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Lackey’s Contractual Quirk and Phillies Deals

Posted by Eric Seidman, Thu, May 30, 2013 10:13 AM | Comments: 10
Acquisitions, Analysis, Commentary

John Lackey wasn’t at his best Wednesday night but he has pitched effectively for the Red Sox this season. Lackey, signed to a five-year, $82.5 million contract prior to the 2010 season, had a rocky start to his Boston tenure. After posting solid peripherals with poor run prevention marks in 2010, he posted a 6.41 ERA in 2011 before undergoing Tommy John surgery. He missed the entire 2012 campaign and is now finally combining the solid peripherals and run prevention the Red Sox expected when doling out the lucrative contract.

However, the Red Sox understood that Lackey, like all pitchers for that matter, represented an injury risk. In order to hedge against that risk the Sox included a clause in Lackey’s contract that, if he underwent Tommy John surgery, an option for 2015 would automatically trigger at the league-minimum salary. With five years and $82.5 million on the table, that clause might not have seemed all that important to Lackey’s camp, as he is guaranteed that money regardless of his health status. But now, with the surgery on the backburner, that 5-yr/$82.5 million deal effectively became a 6 yr/$83 million deal.

There are two implications here that impact, or could have impacted the Phillies in their subsequent big-ticket free agent signings.

First, if Lackey remains effective beyond next season, the Red Sox could have a league-average or better pitcher at a pittance. Second, the automatic triggering of the option reduced the average annual value of the contract. Most option years are not included in the average annual value calculation for luxury tax purposes, but if a future vesting option is triggered before the existing deal expires, the contract itself changes.

The original contract carried a $16.5 million AAV while the “new” deal has a $13.8 million average annual value. That reduction would prove significant if the Sox were up against the luxury tax threshold.

It’s impossible to know how contract negotiations with Roy Halladay, Cliff Lee and Cole Hamels went down without having first-hand knowledge, so we’ll never know if similar clauses were discussed. But for a team consistently concerned about the luxury tax because of large annual sums paid to players at an inherently risky position, that type of creative clause could have gone a long way towards hedging risk.

The Phillies acquired Halladay with one year left on his existing deal with the Blue Jays. The deal was predicated on the Phils’ negotiation of an additional three years and $60 million, with a vesting option for a fourth season. That option was in some ways a hedging mechanism, as Halladay would only reach the innings pitched totals if he was healthy and productive. He hasn’t been over the last two seasons and the option will not trigger.

The extension was considered well below market value for a pitcher of his stature, but the Phillies face an interesting dilemma this offseason. Do you re-sign a Halladay that, if healthy and cured by this surgery, could once again join the ranks of the very good?

Had a Lackey-esque clause been negotiated into his contract, the Phillies wouldn’t have to worry about their future relationship with the Hall of Fame righty, nor would they find concern with an appropriate price to pay him. The automatic triggering year wouldn’t even have to be at the league minimum. I would take Doc at $2 million for next season in a heartbeat. If this was a clause for concern — pun absolutely intended — perhaps Halladay would have accepted a greater average annual salary during his guaranteed years.

Wouldn’t you have paid Doc 3/$75 if a fourth-year option at $2-$3 million was triggered if he underwent certain elbow or shoulder surgeries? From a luxury tax standpoint, there is a big difference for the Phillies between a $25 mil AAV ($75 mil / 3 yrs) and a $19.5 mil AAV ($78 mil / 4 yrs). This is obviously a hypothetical example but it should become evident how incorporating these types of clauses could prove valuable to a team with so much money tied up in so few assets that is hamstrung by a desire to avoid the tax.

The Phillies then signed Lee and Hamels to substantial multi-year contracts that also could have included a similar clause. It’s easy to think that Lee is impervious to long-term injuries or that Hamels may be past the age when younger pitchers typically experience elbow problems. But if Hamels tweaks his elbow in his next start and has to miss over a year due to Tommy John surgery, the Phillies will pay over $20 million next season for literally nothing. Obviously, this is a risk associated with all pitchers up for lucrative deals, but now there is a tangible example of a safeguard against that very situation.

It will be very interesting to see if other teams begin to utilize these types of clauses. The Phillies haven’t yet but it could be a very useful tool for them moving forward if they pursue big-ticket pitching and want to recoup lost value from time spent on the shelf.

Avatar of Eric Seidman

About Eric Seidman

Eric Seidman has written 64 articles on Phillies Nation.

Eric offers his unique analytical perspective to Phillies Nation and is a regular contributor on FanGraphs.com.

 
 
  • Posts: 0 topherstarr

    Interesting article, Eric. Does the change in AAV affect prior years? Does the option change the AAV of the entire contract, such that Boston would be entitled to a refund of any luxury tax they paid in previous seasons with Lackey on the roster? Or is the AAV recalculated from the date the option is triggered to the end of the contract?

     
    • Posts: 146 Eric Seidman

      Avatar of Eric Seidman

      Topher,

      There would not be a refund of past overstated amounts as it appears the re-calculation is applied on a prospective basis.

       
  • Posts: 0 jake

    Most interestingly, this essentially means the Red Sox have 16.8MM in 2015 to spend on a pitcher without replacing a player. So there isn’t a financial crunch in 2014 if they wanted to say…i dunno…pay Cliff Lee that season.

     
    • Posts: 0 schmenkman

      True in terms of actual cash paid out, although it makes $2.7 more available for purposes of the luxury tax threshold, which is based AAV.

       
  • Posts: 5532 Lefty

    Avatar of Lefty

    Great read as usual Eric. Thanks.
    As long as pitchers are asking for longer than 3 year contracts, this should become standard in their contracts IMO.

    I’ve been asking a question about this for many years. I was asking when the negotiations for Hamels were ongoing. Why does the team always have to take all the risk? Why can’t a pitcher that wants the security of a longer deal assume some of the risk? It’s always seemed unfair to me. Good job by the Red Sox management.

     
    • Posts: 146 Eric Seidman

      Avatar of Eric Seidman

      Completely agree. I think this gets into a series of studies Matt Swartz previously did regarding free agents vs guys re-signed by their current teams. He found that guys who re-signed instead of being allowed to hit free agency and sign elsewhere generally performed better than their free agent counterparts. Part of the reason was injuries in that the original team has the most knowledge possible about that player, and even though all teams give physicals, not all teams are necessarily privy to private internal records kept about players. I think particularly when it comes to signing new free agent pitchers, having clauses like this should be a necessity for the team. Teams just aren’t going to want to spend all this money to take the brunt of the risk these days when all that money could go towards scouting and development to eventually have stars under control for the minimum.

       
  • Posts: 1190 Manny

    Avatar of Manny

    I doubt that RAJ is smart enough to include such quirky elements in any contract he gives out.

     
    • Posts: 3085 Chuck A.

      Avatar of Chuck A.

      Manny, I’m beginning to feel the same way about the man.

       
  • Posts: 0 George

    These clauses may be a good idea, but a team still needs the player’s signature, and I’m not so sure most pitchers would sign such a contract. As a free agent, the player would have more than one team going after him, and sometimes it’s the details like injury coverage or no-trades, or opt-outs that get a deal done. Until all teams add such “you take some of the burden” clauses, the owners will continue to take all the risk, or they might not get the free agent they want or need. Of course if all teams are in agreement, the player’s union will cry “collusion,” and they’d probably win in court.

     
    • Posts: 5532 Lefty

      Avatar of Lefty

      The collusion part is true, this would have to be collectively bargained the next time around. But IMO- it should be.

       
 
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