On the Concept of “Overpaying” in Free Agency

You heard them when the Blue Jays gave Russell Martin 5 years/$82M and when the Nationals gave Jayson Werth 7/$126M. They were there when the Yankees gave Masahiro Tanaka more than Zack Greinke, almost as loudly as when Zack Greinke got Zack Greinke money. They’ve been there, perhaps, as long as free agency has existed in sports.

As talks for Jon Lester seem like they’ll push into the $150M+ range, we may enter the golden age of people shouting “Wow that’s way too much money for that guy, what is [GM/TEAM] doing?!” from all corners of the sports world. You’ll hear the same as Max Scherzer signs for tons of cash, and when Jeff Samardzija, barring injury, flirts with $25 million per year next December. It happens every season.

What these people (and I have been one from time to time) don’t seem to realize is that the concept “too much money” simply doesn’t exist in this game anymore, at least not for the best free agents. Let me explain:

By the way, I’m not going to present my feelings on whether or not this is a good thing, though if you’re one of the handsome and/or sexy people that follow me on Twitter, you probably know my feelings on this.

An overpay is a somewhat silly concept to begin with; the value a baseball player provides to a team is a really abstract concept, and trying to calculate it is nearly impossible. This problem is compounded by the uneven salary structure under which baseball teams operate. Each team has a few good players making relatively little money compared to the bad, aging players making 30 times the league minimum. This divide in compensation doesn’t reflect each player’s value to the team.

As such, it’s probably better to think about optimizing total organizational spending instead of each player’s contract. Every team in baseball is optimizing their spending along two bounds – winning and profit. Some ownership groups, like those in Oakland and Tampa Bay, put a heavy emphasis on turning a profit each season, while others put a focus on winning ballgames. Obviously, enough teams put a strong enough emphasis on winning a championship that there’s a market for handing out 9-figure contracts to elite players.

And why shouldn’t there be? While there’s obviously a point at which teams stop turning a profit, it doesn’t appear that many are approaching that point. Baseball revenues have grown significantly over the last few decades, including last season, when each team was projected to gain over $25 million extra through a new national television deal. At the same time, restrictions on spending in the draft and international free agency have driven profits even higher. Most teams are making money hand over fist right now, and the unfathomable amounts that investment groups are willing to spend to buy teams shows this isn’t expected to stop anytime soon.

Meanwhile, teams have been spending a lot of this money by locking young players up to long-term, team-friendly contract extensions. So what you’re left with is teams with Scrooge McDuck-style reserves and few outlets to spend it. They can no longer push the team further along their winning/profit-optimization curve by spending in the draft, or spending in international free agency. And they can’t really push it much by spreading it around on a bunch of free agents, as the pool of attractive players is so small.

So you get teams willing to spend “stupid” money on Jon Lester, Max Scherzer, and Pablo Sandoval. There’s nowhere else for it to go but into the owners’ pockets, and for a lot of owners that doesn’t do enough to satisfy their desire to win baseball games.

That means every season, for every free agent available, you’re going to have at least one team willing to go to previously-insane levels of spending to bring them on board. These are the teams that set the “market value” of a player. The phrase “above market value” means nothing here, as that value is set by these types of contract.

Any front office or owner unwilling to get crazy to sign a Lester- or Scherzer-type player simply isn’t going to sign them; too many other teams will feel that player is going to be a net benefit to the organization to let them slip by at last year’s market value. Until teams start hitting the upper limit of what they can spend without losing money, this process isn’t going to stop.

In today’s market, I struggle to see where that money could be better spent than on a top-tier player. One of the most interesting things about the salary explosion, especially in the last few years, is how much the average player gets paid nowadays. Nelson Cruz is making $14 million per year, Billy Butler is making $10 million, and Nick Markakis looks like he’s going to get $10 million/year…the list goes on.

The difference in spending 6/$138M and 6/$160M on Lester is under $4 million per season, which wouldn’t even get you Zach Duke nowadays. If you don’t sign Lester at all, what combination of players could you find for $25-$30 million/season that would match the impact of having a legitimate #1 starter who has the stuff to age gracefully? Pablo Sandoval and a middle reliever? Nick Markakis and Andrew Miller? I cannot think of a combination that makes the team better than adding a top-of-the-rotation starter.

This isn’t me saying that the Cubs need to go out and spend $160 million on Jon Lester, but that if they’re serious about acquiring a top-flight pitcher in the next 15 months, they’re going to have to give $160 million to somebody. Price, Lester, Scherzer, Zimmermann, possibly Samardzija – they’re all going to command deals in that range. The Cubs are simply not going to compete for those players if they’re not going to spend “stupid” money.

So if the Cubs do not sign Jon Lester because they feel that money could be better spent on a different top-notch player, fine, I get that. But if they feel no player is worth that kind of money, well…I hope they’ve got some really interesting backup plans.

As a side note, it’s interesting to look at some of the deals that looked dumb at the time and see how they compare to current salaries. Jayson Werth is owed 3yrs/$63M, Greinke owed 3yrs/$77M. Both of those guys would demolish those total dollar figures if released into free agency tomorrow. As the market keeps exploding, these “crazy’ contracts for stars like Lester and Scherzer might look somewhat reasonable in a few seasons.