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Friday, March 04, 2011
MLBPA should consider allowing buyouts
There’s a thought that guaranteed contracts are the perfect thing for players. Let me tell you why that’s not true.
Suppose you are a company, and you want to retain talent. You offer someone a 3 year guaranteed contract for a total of 300,000$. Suppose instead it was not a guarantee, that you are allowed to walk out of the deal, without penalty, at any point. This person would not accept a 3 year non-guaranteed deal for 300,000$. He might instead ask for a 3 year non-guaranteed deal for 360,000$. He wants the extra money to make up for the fact that he can get cut loose at any time.
Now, suppose that the penalty to walk out on a deal is 10% of the remaining value of the contract. So, say one year in, you want to cut the guy loose. He has 200,000$ still coming to him, so you pay a 10% penalty of 20,000$, and that’s it. In that case, this person would likely accept say a 330,000$ contract, non-guaranteed, with a 10% penalty.
In all cases, we’ve reached an optimum point for both the employee and employer.
I think the way people think of it, with respect to sports, is that the team would always pay the player say 36 million dollars, regardless of the guarantee or not. But in actual fact, the team is paying the player 30 million dollars because it’s guaranteed, and if it were not guaranteed, they would pay the player 36 million dollars.
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The NHL lets teams buy out contracts at two-thirds of the remaining value. This has a good impact on the fan side, because it allows a team to get rid of albatrosses, without the fans thinking that it’s always hanging over their heads. It gives teams options in terms of roster flexibility.
As I said, there’s an optimal point for the players and teams regardless of the guaranteed salary and buyout parameters in place. It’s just a matter of figuring out what kind of system both sides want. In my view, I’d like to see the buyout provision at around 33.3%.
If say Barry Zito has say 66MM$ due to him over the next 3 seasons, then the Giants can pay him 22MM$ to leave. They would do this if they don’t think he can get them 44M$ of value in performance.
Had this provision always been in place, Zito, and all the other free agents, would have signed BIGGER deals. This would have happened because the teams know they can save themselves by buying out the deals. In the end, they’d have paid for all the free agents, as a group, the same amount. It’s just that the risk of having a really bad deal got reduced.
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So, the discussion point is: how much would you set the buyout level at?
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