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Following the Cardinals signing of former-Tiger Jhonny Peralta, the focus has been on the shortstop’s recent PED bust and the possible implications that giving a four-year/ $54 million deal to player coming off such a suspension might have. That angle might not be the most important part of the deal over the long term, however.
The Cardinals have become the envy of baseball through their incredible player development process and ability to regularly contend without spending big on the free agent market. Their reputation as the smartest team in the game has been earned through success at every level over the past decade. So when they do something differently, people should take notice. Peralta’s deal isn’t unusual because of this PED history. It is unusual because of the way it is structured. Jon Heyman of CBS Sports explains-
Peralta contract terms: $15.5M in '14, $15M in '15, $12.5M in '16, $10M in '17. rare frontloaded pact. #STLCards
— Jon Heyman (@JonHeymanCBS) November 27, 2013
Most teams will typically back-load contracts and there are obvious reasons why that is the norm.
First, there is inflation. Years down the road, $20 million won’t be worth what $20 million is worth today, so teams signing long term deals are obviously more willing to pay the higher rates later. In recent years, baseball salaries have been estimated to inflate at around five percent, so $20 million today essentially translates to $25.52 million five seasons later. Baseball’s inflation levels aren’t completely steady or predictable, as studies by Jesse Wolfersberger at Fangraphs have shown, but the overall trend of around five percent inflation appears to be somewhat persistent and that is reasonable justification for loading up the later years of a big contract.
The other major reason most contracts are back-loaded is not quite as justifiable. Teams are essentially buying production now and paying later with this strategy. By putting less money into the early years of a contract, the team gets the player’s peak at a lower cost and then overpays for the decline years. The rational might be that paying less now helps the team build around the newly signed player and winning now will help pay for the later years. Teams may also be aware that they aren’t necessarily going to pay the entirety of the contract, since trading a bad deal is often a viable option. With inflation hedging future loss in performance, the gamble is usually deemed acceptable. Of course, if the team doesn't win in the deal's early years or a player declines dramatically, this strategy can be disastrous.
The problem with this system is that it is fundamentally at odds with the way players produce value. Player aging-curves are well understood at this point and however teams might calculate the cost of buying a win, they are certainly aware that they are buying assets that will typically depreciate. Inflation might be on their side with such deals, but time is not. With deals structured in the standard back-loaded way, the final years of a contract are almost certain to represent massive overpays on a dollar/WAR basis, making them an inefficient use of a team’s resources.
Peralta’s deal isn’t the only front-loaded contract in the game, but such deals are rare, as Heyman says. Alex Rodriquez’s record setting 10-year contract with the Yankees is structured this way, which is extremely fortunate for the Yankees now that he is showing serious signs of decline. That record-setting deal is obviously atypical though. The other big-money Yankee contracts are all back-loaded.
The Cardinals might be the only organization that routinely avoids back-loaded contracts. They used a front-loaded deal structure when they extended Yadier Molina. Of the top five highest-paid Cardinals, only Jaime Garcia, who signed an extension with the team prior to his first arbitration-eligible season, has such a deal. Pitcher Adam Wainwright and left fielder Matt Holliday both have deals that pay the same yearly salary for the life of the contract.
On the other side of the equation, players might favor the more common back-loaded contract structure, but there are problems with such deals for them as well. This structure can turn players into pariahs at the end of their careers in the eyes of fans and writers, especially if injuries limit their playing time. They also lose the opportunity to make a better rate of return on invested income in exchange for some protection against inflation. While there might be some basic security for players in the back-loaded structure, money in hand has natural appeal and it shouldn’t be too difficult for teams to persuade players to adopt this type deal structure if the overall money is the same.
When baseball pundits and writers gush over the Cardinals model, they are usually talking about the team’s commitment to player development, their fantastic draft record or their ability to spend their money wisely on the free agent market. More minor strokes of brilliance like shunning the back-loaded deal aren't particularly sexy and so it is easy to overlook them. It is worth paying attention to details like this, however, because this relatively small advantage is compounded when it is applied to multiple deals. In the competitive world of Major League Baseball, teams need every advantage and at least a few clubs will probably pick up on this tactic and adopt it whenever possible. Until that happens, the Cardinals will be one step ahead of the curve again.
