Why recent extensions for Harrison, Kluber, more are smart business

Teams like the Pirates, Indians and Royals made smart moves recently by locking up quality young players with contracts that buy out their arbitration-eligible years, and maybe some free-agency years too.

On Wednesday the Pirates signed third baseman Josh Harrison to a four-year, $27.3 million extension, making him the latest in a string of players still at or before their first year of arbitration who have signed contracts spanning all of their arbitration years. In the last four weeks eight such deals have been struck, all of them using the simple calculus of controlling a team’s costs and a player's risk.

It’s easy to forget today, but the reserve system was not completely abolished by the introduction of free agency in the mid-1970s. Teams still own the first six full seasons of a player's career and for the first half of that period—before a player becomes eligible for salary arbitration—they can pay them whatever they want as long as it meets the major league minimum. That minimum salary, just north of $500,000, is a tiny fraction of what the best young players in the game are worth according to the market prices established by free agency.

For example, this past offseason my colleague Jay Jaffe ran a series called "What's He Really Worth?" attempting to establish the open market value of several of the winter’s top free agents. Jay used $6 million as the market price of a win based on research by FanGraphs’ Dave Cameron. At that rate, Harrison would only need to generate 4.55 wins above replacement over the next four years to “earn” his contract. In his breakout season last year, Harrison was worth 5.3 wins above replacement, as measured by Baseball-Reference.com. Even if he was half as valuable this season, he’d still be worth $15.9 million, meaning he would earn the full value of his new contract before it was halfway through.

By that math, every one of these arbitration-period extensions is going to be a bargain because the system in place still artificially suppresses salaries for the first six years of a player's career. What’s remarkable is that it took this long for teams to figure out that they could leverage the associated uncertainty that comes with that salary suppression to delay a player’s free agency. Harrison, for example, signed a $2.8 million contract in January for this, his first arbitration-eligible season, and had just two more arbitration-eligible years remaining after 2015. However, in exchange for receiving a guarantee of steadily increasing arbitration-period salaries, he has granted the Pirates control over the three seasons beyond what had been his expected free agency, and done so at what could very well prove to be below-market prices.

Harrison’s new deal guarantees him $5 million for 2016 and $7.5 million for '17, increases based on his previously negotiated $2.8 million salary for this season. It also guarantees Pittsburgh his 2018 season, which would have been his first year after free agency, for $10.5 million and gives the team options for the '19 and '20 campaigns topping out at $11.5 million in the latter year. Using Jay’s math, if we assume 5.4 percent annual inflation in the value of a win, a single win above replacement will be worth roughly $8.2 million in 2020, meaning Harrison will only have to be worth 1.4 bWAR to earn his salary that season; anything exceeding that figure will render him a bargain. Whatever concerns there might be have about Harrison’s free-swinging plate approach and lack of power, he was worth nearly 1.4 wins in the field alone last year, and his defensive ability and versatility should make him a near lock to earn the full six years of his contract.

With all of that in mind, here’s a quick look some comparable contracts signed in recent weeks, starting with the biggest name among them and a teammate of his.

Josh Harrison's defense alone should make him plenty valuable to Pittsburgh the next several years :: Joe Sargent/Getty Images

Corey Kluber, RHP, Indians

Contract: 5 years, $38.5 million, plus two club options
Arbitration years: 4 years, $24.5 million
Free agent years: 1 year, $14 million (minimum); 3 years, $40.5 million (maximum)

Kluber was worth 7.4 bWAR last year, when he won the American League Cy Young Award, or $44.4 million at market prices. He may never be that good again, but he stands an excellent chance to be nearly as valuable, and thus could earn this contract, and then some, in just its first two years. His second option—there are variables built in as to what kind of option it could wind up being and how much it might be worth, but for now both are club options—is worth $14 million. At 2021 prices, again assuming that 5.4 percent inflation, Kluber would have to be produce just 1.6 wins above replacement to be worth that salary.

Carlos Carrasco, RHP, Indians
Contract: 4 years, $22 million, plus two club options
Arb years: 3 years, $13.3375 million
FA years: 1 year, $8.6625 million (minimum); 3 years, $26.5 million (maximum)

Though Carrasco’s contract is significantly cheaper than Kluber’s, it represents a larger gamble. Carrasco, who is only a year younger, really only has 10 starts from late last year to recommend him for such a deal. Still, those 10 starts plus his strong work out of the bullpen earlier in the season made him a 3.7 bWAR player last year, meaning he was worth $22.2 million last year alone. Cleveland has good reason to expect more from him this year and he would only have to produce 1.2 wins to be worth his $9.5 million option in 2020.

Yordano Ventura, RHP, Royals

Contract: 5 years, $23 million, plus two club options
Arb years: 5 years, $23 million
FA years: None

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With 3.2 bWAR, Ventura was worth $19.2 million last year, but as a 23-year-old fireballer with outstanding stuff, he has ace potential. He had the chance to draw elite salaries in arbitration (at least by arbitration standards), but that was before signing this contract. The informative comparison here is with David Price. Both Price and Ventura had their first extensive stay in their teams’ rotation in their age-23 seasons. In 2012, Price won the AL Cy Young Award at 26. The following year, just his second of arbitration, Price settled for more than $10 million in salary from the Rays. A year later, with Price having landed a $14 million arbitration settlement, Tampa Bay traded its ace knowing it not only couldn’t afford to re-sign him as a free agent but would have difficulty affording his final year of arbitration as well (a Super Two player, Price is making $19.75 million this year with the Tigers, his fourth season of arbitration).

Ventura may never be as good as Price, but having played a full year as a rookie (Price didn’t actually join the Rays' rotation until late May of 2009), he was due to hit arbitration at the same age and reach free agency a year earlier. Instead, the Royals have pushed his free agency back by two years and assured that, no matter how good he gets, Ventura won’t make more than $12 million in any of those seasons without negotiating another long-term deal. That also means that Ventura, if he stays healthy and pitches up to his potential, should remain in Kansas City for at least two years longer than Price was in Tampa Bay. That’s a big win for a small-market team whose franchise-record $112.9 million Opening Day payroll this year is still just the 17th largest in the majors.

Juan Lagares, CF, Mets

Contract: 5 years, $23,553,696 million, one club option
Arb years: 5 years, $23,553,696 million
FA years: 1 year, $9.5 million (club option)

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Lagares is an outstanding defender whose performance at the plate last year (102 OPS+) suggested that he is more than just a good glove. That translated to 5.5 wins last year, a whopping $33 million in market value. What the Mets have done here is to accelerate his arbitration earnings a bit (Lagares will earn $2.5 million next year, which was to be a pre-arb year for him, and $9 million in what was to be his final arbitration-eligible season, in 2019) in exchange for a reasonable option on his age-31 season in 2020 in the hope that the gains he made at the plate last year are real. If so, his $9.5 million option for his first free agent year will be a bargain. If not, the key to this contract will be how much Lagares’s defense declines between now and 2020.

Adam Eaton, CF, White Sox

Contract: 5 years, $23.5 million, plus two club options
Arb years: 4 years, $13.6 million
FA years: 1 year, $9.9 million (minimum); 3 years, $28.4 million (maximum)

Eaton, 26, is a little more than three months older than Lagares, and like his Mets counterpart, he was worth a bit more than five wins last year thanks to outstanding play in centerfield and an above-average performance at the plate (meaning he was a $30 million player at market prices). Also, their extensions are nearly identical in their summary terms (five years, approximately $23.5 million).

However, Eaton had one less year of team control remaining coming into this season and has an extra option year on his deal, so the White Sox have gained control over two more of Eaton’s free agent seasons for a commitment that’s actually smaller than the one New York made to Lagares. Throw in the fact that Eaton has a better offensive projection than Lagares in general and this is a far better deal, which is saying something, because these are all team-friendly contracts.