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Why the opt-out in Tanaka's contract isn't such a bad thing

The overwhelming reaction on the web to the Tanaka signing has been that the Yankees were nuts to include that opt-out clause. The criticism being that they were taking on all the risk associated with giving out an expensive long-term contract to a pitcher, but losing out on the potential for massive gain if he actually lives up to his billing. High risk, without the opportunity for high reward. But the Yankees must have had some reason for including the opt-out. There must have been something they were getting that made it worthwhile for them to include it. That "something" was quite likely a reduction in guaranteed money, in some form or another. Because with few exceptions, baseball player contracts are all about the money, right? If Tanaka wanted that opt-out, he was going to have to give up something to get it. It's likely that without the opt-out, the contract would have encompassed more years and/or a higher AAV, increasing the obligation to the Yankees.

Unfortunately, we can't know what a contract without the opt-out would have looked like. While it's nice to fantasize about being a fly on the wall during the negotiation process, we're left with vague guesses about how much they would have had to pay in lieu of the opt-out. But we can play around with the numbers to get a sense of what that contract might have looked like, and why the Yankees decided it was in their best interests to include it.

Below are 6 tables of projections for Tanaka. While these projections can't come anywhere close to encompassing all the possible outcomes for Tanaka for the next 7 years, they represent a few generic/reasonable/possible outcomes that cover a basic range from very good to very poor, with Tanaka starting 2014 at 6 WAR, then 5, then 4, down to 1. More or less the near-best case scenario down to the near-worst case. For each set, I've assumed he'll hang on to most of his ability through the first 4 years of the contract, with the common half WAR per year decline after he hits 30. Tables on the left are for the actual contract he signed, tables on the right are the proposed contract he would have signed without the opt-out. His posting fee is included as part of his salary for the first two years, to reflect his actual costs to the Yankees.

The Excel spreadsheet I got these from has inputs for AAV of the proposed contract, starting free agent $/WAR, and inflation rate. Wish I could include those here so you can also play around with them, I've got them set here for a $24MM AAV (7/168), $7MM/WAR, and 5% inflation. Under those parameters, for the first three sets, I've assumed that Tanaka would enact his opt-out and become a free agent after the fourth year, as his production to that point would seem to command a better contract than the 3/67 left on the original. The last three sets, him being not so good, he chooses to continue on under the current contract. For the last three years in the event Tanaka opts out, I've plugged in how much WAR the Yankees should be able to purchase with the money they aren't going to be paying Tanaka.

Opt-out No opt-out
WarA Salary Value Surplus WarA Salary Value Surplus Net $/WAR
2014 6.0 32 42.00 10.00 6.0 34 42.00 8.00 7.00
2015 6.0 32 44.10 12.10 6.0 34 44.10 10.10 7.35
2016 5.5 22 42.45 20.45 5.5 24 42.45 18.45 7.72
2017 5.5 22 44.57 22.57 5.5 24 44.57 20.57 8.10
2018 2.6 22 22.00 0.00 5.0 24 42.54 18.54 8.51
2019 2.5 22 22.00 0.00 4.5 24 40.20 16.20 8.93
2020 2.5 23 23.00 0.00 4.0 24 37.52 13.52 9.38
Total 30.5 175 240.11 65.11 36.5 188 293.38 105.38 -40.27

WarB WarB
2014 5.0 32 35.00 3.00 5.0 34 35.00 1.00 7.00
2015 5.0 32 36.75 4.75 5.0 34 36.75 2.75 7.35
2016 4.5 22 34.73 12.73 4.5 24 34.73 10.73 7.72
2017 4.5 22 36.47 14.47 4.5 24 36.47 12.47 8.10
2018 2.6 22 22.00 0.00 4.0 24 34.03 10.03 8.51
2019 2.5 22 22.00 0.00 3.5 24 31.27 7.27 8.93
2020 2.5 23 23.00 0.00 3.0 24 28.14 4.14 9.38
Total 26.5 175 209.94 34.94 29.5 188 236.39 48.39 -13.45

WarC WarC
2014 4.0 32 28.00 -4.00 4.0 34 28.00 -6.00 7.00
2015 4.0 32 29.40 -2.60 4.0 34 29.40 -4.60 7.35
2016 3.5 22 27.01 5.01 3.5 24 27.01 3.01 7.72
2017 3.5 22 28.36 6.36 3.5 24 28.36 4.36 8.10
2018 2.6 22 22.00 0.00 3.0 24 25.53 1.53 8.51
2019 2.5 22 22.00 0.00 2.5 24 22.33 -1.67 8.93
2020 2.5 23 23.00 0.00 2.0 24 18.76 -5.24 9.38
Total 22.5 175 179.77 4.77 22.5 188 179.39 -8.61 13.38

WarD WarD
2014 3.0 32 21.00 -11.00 3.0 34 21.00 -13.00 7.00
2015 3.0 32 22.05 -9.95 3.0 34 22.05 -11.95 7.35
2016 2.5 22 19.29 -2.71 2.5 24 19.29 -4.71 7.72
2017 2.5 22 20.26 -1.74 2.5 24 20.26 -3.74 8.10
2018 2.0 22 17.02 -4.98 2.0 24 17.02 -6.98 8.51
2019 1.5 22 13.40 -8.60 1.5 24 13.40 -10.60 8.93
2020 1.0 23 9.38 -13.62 1.0 24 9.38 -14.62 9.38
Total 15.5 175 122.40 -52.60 15.5 188 122.40 -65.60 13.00

WarE WarE
2014 2.0 32 14.00 -18.00 2.0 34 14.00 -20.00 7.00
2015 2.0 32 14.70 -17.30 2.0 34 14.70 -19.30 7.35
2016 1.5 22 11.58 -10.42 1.5 24 11.58 -12.42 7.72
2017 1.5 22 12.16 -9.84 1.5 24 12.16 -11.84 8.10
2018 1.0 22 8.51 -13.49 1.0 24 8.51 -15.49 8.51
2019 0.5 22 4.47 -17.53 0.5 24 4.47 -19.53 8.93
2020 0.0 23 0.00 -23.00 0.0 24 0.00 -24.00 9.38
Total 8.5 175 65.41 -109.59 8.5 188 65.41 -122.59 13.00

WarF WarF
2014 1.0 32 7.00 -25.00 1.0 34 7.00 -27.00 7.00
2015 1.0 32 7.35 -24.65 1.0 34 7.35 -26.65 7.35
2016 1.0 22 7.72 -14.28 1.0 24 7.72 -16.28 7.72
2017 1.0 22 8.10 -13.90 1.0 24 8.10 -15.90 8.10
2018 0.0 22 0.00 -22.00 0.0 24 0.00 -24.00 8.51
2019 0.0 22 0.00 -22.00 0.0 24 0.00 -24.00 8.93
2020 0.0 23 0.00 -23.00 0.0 24 0.00 -24.00 9.38
Total 4.0 175 30.17 -144.83 4.0 188 30.17 -157.83 13.00

Taking a look at the top table (labeled as WarA), especially the "Net" column (compares the total value of the opt-out contract to the proposed contract), you'll see why some people really hate the idea of the opt-out. If he turns out to be really good, the Yankees are losing out on a great amount of surplus value by giving him the opt-out. Around 40 million in this example. The next table down, same thing, except they're not losing out on nearly as much. But take a look at the bottom four tables. In each of those situations, the Yankees actually come out better by including the opt-out. Because they're getting him for a reduction of total guaranteed money, they save themselves some money if it turns out he's not among the best pitchers in the game,or pitches rather poorly (or suffers injury). In essence, the Yankees are hedging their bet on the contract. They don't have as much to gain if he pitches really well, but they don't have as much to lose if he pitches poorly. And to be honest, what are the chances that Tanaka hits that high projection, where the Yankees really lose out? There are few pitchers in baseball that can maintain near 6 WAR per year over a 4 year period. Yeah, it could happen, but it's probably the least likely outcome of the group. Judging by what most people seem to think his likely talent level in MLB will be, you're probably looking at the third and fourth tables (WarC and WarD). In both those cases, the Yankees come out looking just fine, perhaps even saving themselves as much as $13MM over the course of the contract.

Like I said, I wish you could also play around with the numbers to get an idea of how different inputs affect the worthiness of including an opt-out. What I can tell you, is that with the parameters I have set for these tables, the break-even point for the AAV seems to be somewhere between 23.5 and 24. A lower starting $/WAR benefits the team, as does a lower inflation rate. Higher $/WAR or inflation rate shifts it more toward hurting the team. There does seem to be a lot of money in baseball these days, generally attributed to the spate of new TV deals signed recently, so if you're of the mind that we're going to see rapid inflation of baseball contracts over the next few years, maybe the opt-out looks like a terrible thing. There's also the thought from a lot of people that the TV bubble may be about to burst, so if you think it might, the opt-out probably looks great to you.

One other thing to note, if Tanaka opts out, the Yankees might be in line for draft pick compensation. That's if there even is draft pick compensation at that time, if Tanaka would even qualify, or what any compensation might be. Just something to keep in mind, because that could help cushion the blow if he decides to opt-out.

There's no way to know what his contract would have looked like without the opt-out, or what other forms of compensation the two parties might have been discussing. I've just taken the easiest route in constructing this model, assuming that it was a higher AAV. It's a good assumption that it was some kind of guaranteed money, but perhaps not. A No-Trade clause, perhaps? I'm not sure that sounds equivalent to an opt-out, but it would benefit a team to exclude that from the contract. Awards bonuses, incentives, vesting options? A front-loaded contract or a big signing bonus? Or maybe they were negotiating around guaranteed money in the form of an additional year or two, or a buy-out and/or player option? Who knows? But I'm pretty sure that Tanaka had to give up something to get that opt-out included. The Yankees aren't going to agree to include that on a whim, or out of the goodness of their hearts. They got terms on the contract that they felt were in their best interests, whatever form those terms took.

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