Evan Longoria II? The Rays wrap up
Wade Davis to a six-year, $17.5M deal
that while risky, could pay big dividends
It is no secret that, in recent years, MLB teams have taken to signing their elite young players to discounted extensions long before they reach free agency. Zack Greinke, Dustin Pedroia, Ryan Braun, and Troy Tulowitzki (the first time) are just a few of the stars who have agreed to such contracts. Perhaps none epitomizes the phenomenon, though, quite like the six-year, $17.5 million deal that Evan Longoria signed just six days into his MLB career, turning over an additional three years and $42 million in club options in the process. The abruptness of the Longoria deal surprised many, but it has since turned Longoria into perhaps the desirable asset in the league. On Thursday, the Rays and young starting pitcher Wade Davis entered into a similar four-year, $12.6 million deal with three club options worth up to an additional $25 million. This contract is another instance of the Raysâ€™ brilliantly executed strategy of inexpensively locking up high-upside young talent.
What makes this contract so advantageous for the Rays is the monumental difference between the value Davisâ€™ contract demands and the value he is likely to provide. The average annual value of the guaranteed portion of the contract is $3.15 million, which is already worth less than one win above replacement (WAR). Notably, Davis struggled last season, posting only 0.8 WAR in 168 innings in 2010, so he has not yet proven that he is easily worth that salary. Still, given his 36.3-inning, 1.1-WAR debut in 2009 and that Baseball America rated him the Raysâ€™ third-best prospect before that season, he seems destined to improve dramatically on last yearâ€™s performance. The brilliance of the contract, though, extends beyond the first four years. The club options for 2015, 2016, and 2017, are worth a mere $7.5 million on average. Assuming a conservative 5% rate of player salary growth and accounting for small buyouts associated with the option years, Davis would only need about 1.1 WAR in each of those seasons to justify his contract. For a pitcher with Davisâ€™ upside, that expectation is more than reasonable, but the Rays are not even committed to those years of the deal. If Davis does not reach that level in the next four years, the Rays can simply decline the option and pay $2.5 million (if before 2015), $500,000 (if before 2016), or $250,000 (if before 2017). Thus, the Rays have secured the rights to Davisâ€™ first two years of free agency at a discount and without taking on significant risk.
If this deal benefits the team so greatly, though, why would Davis agree to it? The answer is security. As his contract stands, he would make approximately $400,000 in each of the next two seasons before three years of arbitration eligibility. Through that process, it is quite likely that he would have made or exceeded the $12.6 million he has now been promised. However, that possibility comes with the risk of ineffectiveness or injury reducing his value below that point or even, in the most disastrous case, ruining his career. What Davis receives in exchange for his discounted salary is peace of mind that the arbitration process does not provide. The Raysâ€™ timing on approaching Davis about this deal may turn out to be another stroke of genius, as Davisâ€™ concern with security would be likely to decrease as he continues to establish himself as a major league pitcher. For example, if Davis were to have a breakout 2011 season and post something like 2.5 WAR, his confidence and reputation would improve, and his willingness to play for a discount would decrease. The Rays seemingly consider such a scenario likely since they decided to approach Davis now. From Davisâ€™ perspective, he went from a guarantee of nothing but his 2010 salary of $434,100 to earning between $14.1 million (if the first option year is bought out) and $35.1 million (if all the options are picked up). The Rays identified the point in Davisâ€™ career when they believed he would most appreciate that financial security, and they seem to have done so correctly.
In essence, this is a risk-free contract for the Rays. Even if Davis somehow does not pan out, the couple million dollars of sunk cost will have been a small price to pay for the expected value over contract the Rays received. It seems clear that even if Davis were to fail to live up to this contract, the Rays would not be deterred from similar contracts in the future, as in the long run, deals like this will turn out great for the team much more often than not.
SPECIAL BUSINESS OF SPORTS NETWORK REPORTS:
The Labor Battle in the NFL. See BizOfFootball.com for details
Welcome to the 2011 Business of Sports Network Autism Challenge
Click to donate
to Autism Speaks
Lance Gurewitz is currently a freshman at the Wharton School of Business at the University of Pennsylvania. He also serves as the MLB Trade Rumors Florida Marlins Team Coordinator. You can read and discuss his baseball analysis and other sports musings in 140 characters or less by following @LanceWG42 on Twitter
Follow The Biz of Baseball on Twitter
Follow the Business of Sports Network on Facebook