When options have negative value: Part 1, Manny being money
Just as sports is a bench-test model for life – things are played out in small, according to prescribed rules, with all results reducible to integral numbers – so too are sports contract negotiations a bench-test model for larger business challenges.
Business ain’t so hard when you have a 0.900 OPS
He was so valuable we had to trade him away for pennies on the dollar
At the end of July, to the surprise of many and the amazement of some [Like you – Ed.], the Red Sox traded Manny Ramirez, their awesomely talented, mercurial man-child left-fielder, to the Los Angeles Dodgers. Indeed, measured in strict two-player terms, they gave him away (they’re paying the rest of his 2007 salary) to the Los Angeles Dodgers – as far away from the Red Sox as possible, on the other coast and in the other league.
To be sure, the Red Sox did gain consideration: the Pittsburgh Pirates traded to them Jason Bay, a highly regarded left fielder (Mr. Ramirez’s position) who, though not in Mr. Ramirez’s caliber as a hitter, is represented as a solid citizen, indubitably six years younger, and under contract for 2009, and the Pirates received in return a clutch of young players who are both talented and cheap.
The Sox held all the cards: they had Mr. Ramirez under contract, and they had two more ‘club option’ years – that is, they could have extended Mr. Ramirez’s contract twice, at the same salary, if they chose. Despite this, they lost a fearsome hitter and gained a less fearsome one. Why? The Sox management are very shrewd; how could shrewd businessmen like that get hornswoggled by what most of us think of as a goofy space cadet?
Because I used my head!
What does this have to do with affordable housing?
Easy – one of the core truths about housing affordability – and for that matter, about any long-term business arrangement, is this:
Some contracts are too long for their own good.
A contract too long for its own good becomes a liability for the beneficiary …
and ends up getting retraded.
Indeed, the more I work through how this went down, and why it went down, the more inevitable it all seems [In retrospect! – Ed. Well, yes, that's why we write analytical blog posts – Auth.].
1. Some contracts are too long for their own good
In December, 2000, Red Sox general manager Dan Duquette signed free agent Manny Ramirez to an unprecedented contract: ten years, 8 guaranteed and 2 at the club option, at $20,000,000 a year. (This is just like a long-term lease with options to renew, but unusually, they are the landlord’s option, not the tenant’s.)
For this signing, Mr. Duquette was widely derided. Who was this Ramirez guy? As a left fielder, he was a train wreck. As a person, he was of questionable character and consistency. As a teammate, he was incomprehensible.
Incomprehensible? Moi?
Stories were written suggested Mr. Duquette had grossly overpaid and that Mr. Ramirez would be an enormous bust. And since he arrived in
Yet the vilified Duquette – he was fired not long thereafter – understood the effects of inflation, particularly in baseball where salaries have continued to rise faster than inflation. As the contract wore on, and Mr. Ramirez year after year put up immense numbers, each succeeding year looked more of a bargain.
And when, in 2007, the Red Sox won their second World Series in only four years, only one player remained from the Duquette years, a player everyone agreed had been integral to their victories – indeed, having been voted MVP of the 2004 World Series – one Manny Ramirez.
Wasn’t I worth the money in 2004?
After 2004, several of
By itself, that’s not grounds for a sulk. Athletes do sometimes ‘take a discount’ to play with a winning team, or to stay in a favorable situation. As I previously posted in Less is more? Risk and optionality, Boston’s Mike Lowell did that after the 2007 World Series, where having used the Red Sox to build a great personal brand, tremendous Bostonian celebrity, and a terrific 2007 season into a sublime bargaining position, he then traded that away for less than he could theoretically have got this time around, but much more than he could possibly have achieved without his Red Sox stint. Mr. Lowell, as I wrote, was playing the longer, multi-contract game.
Mike Lowell: some guys really like the winning-team part of sports
In a similar vein, Mr. Lowell’s teammate Curt Schilling responded to a punctuation-challenged commenter on Mr. Schilling’s blog:
Leaving money on the table????? 37.5 for three years thats great! But C’mon Curt you guys play baseball for a living. 37.5 million is a crap load of money for a 33 year old in his descending prime … Give me a break …
If someone offers you 45 million or more, and someone else offers you 37.5 million, and you take the latter offer, doesn’t simple math mean you are leaving money on the table?
His pitching is way better than his financial expertise
To his credit, Mr. Lowell made his decision on factors beyond simply the pay check:
“I enjoy
“I really don’t believe everything should be about money. I’ve had teammates in the past who have gone to other places. Sometimes they have second thoughts that they took more money elsewhere. I didn’t think my happiness should be judged just by dollars.”
Personal. Mr. Lowell is spectacularly popular in
What do you mean, I’ve just signed with the Seattle Mariners?
“I kind of weighed where I felt comfortable and where I’d have the best chance to win a world championship. Plus, we just won and I played with a set of teammates that are unparalleled and the fan base is unbelievable.”
“I always expressed how much I enjoyed playing here in Boston with my teammates, my manager, and all the fans, and that hasn’t changed a bit, so I’m actually looking forward to working hard this off-season and getting myself ready for spring training.”
“There were definitely things that were considered. Not everything about the whole process was easy.”
“The analysis I did with my family is, you look at the cities and you look at the teams, you see where they fit, and you compare that with the way you feel and the way you fit with the Red Sox. So ultimately my fit and my comfort level, family, and my team in
Mr. Lowell placed a continuing value on being surrounded by strong teammates and strong management – and he is 33, so when this contract is over, he will be 36. Mr. Ramirez, however, is not Mr. Lowell; he’s already 36, and perhaps slowing down a bit (his stats were declining although not precipitously), and he wanted to cash another big payday. Yet those two Red Sox options stood in his way; if the club exercised both, by the time Mr. Ramirez was next in free agency, he would be 38, and not even a young Steinbrenner would give such a head case a bank-breaking four- or five-year contract. Mr. Ramirez probably felt – with economic justification – that he had better force the action now, if he could, and get those options voided.
Time for me to take some action!
Athletes have more value if they are perceived as winners, so they have an economic incentive (as well as an emotional won) to play for teams that can win championships. Athletes will move to teams they think can get ‘over the hump,’ as Curt Schilling did when he came to Boston, personally negotiating a contract that gave him a $10,000,000 bonus if the Red Sox did what they had not done for 86 years: win the World Series. In 2004 they did, with Mr. Schilling pitching a myth-making Game 6 against the Yankees despite a torn ankle tendon.
A sock that is now in the Hall of Fame: the ultimate Red Sox
Most Red Sox fans will tell you that Mr. Schilling’s $10 million payday was the best money the club ever spent. Management of the Red Sox, who used that epic 2004 comeback and Series win to transform the franchise’s national image (and to jack up ticket prices to levels that would be breathtaking if I didn’t have so many business friends who now and then offer me a spare ticket to join them for a game), would certainly agree.
In Mr. Ramirez’s case, that motivation was spent – he’d already bit the mechanical bunny, twice. Mr. Ramirez had already won the World Series – in fact, won it twice with the Red Sox. As against the Sox getting another ring and himself getting a huge payday, Mr. Ramirez pretty clearly was looking out for Number One.
We’re teammates … for now
Enter the agent: Scott Boras.
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