the market for extensions, which is starting to get established over the last few years.
As we saw with Starling Marte, plus a lot of other players recently, the market for hitters with more than one year of service time, but less than two years is $30-35 M. McCutchen’s extension is a few years old, but as we saw with Matt Carpenter and Jason Kipnis, the market for players with more than two years and less than three years is still in the $52 M range. There’s not really much of a market for players with less than one year of service time, since there aren’t many players who sign extensions that early.
So what does that say about the extension offer that Gregory Polanco received? The Pirates offered him $25 M for seven years, plus three option years that would have taken the deal to $50-60 M total over ten years. I’m assuming the deal would start in 2014, rather than beginning in 2015. If it started this year, the deal would buy out control of three free agent years from Polanco. That’s the same amount of free agent years the Pirates got from McCutchen and Marte.
Since we can’t compare Polanco’s offer to any recently signed extensions, let’s compare him to the other outfielders in Pittsburgh.
The Years of Control
There are three factors to a guaranteed contract — the signing bonus, the guaranteed years, and the buyout prices in option years. Marte and McCutchen both got free agent years guaranteed. Marte got one year guaranteed, while McCutchen got two years guaranteed. The proposed deal for Polanco wouldn’t have any guaranteed free agent years. So the best way to compare the guaranteed money would be to look at the normal years of control (the 0-6 years) for each player, along with the signing bonus and buyouts.
Polanco’s guaranteed deal through his sixth year of service time would have paid him $25 M.
Starling Marte will receive $22.5 M guaranteed through his sixth year of service, and that is including his 2013 salary before the extension. It doesn’t include his partial 2012 salary. That total also includes his signing bonus, and his buyout prices.
Andrew McCutchen’s price is $25.375 M. Again, that includes his 0-6 contracts, including what he earned prior to his extension. It also includes the signing bonus and buyouts.
The reason I included the signing bonus and buyouts for both players is because those are probably included in Polanco’s deal as well.
So by comparison, the guaranteed amount is very fair for Polanco, considering the years it covers, and considering that he has one and a half fewer years of service time than Marte, and two and a half years less than McCutchen.
The Free Agent Years
It seems that the later you sign your extension, the more you get guaranteed in free agency. Polanco has zero service time, and didn’t have any free agent years guaranteed. Marte had a little over a year, and got one year guaranteed. McCutchen had a little over two years of service, and got two years guaranteed. That also seems to be standard for other extensions around baseball.
It makes sense. The further you are away from free agency, the bigger risk you take in guaranteeing those years. Since these extensions we’re looking at all buy out three free agent years from the Pirates outfielders, we can compare the potential added values. Note that I used the buyouts above, so I won’t be including the additional costs here for the option years.
Starling Marte could receive an additional $31 M if his option years are picked up. He has two option years, totaling $24 M, which would add an additional $21 M to his deal. He also has one guaranteed free agent year for $10 M.
Andrew McCutchen has two guaranteed years at $27 M total. He also has one option year for $14.5 M, minus the $1 M buyout. In total, that gives him an additional $40.5 M through those free agent years.
We don’t know the potential breakdown of Polanco’s extension offer. Jon Heyman reported that the deal could have reached $50-60 M. That means those extra three years would have been worth $25-35 M.
In comparison to Marte and McCutchen, the $25 M figure is a bit low. Then again, Polanco doesn’t have a single at-bat in the majors, so it’s hard to argue that he deserves the exact same deal as Marte or McCutchen. The $35 M figure would fall between those two deals, giving Polanco more than Marte, but about $5 M less than McCutchen.
Usually when there’s a difference in future value like that, it has to do with Super Two status. I’m not sure if that’s the case here, but I do know that Super Two isn’t reflected in the guaranteed value of extensions. Instead, there are clauses in the contract that increase the value of certain years if a player does qualify for Super Two status.
I don’t want to say that Polanco’s offer had a Super Two clause to give that potential added $10 M. So we’ll just stick with what we know. Polanco’s additional deal, at its lowest, would have added $25 M for the three free agent years. By comparison, that’s $6 M below Marte, who was $9.5 M below McCutchen. Considering the service time for each player, the tiered structure seems fair.
Is the Extension Fair?
If these reports are correct, then the Pirates made a very fair offer to Polanco. They offered him the same amount of money that McCutchen received for his 0-6 years, and a few million more than Marte received. They offered him a potential $25 M or more for his first three free agent years. That’s $6 M less than Marte, and $15.5 M less than McCutchen. The differences make sense due to Polanco’s lack of service time. Also, keep in mind that Polanco is receiving more in the 0-6 years, so his difference, compared to Marte, would only be $2 M.
It’s hard to argue that this isn’t a fair offer when looking at it side-by-side with Marte and McCutchen. It’s actually a very aggressive offer for a guy who hasn’t spent a single day on a Major League roster.
Does it Make Sense For Polanco to Reject?
I believe there is a reason you don’t see a lot of players sign extensions like this. That reason is because you don’t need much time in the majors to get more guaranteed money, and potentially more money down the line.
If Polanco waits a year and a half, he could get a deal like Marte, with an extra $6 M guaranteed, and a few extra million potentially added down the line. The real payout is waiting two and a half years like McCutchen. He’d get an extra $25 M guaranteed, and a chance to make an extra $15 M down the line.
There is risk involved here. Polanco could get hurt prior to reaching that two and a half year mark. He could struggle and fail to live up to his potential. Going back to the Jose Tabata extension, he received $15 M guaranteed. That was seen as a team friendly deal at the time. But what would have happened if Tabata declined and waited another year? Does he get an extension coming off his 2012 season, where he posted a .664 OPS and dealt with a lot of injuries? Unlikely.
If Polanco takes the risk to wait and try to increase his value, then it wouldn’t be unheard of. A lot of players do the same thing. That’s why you don’t see many players signing extensions with less than a year of service time.
The End of Negotiations?
I wouldn’t take much away from the news that Polanco rejected the deal. What that tells us is that the two sides are discussing an extension, and haven’t agreed yet. Maybe it means Polanco isn’t ready to sign an extension right now. I will point out that we’ve heard the same thing in the past with Starling Marte and Andrew McCutchen. We heard that the two sides weren’t close. During the Spring, we heard that Marte turned down an offer, only to sign less than a week later. This doesn’t mean an extension for Polanco is coming soon. It just means that the negotiations shouldn’t be ruled over just because the player didn’t sign the first offer we heard about.
Overall, it’s good that the Pirates are being aggressive with Polanco, and trying to extend him early. I’ve written in the past that this is the approach they should take with him. From here, we’ll have to wait and see if that approach ends up successful.
Links and Notes
**Prospect Watch: Andrew Lambo Misses Second Game With Bruised Thumb. Also in this, Wandy Rodriguez struggles in his latest rehab start.
**Minor League Schedule: Brandon Cumpton Returns to Indianapolis Rotation. When Rodriguez returns, he should be in the bullpen, with Cumpton as the fifth starter.
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