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Trevor Bauer’s Deal is Bad for Baseball and Demands a 60/40/20 Rule To Evaluate Contracts With Opt-Outs


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By David Saltzer, AngelsWin.com Senior Writer

Quick! Let’s play a game. Which of these numbers is not like the other two: 40, 45, and 17. If you guessed 17, you’re a winner!

If you also guessed that those numbers represent the reported annual salaries for Trevor Bauer is his pending 3-year deal with the Dodgers, you’d also be right.

This deal is bad for baseball. It’s bad for baseball on many levels, and as such, if baseball had an effective commissioner, it should voided and reworked in the better interests of baseball. This isn’t sour grapes from a pitching-starved Angels fan. It’s the recognition that this contract was specifically designed by both sides to thwart the Collective Bargaining Agreement.

Consider for a second that Bauer is getting paid more in 2021 than three other baseball club's entire projected payrolls. That is just insane! 

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There are two main reasons why the reported Trevor Bauer deal is bad for baseball. The first is that it sets a ridiculously high bar for all future pitchers that will make pitching too expensive long-term for small and mid-market teams to develop and maintain a solid rotation long enough to develop a championship team.

Most likely Trevor Bauer won’t pitch much more than 200 innings in either of the next two years. At $40 million and $45 million each year, Bauer is establishing the market for all future pitchers at nearly $200,000.00 per inning pitched. That’s nearly $67,000 per out! That is an insane amount—one that will tank small and mid-market teams and one that will have long term damage to the game. This, more than anything, shows why Major League Baseball needs an absolute floor and hard ceiling on team payroll. Large market teams will continue to drive up the prices for players, particularly pitchers, to the point where small and mid-market teams won’t be able to hold onto a rotation long enough to compete. With this new mark set, all future arbitration salaries will have a new target amount on what a starting pitcher should earn per out and the prices for frontline starting pitchers will shoot up dramatically.

While the damage done by the precedent set in the Bauer deal will have long term consequences for the game—consequences that will hurt the game quite a bit—that isn’t the truly odious part of the deal. What is truly against the better interests of baseball is that after each and every year in the deal it is rumored that Trevor Bauer will have an opt-out option whereby he can choose to become a free agent again. That, along with how this contract is structured, is what is truly bad for baseball.

How can Bauer’s opt-out options be bad for baseball when other contracts with opt-outs are not? Simple. It’s because those opt-out options were designed to cheat the game of its internal mechanism for self-regulation and spending constraint. Look at the numbers above: 40, 45, 17. Notice anything about them? The first two years pay comparable salaries. The third year only pays 37.78% of the second year. Worse yet, the final year of the contract only pays him 16.67% of the total deal. The fact that there is such a dramatic difference in the final year’s salary shows the real reason why the Dodgers and Bauer structured the contract the way in which they did. It isn’t because Bauer will suddenly become worth less money in that final year. It isn’t because he needs so much more money up front in order to feed his family. It’s because both sides agreed to thwart the Collective Bargaining Agreement.

No one, with any shred of honesty, can say that they expect Trevor Bauer to fulfill this entire contract, as written, without opting out or renegotiating. It doesn’t even pass the laugh test. If Bauer pitches to the level to which he is being paid, he has every incentive to opt-out of the last year. He can’t lose on that deal! He can either re-approach the Dodgers for a negotiation, or take his chances on the open market, and he will get more than the remaining $17 million in his final year.

The only way Trevor Bauer would not opt out of that deal, especially in his third year, is if he is hurt and needs to heal or reestablish himself. If he is truly hurt (and I would never want to see a player hurt), then he might stay for that final year while he recovers. But, if he pitches anywhere near the level that he is expected to play, then he will be able to command more money and more years after that second year opt-out. Heck, he might be able to command more money and more years after that first year opt-out! This is bad for baseball.

So then why would the Dodgers and Trevor Bauer structure the deal that way? They did so in order to lower the Average Annual Value (AAV) of the contract to only $34 million dollars and to cheat the system. Had it only been a 2-year deal, the AAV for the deal would be $42.5 million, which not only is substantially more, but even more costly under the Luxury Tax established in the Collective Bargaining Agreement.

Since the owners and players could never agree on a true ceiling for team payrolls, in order to try and control costs and to keep large markets from completely dominating the sport, the two sides agreed to try and control spending through the Luxury Tax. The Luxury Tax is based on the combined AAVs for all the players on the team. The more teams go over the Luxury Tax amount, and the more years the team is over the threshold, the higher the rate the team pays in Luxury Taxes. It does not matter what the club actually spends in that year on payroll—it only matters what the combined AAV is for the year.

By signing Trevor Bauer, the Dodgers appear to be over the limit for this year and unless they make changes, will pay the Luxury Tax. Since this will be the first year that they are over the limit, they will pay a 20% surcharge on every dollar that they spend over the limit. Next year, the Dodgers are likely again to be over the limit and are likely to pay a 30% surcharge on every dollar. In the third year of the deal, if the Dodgers are again over the limit, they would pay a 50% surcharge on every dollar over the limit!

So, now we know why the deal was most likely structured the way that it is rumored—to cheat the rest of baseball from the Luxury Tax. The difference between a $34 million AAV and a $42.5 million saves the Dodgers an additional $1.7 million in the first year of the contract, $2.55 million in the second year of the contract, and an additional $4.25 in the third year of the contract because they have a lower AAV when determining the dollar value of the contract for the Luxury Tax! That is potentially, $4.25 million saved over the first two years of the deal and up to $8.5 million saved if he stays for the third year! Since it is highly unlikely that he will stay for that third year, the Dodgers are still gaming the system to avoid the paying $4.25 million disincentives that were meant to keep them from dominating the free agent market.

This is why the deal needs to be voided and reworked in the better interests of baseball. If teams can structure deals this way, and add an additional year and an opt-out at a ridiculously low salary, what’s to prevent a team from adding two years like that? If one year can lower an AAV by $8.5 million, how much more could the Dodgers have lowered the deal by adding two years at $17 million/year? If two years suddenly becomes tolerable for baseball, let’s try three years. Heck, why not ten years. Let’s drop the AAV for every player so that no team ever pays the Luxury Tax again. All of a sudden, that super expensive free agent who may put your team over the Luxury Tax limits won’t do so anymore. And the big market teams will be able spend with impunity and destroy the small and mid-market teams.

If baseball had a real commissioner, one who truly cared about the better interests of the game, then s/he would implement a simple rule for gauging contracts with opt-outs. Let’s call it the 60/40/20 rule. This rule would be used universally to determine if a player and team is trying to game the Luxury Tax or not.

Simply put, any contract that frontloads more than 60% of the money to the player before an opt-out, such that 40% or less remains after the opt-out, or any contract that drops the actual pay to the player by more than 20% in the year following an opt-out will be voided in the better interests of the game. This rule doesn’t prevent opt-outs, it just prevents teams from doing what the Dodgers just did.

The first part of this rule would force the commissioner to look at how the money in a contract is divvied up before an after an opt-out. If there is more than a 60/40 split in the deal whereby the player earns more than 60% of the total money before the opt-out, then on its face, the deal appears to be meant to get the player on a lower AAV and thwart the Luxury Tax. A contract like that be immediately voided as being against the better interests of baseball.

The second part of the rule, the 20 clause, is to force the commissioner to look at every year in a contract that has multiple opt-outs. If a deal has multiple opt-outs, and the players salary drops by more than 20% in the year following an opt-out, it again should be voided as being against the better interests of baseball. Again, such a drop should immediately signal that the team is counting on the player to opt-out and only added the following years to lower the AAV.

Backloaded contracts with opt-outs aren’t the problem: as players get older, they are more likely not to opt-out of guaranteed money as they are less likely get as much money and as many years. It’s the nature of the aging process and decline in production.

So, if a deal is structured such that it pays more at the end of the contract, that’s not so much of a problem. Backloaded contracts don’t hurt against the Luxury Tax because in the years the player played under that contract, the AAV was higher than his actual salary. If anything, a backloaded contract may cause a team to go over the Luxury Tax and pay it, even if the actual payroll wasn’t above the threshold.

This is easy to see with a current contract. While there has been much speculation about Nolan Arenado opting-out of his remaining money, it is very unlikely that he would do so. It is very unlikely, even after his trade to St. Louis, that he would walk away from all the money remaining on his contract. So, the deal was most likely not structured to cheat the system.

But, frontloaded contracts with opt-outs are the problem. If Bauer’s deal is allowed to go through as rumored, then there is nothing to stop teams from adding many more years to a deal at a dramatically lower salary with an opt-out just to lower the AAV. Both the teams, and the players will know that neither side intends to stay past the opt-out, and the Luxury Tax will be cheated.

Look, I’m all in favor of opt-outs. If a player wants to structure a deal to include an opt-out in it, and the team is willing to do so in order to sign the player, then it is a fair topic of negotiation. There are many legitimate reasons why a player would want an opt-out, just as there are many legitimate reasons why a player might want a partial or full no-trade clause. If a team is willing to include those in a deal, it should be allowed to do so, as long at it is not designed to cheat the system.

What I am not in favor of, is exactly what’s happening here with the rumored Bauer deal. The team is trying to thwart paying millions in the Luxury Tax. They want to claim a deal that really has an AAV of $42.5 million only has an AAV of $34 million. I don’t blame their front office for trying this trick; I do blame the commissioner for not seeing through it and forcing the contract to be restructured.

In the past, several teams, including the Angels, tried creatively cheat the system with “personal services” clauses (whereby a team pays the player for consulting services for years after playing) and “milestone accomplishments” clauses (where the team retains the rights to market historic on-the-field accomplishments). Both types of clauses were designed to funnel more money to the player without raising the AAV of the contracts. In both cases, both the owners and the players union agreed to ban those types of clauses because they were rightly seen as ways to thwart the system. So, the precedent for banning aspects of a contract are there—now all the fans need is a commissioner who would enforce it and start with the Bauer deal.

If Trevor Bauer reads this, I’m sure he’d say that he fully intends fulfill every year and every part of his contract. I’m willing to put up $100 that says that if he’s healthy, he will opt-out or renegotiate the deal at some point before the contract is over. I truly doubt, though, that he, or anyone would take that bet because it is too obvious that he will opt-out. That's the whole point of this contract—it's to get him to opt-out of that final year.

As long as Major League Baseball maintains the Luxury Tax, and does not impose a hard floor and ceiling on salary, the commissioner should adopt a 60/40/20 rule for evaluating contracts. And, looking at the Bauer deal, it should be immediately voided and reworked, as it is clearly not in the better interests of baseball just like the personal services clauses and milestone accomplishment clauses were not in the better interests of the game.

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Must be nice to be owned by a hedge fund. After 60 days I'm betting that Kershaw will be ready to put out a contract on Bauer.

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