With More Teams Embracing Them, Opt-Out Clauses Could Become Baseball’s Newest Currency

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Jason Heyward took at least $16 million less in guaranteed money over two fewer years to sign with the Chicago Cubs rather than either the Washington Nationals or the St. Louis Cardinals. Yoenis Cespedes took at least $25 million less, also over two fewer seasons, to come back to the New York Mets rather than accept a five-year offer from the Washington Nationals. The common thread in all of this? Aside from both deals involving players choosing not to play for the Nats, I mean? The presence of opt-out clauses.

Heyward’s pact with the Cubs includes player options to void the deal at two separate points, after either the third or fourth years. Cespedes, on the other hand, can actually walk away from his at the conclusion of his first season. The prevailing thought among many fans has been that these are great deals for the players, who are insulated against poor performance by the ability to re-up with their team for more money.

While that may be the case for Scott Kazmir, whose three-year deal with the Dodgers includes a first-year opt-out before jumping from $12.67 to $17.67 million in years two and three, Heyward and Cespedes have even more team-friendly deals. Don’t get me wrong, Kazmir’s deal looks pretty good in light of the premium being placed on even mid-level arms this winter. But where his deal escalates after the opt-out, the two outfielders actually see their salaries drop.

Conventional wisdom regarding opt-outs has held that they were great for teams if a player out-performed his early salary but that they could turn into albatrosses should said player fall on his face and choose opt in for even more money the following season(s). The fallacy in this logic is somewhat transparent, as a more traditional contract would still carry all the same risk, just without providing the player a separate opportunity to force it on his team.

Theoretically, a contract with opt-out clauses automatically has less inherent risk than one of the same value absent such a clause. That’s because there exists the possibility that even a player who has under-performed his deal could choose to walk away from a higher salary the following year. Not that that would ever actually happen, mind you, just that the option exists.

But where teams can really stack the odds in their favor, where they really begin to reduce the risk of their investment, is in leveraging a professional athlete’s confidence by front-loading a deal and strategically placing opt-outs in front of years in which the salary drops. These guys want to bet on themselves and the likelihood that they’ll be worth more in the future. Because of course they will. But there’s a tried-and-true gambling axiom that says, “The house always wins.” As such, MLB front offices are using player options as big chips in order to maintain a house advantage.

Take Heyward’s contract, for example. He’ll earn just $17 million in his first year in Chicago, after which he’ll see a sizable raise to $24 million in years two and three. That figure actually drops to $22.5 million in the fourth year, so Heyward can choose to take a pay cut or hit the open market once more. This is a big win for Heyward, who is insulated against playing under a below-market-value deal for another few years. But say he wants to stick around. He’ll have another option heading into a fifth year that will pay him only $23.5 million, a sixth that will pay the same and two final seasons at $24.5 million.

Cespedes, on the other hand, will be paid commensurate with the top outfielders in baseball in 2016. His $27.5 million salary gives him the highest guaranteed average annual value among free-agent position players to sign this winter, but he can opt out prior to a drop to $23.75 million in the two subsequent seasons of the deal. It’s a big investment, to be sure, but one that makes all the sense in the world for the Mets.

While it’s difficult to look at the money set forth by either the Cubs or Mets and laud their frugality, it’s impossible to dismiss the risk management they’ve employed here. Should either player fall short of ideal production, the clubs won’t be forced to pay steeply escalating salaries over time. And should either player’s production exceed his contract to such a level that he leaves for greener pastures, his old team is able to assign those budgeted funds to another player.

Everyone wins, right? Well, everyone but the Nationals.

Beyond just the idea of mitigating the risk of over-payment, however, the Cubs and Mets are benefiting from greater flexibility when it comes to time. By leveraging players’ confidence in themselves, those teams were able to shave two years off of the contract length being offered elsewhere. That’s two fewer years of paying an aging player, of being unable to extend a young prospect, of being handcuffed when it comes to signing another free agent.

Contrast that with the strategy the Orioles employed in bringing Chris Davis back into the fold on a seven-year, $161 million contract. The length there is somewhat misleading, though, as $42 million of the deal is being deferred over the course of 15 years following the conclusion of the original seven. Yes, the Orioles will be paying Crush Davis until he is 52 years old. Hey, stop laughing! Okay, you’re right, it is kinda funny.

It may also be kinda smart, as Dave Cameron lays out for FanGraphs by looking at the true worth of the contract using net value calculations. Essentially, the Orioles save a significant amount by deferring a quarter of the money owed Davis because that money loses value over time. And that makes sense, right? After all, the $1.4 million Baltimore will pay out in 2037 will be worth a great deal less than is now due to inflation.

That’s all well and good when viewed simply in terms of theoretical values, but it doesn’t really speak to the problematic nature of time. At it’s core, such a deferral is really no different from my son stashing his laundry behind his drawers rather than folding and stowing it all properly. O’s owner Peter Angelos cares little, as he’s unlikely to make it to the ripe old age of 108. Will the new owner(s) be happy about keeping those payments on the bottom line though?

Salary deferrals are an easy way to retain a star player with lower actual financial impact than what the figures indicate on the surface, but when it comes to setting a team up for immediate success and long-term flexibility, the use of opt-out clauses appears to be much more favorable. It may be a while before we see this become more than a clever gimmick, but don’t be surprised when such options have become de rigueur in another couple of years.