Analysis

How Should MLB Teams Spend Their Free Agent Money?

 

It’s that time of year again folks; a time where 30 different teams engage in ruthless bidding wars to overpay baseball players by the largest margins imaginable known as MLB Free Agency. This offseason is no exception (despite the lack of upper level talent), with several solid players poised to land massive contracts that put the average person’s salary into shame.

Of course, there’s going to be the usual share of good move made in free agency, coupled with the far more frequent and laughable overpays of many top free agents. It’s highly unlikely that teams are going to start all 30 clubs are going to simultaneously smarten up and stop overpaying every decently talented free agent, so what should MLB GM’s do to construct the best roster possible?

Before a solution for MLB’s free agent overspending can be found, we first need to establish what exactly makes a free agent signing bad. Although it was difficult to place every single bad free agent signing into a few categories, these are the mistakes which are among the most common. n

General Stupidity

via the Boston Globe

Contracts that fall into this category are easily identifiable from the start. Every offseason, someone gets an massive slum of money — much of which is undeserved — in a contract which is recognized as being a massive overpay from anyone with a knowledge of baseball.

It’s easy to look back and say that a contract was dumb, but much of the time, it’s clear that a contract is going to do more harm than good, right from the start. I mean giving Pablo Sandoval 5/95 was obviously a bad idea.

Some of you might look at this and say that “in hindsight, obviously this move turned out badly, but in the beginning, there was still a solid chance that this move would work out”. To this, I’d respond by saying that every player has potential to overperform or underperform. Therefore, a contract should reflect this by having wiggle room for the said over/underperformance.

I refer to this as a contracts potential for both upside and downside, and a free agent contract should have at least equal amounts of both to be justifiable from a team standpoint. If we analyze the Sandoval contract, we can see the definite lack of upside.

Sandoval’s fWAR per season in 3 years leading up to free agency: 2.5
The value of the contract: 5/95
Amount of fWAR required to justify the contract*: 2.7
*= 1 fWAR equals ~7 million dollars

Given that most free agents are either declining or expected to decline, and shouldn’t be expected to show positive regression. Therefore, any contract that requires positive regression to justify the amount of money spent, is likely going to fail. If justifying a contract on a per dollar basis required an aging (and therefore, usually declining) player to overperform his mean performance in the previous seasons, then there’s a clear lack of upside and excess of downside in offering the contract. MLB players are not expected to improve, or even remain equal in terms of talent level, therefore their contracts should not them too.

Sandoval would have to overperform his past performance over a 5 year period, while he was aging, in order to justify his contract. From this it is clear that Sandoval’s contract had a lot more potential downside than upside. As a result, the contract falls into the “general stupidity” category, since there’s virtually no chance of seeing performance above market value.

Paying for Reputation

via the Chicago Tribune

Another common mistake teams make is paying for a player’s reputation, rather than their actual performance. Although improvements in analytics have reduced the frequency of this mistake, it still happens far more than it should.

For example, teams often overpay for “proven closers”, despite the obvious lack of value that signing closers usually provides. Consider this season’s MLBTR’s Top 50 Free Agent Predictions. In this article, they predicted that 32 year old Wade Davis, a proven closer, would sign for 4/60. They also predicted that a 28 year old Addison Reed would sign for just 4/32. That’s despite Davis and Reed having essentially equal performance in the last 3 seasons, where they’ve produced 4.4 and 4.5 total fWAR respectively. In this scenario, it’s obvious that relative to Reed, a team that signs Davis is going to be overpaying for reputation rather than performance.

Overpaying a player for their reputation is an avoidable mistake that happens every offseason in some capacity, and most of the time it’s a detriment to teams who are more concerned with team performance and financial stability rather then jersey sales.

Violating the 90/10 Rule

via the Denver Post

If you’ve never heard of the 90/10 rule, it’s cause I made it up while rebuilding small market teams in MLB The Show franchises. In theory, it states that the goal of free agency should be to find a player with 90% of the skill of the most talented free agent, for 10% of the price.

In reality, it almost never adds up to 90/10, especially in free agency. However, the idea that if slightly worse yet significantly cheaper alternatives are available, the goal should be to sign them. The rule essentially states that the goal shouldn’t necessarily be to get the best players possible, but to get the best players relative to their price.

A good example of this is the contracts handed out to Ian Desmond and Jon Jay last offseason. Although the Desmond contract probably also falls under the category of “general stupidity”, it also violates the 90/10 rule by ignoring the significantly cheaper options in Jay.

In 2016 Desmond put up 3.3 fWAR, while Jay put up just 2.2 when prorated over the same number of plate appearances. In terms of fWAR per dollar, it’s clear that Jay’s one year deal of just 8 million, provides far more than per Desmond’s contract, with an average annual value of 14 million.

Assuming an equal number of plate appearances, Jay’s contract paid him approximately 3.63 million per 1.0 fWAR in the previous season, while Desmond was paid 4.24, a relatively large gap given that Desmond was only worth about one extra win in the previous season.

If I point out that the Rockies still owe Desmond 62 million dollars for what was at the time, slightly superior production, while Jay’s contract has now expired, it puts into perspective the potential consequences that can come with paying significantly more for slightly better production.

Although the idea that teams (especially small market ones) should look for the best value on a per dollar basis rather than exclusively skill seems simple, teams still frequently violate this rule by overpaying for nearly equal production. The Desmond contract is just one example of a club overpaying for slightly more skilled player, who is also significantly less valuable relative to price.


So if MLB teams are to avoid breaking these rules, what should they look to do differently this offseason. To avoid general stupidity, ask yourself whether a contract idea has a lot more potential downside than upside, and if it does, decide not to offer it. If you want to avoid overpaying for reputation, make sure you look at every free agent objective information rather than by their knee-jerk value. Assuming you want to be the most financially efficient team possible, make sure you look to spread you money on the most valuable players possible, rather than just pursuing the one who you think is the best.

With that said, MLB teams are still going to make all the mistakes mentioned above, often in combination. For example, the aforementioned MLBTR article predicted Eric Hosmer would sign a 6 year contract worth 132 million, which would violate all three of the rules mentioned above.

To justify that contract, Hosmer would have to produce roughly 18.9 fWAR over the 6 year span. Given that he’s produced 9.9 fWAR across a 7 year career to date, this is an obvious red flag. Although recency bias does benefit Hosmer somewhat, with two good seasons since 2015, it is still concerning. Even if he manages avoid any decline and produce at the rate he has in the last 3 years rather than his entire, statistically unimpressive career, he’ll still produce just 15 fWAR over the contract, a definite example of a contract with a significant lack of upside.

For many reasons however, Hosmer does have the reputation of being a borderline star, thanks to aggressive all-star voting from Royals fans in past seasons, solid totals in meaningless stats such as RBI and BA, and superagent Scott Boras inflating everything he does to make it seem significantly better than it really is. However, paying for this reputation is a mistake, especially considering his general lack of value.

It would still be somewhat acceptable to give Hosmer 6/132 if there were no other talented first baseman available in free agency, however there is at least one who’s capable of putting up comparable, yet cheaper production. Consider the fWAR’s of Hosmer, and fellow free agent 1B Carlos Santana. Their production in the last 3 seasons and projected price (per MLBTR) are below:

  • Hosmer: 7.5 fWAR, 6/136 projected contract, 9.01 mil/fWAR
  • Santana: 8.8 fWAR, 3/45 projected contract, 5.11 mil/fWAR

Even if you believe that Hosmer’s weak 2016 was a fluke and that he is actually better than that season would suggest, it’s still hard to justify overspending by this magnitude. Santana is at worst, a slightly less skilled player that’s cheaper in the short term, and requires significantly less risk to acquire given the shorter length of his contract.

It might be controversial to say that the most skilled free agents aren’t always the most valuable, but it’s been shown time and time again that this isn’t always the case. Giving out contracts with virtually no chance of providing above market value are definite mistakes. There’s likely never going to be a stoppage of mistakes like general stupidity, however major league teams can and should start signing players based on the per dollar value they can provide, rather than skill alone.

MLB championships are not won in the same was as NBA championships; you don’t need a Top 5 player to have a shot at the title. Instead, you need the best group of 25, and the easiest way of signing free agents who help accomplish this is by spending your free agent money on the most financially efficient players available.


Featured Photo: Images via Orange County Registar, Wikipedia, Yahoo, and MLBTR (L to R)

Quinn Sweetzir

Economics and History double major, University of Regina '22. Blue Jays fan for life. Twitter: @Quinn_Sweetzir

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