Thursday, October 30, 2008
Thursday, October 23, 2008
No-Trade Clauses
In the comments of my previous post, one reader asked me to explain why a team would ever give a player a no-trade clause. While a player with a no-trade clause is certainly more difficult to trade than a player without a no-trade clause, there are plenty of valid reasons to "give" them to some players...
1) A no-trade clause does not mean that player cannot be traded. Often, players will consent to be traded even if they have a no-trade clause. In 2008 alone, Scott Rolen, Johan Santana, Manny Ramirez, Ken Griffey Jr., and Greg Maddux were all traded in spite of their no-trade powers. Some of these players threatened to veto deals to particular clubs, or specified a few "acceptable" teams, but the fact remains they were traded. The definition of a trade means the acquiring team values a certain player more than the team currently with a player. It seems that players like to be where they are most wanted, and will often change their mind and agree to a trade they previously said they would veto. Additionally, teams are often able to provide incentives to a player to waive his no-trade clause. An extra option year may be picked up, or an extension to the player's contract offered. No-trade clauses make it marginally more difficult to move players, but does not make it impossible.
2) The no-trade clause may be important to a player, and he will insist on having one included in his contract. Many baseball players have families. They have friends. They have a life outside of baseball. No-trade clauses protect players against disruptions in their lives outside of baseball. They ensure that they cannot be arbitrarily assigned to some club on the other side of the country without their consent. In the specific case of the Padres, some players may (I am not sure if this actually exists) have taken a "San Diego discount." The insertion of a no-trade clause, or other contract mechanism such as an escalation in salary in the case of a trade, guarantees their "discount" is only applicable to San Diego.
Obviously players value no-trade clauses, but they are also costly (albeit in a non-monetary fashion) for teams. Theoretically, the full cost of the no-trade clause is recognized by teams, and some sort of acceptable concession is made on the part of the player. Say a player is worth $10 million per year, and values a no-trade clause at $1 million per year. The team believes their true cost of a no-trade clause is only $0.5 million per year because there is a high probability they will be able to trade the player anyway. Because the no-trade clause is valued asymetrically, the player can be paid anywhere between $9 million and $9.5 million and both parties will be better off because of it. The club will pay, including the cost of the no-trade clause, less than the $10 million the player is worth, and the player will get more than the $10 million he is worth.
3) The "10 and 5 rule" lessens the impact of contractually guaranteed no-trade clauses. The collective bargaining agreement gives any player who has been in MLB for 10 years, including 5 years on his current team full no-trade powers. In many cases, players who ink a contract with a no-trade clause are really only getting 1 or 2 additional years of no-trade protection above what they would already have received.
I am sure I am omitting some of the reasons teams may give no-trade clauses, but the overiding reason they exist is "reason number 2." No-trade clauses can be a win-win, making both the team and the player better off due to the asymetry of their valuations of the no-trade clause. Sometimes no-trade clauses come back to bite a team in the rear-end, but so do many contracts without no-trade clauses. The no-trade clause is not what "kills" the team, but rather a mistake in the initial player evaluation.
1) A no-trade clause does not mean that player cannot be traded. Often, players will consent to be traded even if they have a no-trade clause. In 2008 alone, Scott Rolen, Johan Santana, Manny Ramirez, Ken Griffey Jr., and Greg Maddux were all traded in spite of their no-trade powers. Some of these players threatened to veto deals to particular clubs, or specified a few "acceptable" teams, but the fact remains they were traded. The definition of a trade means the acquiring team values a certain player more than the team currently with a player. It seems that players like to be where they are most wanted, and will often change their mind and agree to a trade they previously said they would veto. Additionally, teams are often able to provide incentives to a player to waive his no-trade clause. An extra option year may be picked up, or an extension to the player's contract offered. No-trade clauses make it marginally more difficult to move players, but does not make it impossible.
2) The no-trade clause may be important to a player, and he will insist on having one included in his contract. Many baseball players have families. They have friends. They have a life outside of baseball. No-trade clauses protect players against disruptions in their lives outside of baseball. They ensure that they cannot be arbitrarily assigned to some club on the other side of the country without their consent. In the specific case of the Padres, some players may (I am not sure if this actually exists) have taken a "San Diego discount." The insertion of a no-trade clause, or other contract mechanism such as an escalation in salary in the case of a trade, guarantees their "discount" is only applicable to San Diego.
Obviously players value no-trade clauses, but they are also costly (albeit in a non-monetary fashion) for teams. Theoretically, the full cost of the no-trade clause is recognized by teams, and some sort of acceptable concession is made on the part of the player. Say a player is worth $10 million per year, and values a no-trade clause at $1 million per year. The team believes their true cost of a no-trade clause is only $0.5 million per year because there is a high probability they will be able to trade the player anyway. Because the no-trade clause is valued asymetrically, the player can be paid anywhere between $9 million and $9.5 million and both parties will be better off because of it. The club will pay, including the cost of the no-trade clause, less than the $10 million the player is worth, and the player will get more than the $10 million he is worth.
3) The "10 and 5 rule" lessens the impact of contractually guaranteed no-trade clauses. The collective bargaining agreement gives any player who has been in MLB for 10 years, including 5 years on his current team full no-trade powers. In many cases, players who ink a contract with a no-trade clause are really only getting 1 or 2 additional years of no-trade protection above what they would already have received.
I am sure I am omitting some of the reasons teams may give no-trade clauses, but the overiding reason they exist is "reason number 2." No-trade clauses can be a win-win, making both the team and the player better off due to the asymetry of their valuations of the no-trade clause. Sometimes no-trade clauses come back to bite a team in the rear-end, but so do many contracts without no-trade clauses. The no-trade clause is not what "kills" the team, but rather a mistake in the initial player evaluation.
Friday, October 17, 2008
Trading Peavy: It's all About Excess Value
Today I received an email from a Padre fan upset about the possibility Jake Peavy may be traded. The letter began:
As you may have heard the Padres are actively, yes actively, shopping Jake Peavy and hope to find a suitor before free agency begins. I want to start off by saying that moving him would be stupid...period. There is no excuse, no way to justify it. Not "potential" injuries, not cost, not anything. A pitcher of his caliber is going for 20 mil/a year now (Santana and what Sabathia will get)...
This letter epitomizes a widespread misunderstanding about player value. Jake Peavy may very well be worth $20 million on the free agent market, but that does not mean he has more value than a player (or set of players) who would be worth $10 million as a free agent.
Peavy's true value to the team is the difference between his marginal revenue product and his salary. If we assume Jake Peavy is a $20 million pitcher, then (all else equal) he will generate an average of $5.25 million in surplus value for the Padres over the next 4 years. Just because this (highly limited) model predicts Peavy generates positive value for the Padres over a 4 year period does not mean the Padres should not explore a trade. Another team could offer a package of young players expected to generate $10 million dollars per season with a collective cost of $2 million per season. If the Padres were to accept this trade they would be better off. Instead of earning $5.25 million per year of profit, the Padres would be making profits of $8 million.
Of course, as fans, we are not interested in how much profit the team makes, but rather how well the team does. My example seems to suggest the Padres would neccesarily get worse, as they are losing $10 million per year in production. What I failed to mention was assuming the team maintains an even payroll, making this trade could be the first step toward improving the team.
Over the next 4 seasons, the Padres will pay Jake Peavy a non-discounted average of approximately $15 million. In my theoretical trade, the Padres take back $2 million per year in salary obligations. This leaves $13 million per season to spend on additional players. Assuming the Padres maintain an even payroll, the team will have replaced $20 million of production with $23 million of production (Note: there are enough replacement level players on the current roster such that their contributions can essentially be ignored). In addition to getting $3 million dollars better, the Padres will have also reduced their risk. This includes both the risk of injury, and the risk of poor performance.
Now, what if the Padres do reduce payroll. Should we as fans still support a trade of Jake Peavy? In short, yes. Lets assume the Padres are planning to reduce their current projected 2009 payroll by $15 million and do not want to trade Jake Peavy. Instead, the team decides to forego resigning Brian Giles ($6 million in savings), and Trevor Hoffman (estimated $5.5 million in savings), and trades Khalil Greene ($6.5 million). These players are replaced by cheap talent that costs (and is expected to produce) $3 million. It is likely Giles, Hoffman, and Greene will collectively be worth in 2009 at least the $21 million I project they will be paid. If so, by reducing costs in this manner, the Padres will have gotten at least $18 million worse.
By trading Peavy, the Padres will be able to reduce costs while also aquiring valuable assets. In my example, the Padres only get $10 million worse by trading Peavy, which is certainly better than $18 million worse. (Disclosure: I am going to go ahead and use the $15 million per year average, rather than the actual 2009 salary number. But, if you want, you can trade Greene as well, and the team still does better than in the previous example). I recognize there are other ways to reduce payroll than getting rid of Giles, Hoffman, and Greene, but the concept is the same: the Padres will be unlikely to get much back in return. Instead, the full effects of payroll reduction are likely to be felt on the field. If the Padres are able to acquire surplus value for Peavy, not only is ownership better off, but the fans are better off as well. This is the case regardless of whether the team cuts payroll.
In this post I have used somewhat arbitrary examples. The reason for this was not to somehow prove the Padres should trade Jake Peavy. That type of analysis must include concepts such as the variability of Peavy's value depending on the projected success of the team. Rather, I merely wanted to demonstrate (and I know I am in some cases preaching to the choir) that if the Padres are able to deal Peavy to a team that more highly values his services, they should do it. The team, and the fans will be better off because of it.
As you may have heard the Padres are actively, yes actively, shopping Jake Peavy and hope to find a suitor before free agency begins. I want to start off by saying that moving him would be stupid...period. There is no excuse, no way to justify it. Not "potential" injuries, not cost, not anything. A pitcher of his caliber is going for 20 mil/a year now (Santana and what Sabathia will get)...
This letter epitomizes a widespread misunderstanding about player value. Jake Peavy may very well be worth $20 million on the free agent market, but that does not mean he has more value than a player (or set of players) who would be worth $10 million as a free agent.
Peavy's true value to the team is the difference between his marginal revenue product and his salary. If we assume Jake Peavy is a $20 million pitcher, then (all else equal) he will generate an average of $5.25 million in surplus value for the Padres over the next 4 years. Just because this (highly limited) model predicts Peavy generates positive value for the Padres over a 4 year period does not mean the Padres should not explore a trade. Another team could offer a package of young players expected to generate $10 million dollars per season with a collective cost of $2 million per season. If the Padres were to accept this trade they would be better off. Instead of earning $5.25 million per year of profit, the Padres would be making profits of $8 million.
Of course, as fans, we are not interested in how much profit the team makes, but rather how well the team does. My example seems to suggest the Padres would neccesarily get worse, as they are losing $10 million per year in production. What I failed to mention was assuming the team maintains an even payroll, making this trade could be the first step toward improving the team.
Over the next 4 seasons, the Padres will pay Jake Peavy a non-discounted average of approximately $15 million. In my theoretical trade, the Padres take back $2 million per year in salary obligations. This leaves $13 million per season to spend on additional players. Assuming the Padres maintain an even payroll, the team will have replaced $20 million of production with $23 million of production (Note: there are enough replacement level players on the current roster such that their contributions can essentially be ignored). In addition to getting $3 million dollars better, the Padres will have also reduced their risk. This includes both the risk of injury, and the risk of poor performance.
Now, what if the Padres do reduce payroll. Should we as fans still support a trade of Jake Peavy? In short, yes. Lets assume the Padres are planning to reduce their current projected 2009 payroll by $15 million and do not want to trade Jake Peavy. Instead, the team decides to forego resigning Brian Giles ($6 million in savings), and Trevor Hoffman (estimated $5.5 million in savings), and trades Khalil Greene ($6.5 million). These players are replaced by cheap talent that costs (and is expected to produce) $3 million. It is likely Giles, Hoffman, and Greene will collectively be worth in 2009 at least the $21 million I project they will be paid. If so, by reducing costs in this manner, the Padres will have gotten at least $18 million worse.
By trading Peavy, the Padres will be able to reduce costs while also aquiring valuable assets. In my example, the Padres only get $10 million worse by trading Peavy, which is certainly better than $18 million worse. (Disclosure: I am going to go ahead and use the $15 million per year average, rather than the actual 2009 salary number. But, if you want, you can trade Greene as well, and the team still does better than in the previous example). I recognize there are other ways to reduce payroll than getting rid of Giles, Hoffman, and Greene, but the concept is the same: the Padres will be unlikely to get much back in return. Instead, the full effects of payroll reduction are likely to be felt on the field. If the Padres are able to acquire surplus value for Peavy, not only is ownership better off, but the fans are better off as well. This is the case regardless of whether the team cuts payroll.
In this post I have used somewhat arbitrary examples. The reason for this was not to somehow prove the Padres should trade Jake Peavy. That type of analysis must include concepts such as the variability of Peavy's value depending on the projected success of the team. Rather, I merely wanted to demonstrate (and I know I am in some cases preaching to the choir) that if the Padres are able to deal Peavy to a team that more highly values his services, they should do it. The team, and the fans will be better off because of it.
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