Player Contract Options
January 16, 2005
When a player gains control over his contract, the club is giving up something valuable.
There have been two excellent articles lately about no-trade and opt-out clauses in the Drew and Beltran deals.
First, Rich Lederer wrote a dead-on assessment of the opt-out part of the JD Drew contract. Essentially, JD Drew has the option to leave his contract with the Dodgers after the first two years and re-sign with another team if he wants to. It’s totally up to him.
Of course, Drew will only invoke this clause if he feels he can make more money with a new contract. In other words, he’ll only do this if he has two great years, remains healthy, and figures that other major league teams will be willing to pay him more than $11 million a year.
On the other hand, the Dodgers are on the hook to pay him $11 million a year for five years. They can’t get out of this deal if Drew does poorly.
Long-term contracts represent a risk and reward for both the player and the team. The team is rewarded if the player does better than expected, but takes the risk if he doesn’t. Conversely, the player is guaranteed a steady stream of income for the length of the contract, regardless of how well he does. But he gives up the right to negotiate a new contract if he does better than expected.
The Drew deal is different. Essentially, the opt-out clause means that this contract may be worth MORE than $11 million a year to Drew for five years (because he can opt out and get a better deal) and it’s riskier for the Dodgers (because they have the same downside on the deal, but may not get to see the upside).
Given Drew’s injury history, this deal actually makes sense. For instance, I think $11 million a year is $3 to $4 million less than Drew will be worth over the next couple of years if he stays healthy. However, the health is the question. So you might say that the Dodgers got a deal at $11 million a year, but had to “make up the difference” with the opt-out clause. My guess is that the opt-out clause was the key to the deal.
Also, the Sports Economist has an article comparing Beltran’s no-trade clause to a financial option. This is a little hard to explain, but the main point is that a no-trade option gives the player control over his destiny, and that is also worth money.
If I were a General Manager, I would be very hesitant to include a no-trade clause in a contract. This has nothing to do with “valuing options” and everything to do with running a sound business. A businessperson needs to be able to control his/her “assets,” and a no-trade clause undermines the ability of a GM to do so. I can understand why a player would want a no-trade clause, but I can also understand why a GM would refuse to include it in a contract.
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