Phillies Screw Up, Sign Hamels

The Phillies recently announced that they've signed their star pitcher, Cole Hamels. The deal, for $20.5 million over three years, covers Hamels' three arbitration eligible seasons. This is being treated as good news by many Phillies fans, but I don't think it is. Well, I don't think it's bad news. It's just not the good news it could or should be.

First, a bit of background. In baseball, a player reaches free agency after six years of service in the league. Free agency is when player salaries go way up, because at that point they can shop their services to the highest bidder. Free market blah blah blah crap crap crap you've heard it all before. But for the first six years all players are tied to the club that drafted them. So, unless the Phillies trade or release him, Hamels is Phillies property for the first six seasons of his career whether he likes it or not.

There are two important aspects to understand about this. The first six seasons are statistically the most productive of a player's career, so they are the most valuable to clubs and thus they should be the most expensive. But they aren't the most expensive. Instead they are the least expensive. During those first six seasons of servitude, the player is cost controlled. That's not to say the Phillies can pay Hamels a dollar for his services - there are some rules - but compared to what he'd make on the open market, a dollar isn't that far off. For the first three years in the league the player and the team can negotiate the player's salary, but the salary is ultimately determined by the team. So, if the player and team can't reach an agreement the team can just renew the player's salary at a small percentage increase (I think its about 10%, but that could be off) and that is what the player will be paid the next season. As you can imagine, this supresses players salaries to a huge extent.

That is what happened to Hamels last season. He and the team couldn't reach agreement, so the Phillies just unilaterally said, 'OK, you're going to make $500,000 for the 2008 season.' That's nothing compared to what Hamels would make if he was a free agent. Baseball Prospectus has a statistic called MORP (explained here) which essentially estimates what a player's value is on the open market. MORP estimated that Hamels was worth over $17 million in 2008. That means the Phillies saved $16.5 million compared to the price they would have had to pay Hamels on the open market.

Of course that's all theoretical because Hamels isn't eligible for the open market until after six years in the league. After three years of service the Phillies lose the right to determine Hamels salary unilaterally. At that point the player and the team can both submit salary figures to an impartial arbitrator, who will hear both sides and then pick a figure. This still suppresses player salaries over what they would earn as free agents, but its still a vast improvement (from the players perspective). Players are eligible for arbitration for three years and then they hit free agency.

Hamels is now eligible for arbitration for the first time, which was likely part of the impetus for the Phillies to do the deal. Because they own his rights for the next three seasons, Hamels new contract gives the Phillies cost certainty, i.e. they know what Hamels will be making over the next three seasons as opposed to having his salary picked each year by an arbitrator. Hamels gives up some potential salary (he likely would have made more than 20.5 million by going to arbitration each of the next three years) for the certainty of knowing that even if he gets hurt or suffers a downturn in performance he'll still get his $20.5 million.

Here is where the Phillies erred. Because the team controls the player, the team does not have to gaurantee the player's salary beyond one year, but they do because they usually get two things: 1) cost certainty, and 2) they buy out a number of free agent seasons. It is this crucial second point that the Phillies failed to capitalize on. Because the club is guaranteeing multiple years of salary they often receive additional years added to the deal tying the player to the club beyond when they would normally become a free agent. In short, by guaranteeing the player a multi-year contract, the team receives more years of service from the player at a discounted cost.

The Phillies didn't get any additional years on Hamels' deal though. They had him under control for three years and they signed him to a three year deal. Before the contract Hamels was eligible for free agency in three years and after signing the deal he still is. Oops.

For instruction on how this should have been done, I'm going to cite the Boston Red Sox. I know they aren't everyone's favorite team here (though they are mine) but even if you dislike them, its hard to argue they aren't the model franchise in baseball. The Red Sox just signed two of their arbitration eligible players to long term contracts, Dustin Pedroia and Kevin Youkilis. Pedroia's deal buys out two years of free agency with a club option for a third. Youkilis' deal buys out three years of free agency with a club option for a fourth. By signing these two deals, the Red Sox have bought out a potential seven years of free agency from two of their better young players.

The merits of the two deals signed by Boston can be argued, I don't mean to imply that they can't. But the Sox were able to use their leverage over the two players to buy free agent seasons at a fraction of what it would have cost them on the open market. The Phillies failed to do this with Hamels, and its going to cost them. If they are lucky it will only cost them lots of money, but if Hamels choses to leave it could have cost them a year or more of his services too.

Phillies fans may be happy with this deal now, but check back in three years when Hamels is eligible to leave Philadelphia and the Phillies have to pay through the nose to keep him.