Sunday, January 16, 2011

Reds Extend Votto. Good idea????

The news of the day is that the Reds have extended the contract of Joey Votto. A cause for celebration? Eh.....I'm not so sure.

Early word is that the Reds signed Joey Votto to a three-year extension worth $38M.

In Major League Baseball, contracts are guaranteed. In essence, unless a player retires or kicks the bucket, he will be entitled to every last dollar under that contract. As a result, MLB contracts are, to a certain extent, risk shifting mechanisms. The longer the contract, the more risk incurred by the franchise. The shorter the contract, the more risk incurred by the player. And, in the case of Joey Votto, who was already under team control for the next three seasons, this contract is largely about managing the risk.

The problem with this contract is that the Reds incurred risk unnecessarily. Even if the Reds had decided to go year-to-year with Votto through the arbitration process, they still had the power to keep Votto in Cincinnati for the next three years. But, by going year-to-year, they would have forced Votto to incur the risk of injury or poor performance. Instead, the three-year extension operates to shift that risk to the organization.

So, what exactly did the Reds get for incurring the extra two seasons of risk? Typically, when an organization buys out the arbitration years of one of its young players, the player agrees to give up a season or two of free agency in exchange for the guaranteed financial security. Under that scenario, the organization agrees to incur the added risk, but receives the benefit of an extra season or two of control over that player. Both sides obtain something of value, as the player gets financial security for life by shifting the risk to the organization, while the organization gets a couple extra seasons of control over that player in exchange for incurring the risk.

So, the question remains, what exactly DID THE REDS GET for taking on the extra two seasons of risk?

Well, they clearly didn't secure any extra years of control over Votto, so the only thing they can hope to have achieved is cost savings. But, realistically, how much cost savings did they get?

John Fay recently reported that Votto was likely to ask for between $8.5-9.5M in arbitration this year with the Reds countering at around $7M.

If we break it down, I think there's a good chance that Votto would win his arbitration case. Let's assume that he asks for $9M. The MLB arbitration process is based in part on the market, which in this case is defined as players eligible for arbitration for the first time. The most obvious comparison for Votto's arbitration case would be Ryan Howard.

In 2008, Ryan Howard won his arbitration case after asking for $10M with the Phillies countering with $7M. While some will argue that Howard was coming off the better season, I think it's clear that Votto was the better player. And, coming off an MVP award, it would be difficult to come up with a compelling case AGAINST Votto's salary demand.

So, if it had gone to arbitration, Votto would likely have earned ~$9M in 2011. Taking that away from the total value of the three-year extension and you have $29M remaining. Basically, Votto would have had to get MORE than $14M in 2012 and $15M in 2013 for the Reds to reap any financial savings on the contract extension.

I just don't see a ton of cost savings here for the Reds. If Votto strings together two more seasons like he had last year, then he would probably receive more through arbitration than he is set to receive under the contract extension. If Votto won $9M in arbitration in 2011, then a repeat performance would reasonably get him a $5M raise. So, the estimated $14M in salary for 2012 under the extension seems pretty reasonable for Votto. And, if he puts together another strong season in 2012, then I could see him earning somewhere in the $17-20M range for his final season, which would be better than the estimated $15M he'll earn under the contract. Of course, that entire scenario comes with the rather large IF regarding Votto's ability to stay healthy and productive over the next two seasons. Forcing him to go through arbitration would have left that rather sizable IF (and the risk that comes with it) resting on Votto's shoulders.

For this deal to make sense, the Reds needed to get an extra season or two of control over Votto. Jocketty should have played hardball with Votto, informing him that if he wants the guaranteed financial security, then he'll have to surrender two years of free agency. In an offseason defined by the length of the contracts being thrown around, it's surprising the Reds couldn't do better here than a three-year extension.

Instead, the Reds took on the risk and got little in return for doing so. They may save a few million on the back end of the deal, but that's only true if Votto continues to be healthy and produce at near MVP levels.

Now, admittedly, there are other factors at work that militate towards signing Votto to an extension that buys out solely his arbitration eligible seasons. First, arbitration is an ugly process. The team is forced to bad mouth the player in order to drive down his cost. And, understandably, that can lead to bad blood between the player and organization. It's not a fun process for either side. Second, a player of Votto's caliber has the ability to establish record breaking awards in every arbitration cycle. If that happened, he would establish a new benchmark for every subsequent arbitration hearing, which is an undesirable result for the other owners as it would operate to drag player salaries higher. Still, while these other factors certainly bear mentioning, I don't see either as a reason not to force Votto to go year-to-year unless he is wiling to forfeit a year or two of free agency.

As for Votto, he did quite well here. He obtained his financial security without having to delay his free agency eligibility. And, judging by the length of the deal, it is now very clear that Votto either wants out of Cincinnati or wants to test the lucrative waters of free agency. Regardless of whether it's the former or the latter, it now seems increasingly unlikely that Votto will spend the bulk of his career in Cincinnati, as the next time his contract is negotiated the Reds will likely be competing with the Yankees, Red Sox, Blue Jays, and others.


  1. Good will (from Votto, MLB Owners and the fans) and cost certainty is about all they got. Not sure it much matters, sure they took on some risk but in this case I don't know how they could avoid it without also losing something. This whole Votto thing is a cruel reminder that this is a business. But the Reds have taken on the risk and ironically did it with an eye towards something more than business?

  2. Will,

    Yeah, I suppose there is some goodwill to be gleaned from this deal. And, I suspect, there is some value to continuity, but I still would have been damn tempted to force him to go year-to-year. I do, however, understand Votto's likely problem.

    I suspect he only wanted a three year deal because he's already 27. So, when he hits free agency it'll be an easier to land a massive 6-7 year deal if he's 30 when he hits the market. If he's 32 or 33, then he won't get such a huge deal. Right or wrong, I suspect he'll believes he'll get two big contracts by not going beyond 3 years in this extension.

    Either that or he simply wants to go play in Toronto.

    Anyway, thanks for the comment!


  3. still cant fathom why we would agree to this without AT LEST 1 year of his free agency... wierd

  4. Smitty,

    Yeah, I would have been seriously tempted to play hardball, but I suppose it's probably not worth it. The Reds are a good team and don't need the distractions that come from contentious contract negotiations.

    In the end, I still think it all comes down to Votto wanting two big contracts over the remainder of his career. But, Votto's comments that he wanted a three year deal and it had nothing to do with wanting to get to free agency are a bit disingenuous.

    He seems baffled that would anyone would infer that his desire for a contract length that only buys out his arbitration years as a sign that he wants to hit free agency. Odd.

    Anyway, what's done is done. We won't have to worry about it for another 2 years. Hopefully those are good ones for the organization.

    Thanks for the comment!