Tuesday, December 22, 2015

Thoughts on Opt-Out Clauses

The Giants recently signed RHP Johnny Cueto to their first contract with a player containing an "opt-out" clause.  While the overall contract is for 6 years/$130 M, Cueto can "opt-out" and become a free agent after 2 seasons.  The way this generally plays out is if the player performs well for the first years of the contract, he can "opt-out" and essentially get himself a nice extension of the contract, presumably at a higher salary and for more years than what are left on the original contract.  On the other hand, if he plays poorly, the team is stuck with the bad contract for the entire length of the contract.  So far in MLB, there have been only a handful of these types of contracts.  ARod and Zack Greinke are examples of players who opted out and got much bigger deals.  I can't think of any examples of players not opting out.  If Barry Zito's contract contained an opt-out, he almost certainly would have stayed with his original contract.

It is easy to conclude that opt-outs are exclusively player friendly as they put all the risk on the team and none of the upside.  I am sure most Dodger fans would heartily agree with that notion.  They would much rather have Zack Greinke for the last 3 years of his original contract than the financial flexibility the team received when he opted out.  In the wake of the recent Jason Heyward contract and the Cueto contract, a new line of thinking has emerged claiming benefit in the opt out for the clubs.  The thinking goes that if the player performs well enough to opt out, that is good for the club and if the club does not extend the contract and the players leaves via free agency, the club is off the hook for the riskiest part of the contract, the final 2-3 seasons, and can then use the money they would have spent on that player for a younger player with less risk.  A veritable war of words has erupted on the internet with different writers taking opposite sides of the argument.  Dave Cameron of Fangraphs has possibly been the most outspoken on the side of opt-outs being 100% bad for the teams and 100% good for the players.  Let's take a closer look at Johnny Cueto's contract as I believe it contains proof that the Giants actually like the op-out clause and want him to exercise it after 2 years.

Cueto's contract calls for a $5 M signing bonus with a first year salary of $15 M then $21 M/year for the next 5 years with a $22 M team option in the 7'th year with a $5 M buyout.  Here's the kicker:  The $5 M buyout gets paid as a bonus if he opts out after 2 years!  Let me repeat that:  The Giants are offering Johnny Cueto a BONUS to opt out!  The only reasonable conclusion is the Giants want him to perform well for 2 seasons then want him to opt out of the contract freeing them from the final 4 years when he is older and possible not as effective.  But, you say, what if he pitches poorly and does not opt out?  The Giants are on the hook for the entire contract.  Well, they are on the hook for the entire contract with or without the opt out anyway, so there is no downside there!

The other thing to consider is that the opt-out clause probably saves the team money on the overall contract.  Think of it this way:  The Giants knew that Cueto was negotiating with the Dodgers for approximately the same amount of total money, except with no opt-out clause.  The Giants really wanted to sign Cueto, not only to add the best pitcher left on the market, but to keep the best pitcher left on the market away from the Dodgers.  There were 2 ways to do that:  1.  Outbid the Dodgers on a straight 6 year contract or 2.  Offer him the opt-out clause.  Yes, if Cueto pitches poorly the Giants are stuck with the entire $130 M on the contract, but they would still be stuck, and for more money, without the opt-out!

In conclusion, the one risk to the team on the opt-out is that, like the Dodgers with Zack Greinke, they lose a good player they may not be able to replace at any cost or pay more to keep him. The benefits of the opt out are 1.  The overall risk of the contract is probably lower due to the opt-out and 2.  They get the likely best years of the contract or the top surplus value.  While the opt-out is definitely player-friendly, it is not entirely team-unfriendly which is why teams are willing to sign these deals.  The proof that the Giants see it that way is the $5 M bonus they will give Johnny Cueto to opt out of the contract after 2 years.  The Giants WANT Johnny Cueto to opt out of the contract after 2 years!


  1. There are two cardinal rules to make opt-outs work in favor of the team: 1. Use the time covered by the front end of the contract to identify a succession plan to replace the player when he opts out. 2. Do not, under any circumstances, give in to the temptation to sign a contract extension or join in the bidding after he becomes a FA.

    With Greinke, the Dodgers did a good job with #2, but a terrible job of #1. On the other hand, they do have some highly ranked pitching prospects who could be ready within a year. I don't know if that market has the patience to wait for them.

  2. I look at like this, the opt-out didn't cost the Giants anything. It didn't increase their risk because that's an unavoidable cost-of-doing-business. They either have a $30+ million a year pitcher (at big a discount) or they don't. If they don't, well, he still might be a $20 million/year pitcher so they'll at least get fair value. If he's not even that, well, better to be on the hook for this contract than Greinke's or Price's.

  3. I think the availability of young pitchers has a big part of the Giants willingness to do the opt out. Right now, you have MadBum is relatively young. Contracts expiring in next two years are Peavy and Cain. Shark is longer term. So:

    After next year, we replace Peavy
    After the following year, we replace Cain.
    We might have to replace Cueto.

    In that time span, we should have the following pitchers ready: Blackburn (solid back of the rotation guy and very young), Beede, Bickford, and Mejia (all of whom will be at AA or higher this year). You then have the second tier types who could also be available--Suarez, Gage, Coonrod, Johnsons and maybe even Stratton. Recognizing hit/miss, you have to hope at least 50% of your first 4 are the real deal. That means you've replaced Peavy and Cain. That gives a fair degree of comfort on the replacing Cueto. It is not a direct replacement to be clear--Peavy/Cain are now 4th and 5th type pitchers, seems like Blackburn is a 4/5, but the ceiling is higher for the other three and one would hope you'd get at least one number 2 out of it.

    Bottom line is that the Giants were very smart. I wouldn't call this a band aid, but rather a smart surgical strike that doesn't tie us up unnecessarily long term, and giving us a fair amount of salary flexibility as we continue to plug the kids in.

    1. I'm sure that's part of the thinking. Also, while the team will probably add some FA in the next two years, we've only got a $106.5 million on the books for 2018.

      We'll need, between now and 2018:

      2018 Bumgarner option year (or even new contract)
      One FB solution. If Belt isn't resigned, there's Shaw or a FA possibility.
      One LF solution. Pagan could be moved there for a year. Blanco could start for a year. Parker & Williamson are in AAA.
      One CF solution. Blanco could man this for 2016, with Pagan as the BU. Or vice-versa. 2017 would require a new solution.
      One closer solution. Strickland seems to be the guy who will get that role in the future.
      One set-up man solution. That could be Osich or one of the other fire-ball relief candidates in the minors.
      A LOOGY. But for one year, Kontos has generally had very good LH splits so he could take this role if Lopez retires/isn't resigned.
      A SP for 2017.
      A SP for 2018

      Anyone who moves up on the roster (like Strickland to closer) will have to be replaced. And, unless the farm system suddenly goes upside down, the Giants should have enough quality prospects to fill the 'back-up' holes in their roster.

  4. The anti opt-out camp keeps claiming that an opt-out is a lose-lose situation for a team. They say that a player who is doing well is a near guarantee to opt-out, forcing the team to have to replace that free agent with another player of similar caliber at an equal or higher cost. But your point 1 above is well taken... a team with foresight will have a succession plan to replace the free agent, whether internally or externally, perhaps at even a lower cost. The anti opt-outs also assert that a player doing poorly is a lock to not opt-out and become a salary sucking lump for the duration of the contract. While that may be true in some cases, there will be other "poor" performers who could elect to opt-out anyway because: a. the money is out there- he may be underperforming expectations, but with the way salaries are trending upwards, he may be able to make more on a new contract anyway; b. a player and his agent may overvalue himself; c. the player may just want to leave- he realizes he and the team are a poor fit, the team is a non-contender, the fans and teammates have turned on him and he wants to make a new start elsewhere, or some other reason.

  5. Happy holidays, all!

    Dr. B writes, "I can't think of any examples of players not opting out."

    Can we not consider a player option that is picked-up as not opting out? For example, Brian Wilson signed (if my memory is correct) a 2 year, $18 million contract with the Dodgers, the second year of which was a $10 million player option. Wilson opted to take the second year of the deal rather than enter free agency. Again, my recollection of the numbers/details may be fuzzy.

    Viewed in this way, isn't Cueto's opportunity to opt-out after year 2 with the Giants analogous to him holding a four-year player option?

    1. Well, yes. The last 4 years of Cueto's contract can be viewed as one big multiyear player option, so I guess it's not fundamentally different than the player options we've had all along. We just aren't used to seeing them in multiyear packages. Good point!

  6. I think your last point is the key one. Opt out clauses help you sign the player. The way Cameron frames the argument you'd think that the Dodgers just threw in the opt out to Greinke out of the goodness of their hearts and now they regret it. No. The opt out was a negotiating add in that was key in their signing of Greinke. They got three years of superlative pitching out of him for $70M. They won the division in each of those years after not having won it in any of the previous three seasons. They also get a valuable draft pick. Yes, at this point right now, they'd obviously rather he'd have not opted out, but to not frame the results of the original agreement a win for both sides is brain dead analysis.

    I think both Cueto and the Giants saw that as a win win, and really wanted to replicate it.

    To be honest, Cameron's weird antipathy to the opt out is bizarre. The benefits pretty obvious.

  7. And, I agree wholeheartedly that the anti-opt-out camp is mistaken when it views opt-outs as always working against the team. As noted above, if a team has a succession plan in place, then the opt-out can be win-win. Perhaps, some are viewing the world as a zero-sum game?

    In the Giants situation, Cueto for two years provides the team the opportunity to potentially replace his production at a lower price if he opts-out of the contract if Beede, Bickford, et al. develop into capable replacements. The cost of the replacements is the MLB minimum which would afford the club the opportunity to allocate Cueto's $23 million/year to other positions. Basically, I see this as the Giants betting on their ability to develop sufficient replacements for Cueto. Maybe I am seeing something wrong?

  8. I agree with this thread of reasoning. Moreover, one can imagine a circumstance in which a player does not opt out, and also continues contributing to the team that signed him: if Cueto, for example, is injured in the latter part of 2017, he might decide that opting out is unwise because the perception of risk would depress his market. Given Cueto's previous injury record, he's had occasion to think about this, and the frequency of his injuries (again, postulating an injury in 2017) increases the risk. Yet he might very well recover from the hypothetical 2017 injury and continue pitching very well for the Giants. It's wrong, then, to assume that only poor performance will keep a player from opting out.

  9. Really, the Cueto 'opt out' contract shows that the Giants are going for it big time in 2016, and maybe 2017, and figure everything beyond that will be sorted out later. A lot can change in 2 years, between players developing, injuries, and of course the economics of baseball. This is a contract that works well for our current situation, and retains flexibility for the future.