Sunday, February 24, 2013

Options For Everyone

The business of Baseball transcends the game in many ways. Oftentimes purist fans want to forget about the business side of Baseball as it takes away from the joy of watching America's Pastime the way it was meant to be watched. On the other hand, like in medicine, philanthropy, and other parts of life, Baseball is a business, no matter how much we wish it weren't. While many heads in the clouds hope that one day Baseball will return to just a bunch of boys playing game after game in the summer sun, the business side of Baseball isn't going anywhere. In fact, embracing the money side of the game can enrich one's fandom. Determining the length, dollar amount, and other parts of contracts makes up such a large part of analyzing the game, that some focus solely on such topics. If your looking for a good website for all things business oriented concerning Baseball check out Maury Brown's website For now, I want to discuss the idea of an option. 

Adam LaRoche
Every player's contract has an average annual value, a yearly dollar amount that when combined equals the total value of said player's contract. So, for example, this offseason Adam LaRoche of the Washington Nationals signed a 2-year contract worth $22 million. He will earn $10 million in 2013 and $12 million in 2014. That $22 million counts as his base salary. Options are one-year additions that teams and players' representatives negotiate on when discussing a contract that have a dollar amount associated with them, but are not guaranteed unless the option is "picked up" or the option vests. Options give teams and players flexibility. Sometimes tacking on an option to a contract can make negotiations run more smoothly, other times they can be deal breakers, causing the two sides to forgo a contract and move on. More often than not, options are useful tools for both a player and the team; giving both sides a bit more wiggle room when discussing contracts involving tens of millions of dollars.

A few different types of options exist, including team options, player options, mutual options, and vesting options. I'll give a quick synopsis of each type, using examples to illustrate the positive and negative affects of each. First, let's discuss the team option. Team options, or club options, are the most commonly utilized form of the option. In his book, "The Extra 2%", Jonah Keri mentions club options when discussing ways in which the lowly Tampa Bay Devil Rays, now known only as the Rays, got the most out of the contracts they offered to top tier players. Keri describes it best when he says, "But with a club option, the team wields all the power. Got a 40-home run hitter? Keep him. Did he turn into Mario Mendoza? Happy trails." Team options give a club's front office complete latitude as to whether to keep or release a player. If an option has a dollar amount that a player would not find on the open market due to attrition in productivity then the team will choose to not pick up said option because no team wants to waste money on a player who isn't worth the money he will receive.

James Shields
On the other hand, using the example of the Rays, tacking on multiple team options onto a contract given to a young player could allow a team to keep said player for relatively less money than that player would make on the open market, making such an option very valuable. For example, when the Rays offered James Shields a contract early in his career, they added three player options on to the end of the deal, anticipating that Shields would only get better with time, and thus giving them complete autonomy when making the decision to keep him or not. Veterans who sign contracts during their prime years rarely allow teams to add club options onto their deals, preferring the other types of options instead, but young players who haven't proven their worth yet, or older players who are on the wrong part of the aging curve accept team options because it leaves some possibility that they could continue playing without becoming a free agent. Oftentimes, if a team refuses to give a player a contract without a club option attached, the player's agent will demand that a buyout clause be attached. A buyout clause is a dollar amount that a team must pay the player if said team decides not to pick up the club option, thereby securing the player some money no matter which way the club decides to go.

Derek Jeter
Now that you understand what a team option entails, let's move on to a player option. Player options are simple; they constitute the exact opposite of a club option. If teams place club options on younger or older players' contracts, player options are more often seen on contracts of players in their prime, or franchise players' contracts. Since the team has the money, front offices rarely want to allow a player to decide whether he will play another year after the base years of his contract have expired. It leaves teams with fewer alternatives, making it more difficult for General Managers and their staffs to plan for the future. On the other hand, some players are just worth it. For example, Derek Jeter, the face of the Yankees franchise, a future first-ballot hall of famer, and a consistently productive player even in his late thirties, had a player option attached to the contract he signed with the Yankees in 2010. The foundation of the contract runs through 2013, with a player option worth $8 million for 2014. Jeter's AAV for the base of the contract is about $17.6 million, significantly more than the dollar amount associated with the 2014 player option. Like club options, player options commonly have buyout clauses linked to them. In Jeter's case, the team has a $3 million buyout option they must pay if Jeter declines the player option for 2014. Player options are rarer than club options, but for a player as important to a one club as Jeter is to the Yankees, teams will do whatever is necessary to ensure that player signs a deal with them.

Conceptually, player and club options have little complexity to them. But wait, there's more. Another type of option seen in Baseball is the mutual option. This type of option combines the aspects of a team option and a player option. Essentially, a mutual option is an option that both the player and team must agree to. Wendy Thurm, a former lawyer, and writer for describes the positive and negative aspects of a mutual option best:

"A mutual option is a hedge against volatility in the market for that player in that particular option year. If the player’s value plummets, the team can decline the option and pay the buyout. If the player’s value rises, he can decline the option and seek a better deal as a free agent. If the player’s value is stable, however, then it might be in both parties’ interest to exercise the mutual option."

So, mutual options give both the team and the player the ability to come together and make a decision. This may seem like the most mature option available because it very well may be. Player and club options give control to one side, shutting out the other, but mutual options, like the negotiation of any contract, allow both sides to have a say. For a good example, let's take Adam LaRoche's contract, mentioned above. In LaRoche's deal, the two sides negotiated a mutual option for 2015 worth $15 million, substantially more than the $11 million AAV of the years preceding 2015. This option, like so many others, comes with a buyout clause. If the two sides don't agree to the mutual option, the Nationals must pay LaRoche $2 million in his departure.

Bobby Abreu
So, we've gone through club options, player options, and mutual options. All that's left is the vesting option. Recently the diligent writers at published a piece about vesting options, publishing with it a list of examples in which vesting options were and were not triggered. A vesting option is the same as the other types of options, except that in order to trigger the option, the player must attain some predetermined level of productivity. For example, the Angels gave Bobby Abreu a vesting option for 2012 that would be triggered if Abreu reached at least 433 plate appearances in the 2011 season. If he did not come to the plate 433 times or more the option would be moot, but if he achieved that minimum number of plate appearances he would be an Angel for another season. We see vesting options pop up most often on the contracts of older players or oft-injured players. These conditions cause instability, and a team doesn't want to be "on the hook" for money if a player cannot prove to the team they can perform on the field. For relief pitchers vesting options often involve appearances or games finished, for hitters we see plate appearances used, and for starting pitchers, innings pitched are most commonly used as a barometer. Sometimes vesting options come with clauses that allow a player to decline said option even if the option has vested, but not all incorporate such provisions. 

So, now you know everything and more about contract options in Major League Baseball. Maybe for some fans these topics detract from the fun and childlike innocence attached to the game, but for most, it offers another fascinating aspect to the non-playing side of sports. So much of the analytical revolution in Baseball combines on-field play with off-the-field decisions made by MLB front offices. No matter your preference, I hope you've learned something, so that maybe, the next time you hear he details of a contract, you might understand them a little better. 

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