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Tuesday, November 01, 2011
Paying CC to terminate his opt-out option
CC Sabathia had an opt-out option following the 2011 season. That opt-out clause had a certain amount of value when his first signed preceding the 2009 season, and that opt-out option’s value changed pitch by pitch, game by game, year by year, so that when the 2011 concluded, that opt-out option had a certain amount of value.
CC had signed a 7yr/161MM$ deal with the option going into the 2009 season. Had he not had that option, he would have signed for MORE. It might have been a 7/180MM$ deal let’s say. That is, he got some discount in order to have the opt-out option. This is really a faith in himself, that he knows more than the Yankees about how he would have aged.
In his last 3 years with the Indians, he had a total of 20 fWAR. Seeing that he was at his (theoretical) peak and had nowhere to go but down, the expectation would have been for him to accumulate something like 16.5 wins for 2009-2011, and then 15 wins for 2012-2015. Those 31.5 wins, worth a weighted average of 5.7MM$ per win gives us 179MM$. CC signs for 18MM$ less, in return for the opt-out option.
If CC earns less than 16 wins for 2009-2011, then it’s a wasted option. If he earns more than 17 wins in 2009-2011, then we have a good chance that he is aging better than expected. He will then exercise that option. He had 19 fWAR from 2009-2011. This means that CC aged better than expected.
Whereas when he signed the deal in 2009, his expected WAR for the 2012 would have been for around 4.5 wins. Today, knowing what we know with his last three seasons (and his career), his expected WAR for 2012 is closer to 5.5 wins. Because he is better today than we expected him to be, he exercices his opt-out option. This is no different than any stock option. CC Sabathia Properties is just like your Microsoft or Oracle stock options.
Had the economy not tanked, CC would have gotten a much better deal than the one he got. This is how it looked like in 2009:
Year Wins $/wins Pay
2009 6.0 $5.0 $30.0
2010 5.5 $5.3 $28.9
2011 5.0 $5.5 $27.6
2012 4.5 $5.8 $26.0
2013 4.0 $6.1 $24.3
2014 3.5 $6.4 $22.3
2015 3.0 $6.7 $20.1
(We need to subtract 6MM$ for each of 2009, 2010, 2011, in return for the opt-out option. The 6MM$ and all the above numbers are just an illustration. I don’t know what the actual value of the option is, but it would be easy enough to figure out.)
He was paid for delivering 16.5 wins, but he delivered almost 19 wins. He was undervalued, and therefore, he wants to be properly valued.
This is what he looks like today:
Year Wins $/wins Pay
2012 5.5 $5.0 $27.5
2013 5.0 $5.3 $26.3
2014 4.5 $5.5 $24.8
2015 4.0 $5.8 $23.2
2016 3.5 $6.1 $21.3
That’s 5 years and 123 million$.
The two key differences is that he’s more talented today than we expected him to be. But, with the economy tanking, he doesn’t get the larger multiplier effect. Hence, the fairly mild extension he got.
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