On Club Options

by Sully on November 6, 2010

in Red Sox

contractAs a follow up to Marc’s post defending Boston’s decision to exercise David Ortiz’s $12.5 million option for 2011, I would like to address club options a bit more generally. A club option is just a compromise. The player wants an extra season, the team doesn’t want to give it to him, but the team includes the club option in case the player performs at a level where that final year makes sense. I would like to mock up how the negotiations with Ortiz might have gone when he signed his extension in 2006.

To put you back in the moment, call it Spring Training 2006, Ortiz was coming off three seasons for the Red Sox during which he hit .297/.383/.600. More amazingly, that slash line does not even begin to tell the story of what he meant to Boston’s rabid fan base. He had performed time and again when the Red Sox needed it most, and there’s just no way at all Boston could have won their 2004 World Series without him.

From a public relations perspective, Oritz had leverage. He was an MVP-caliber player but had not made the big bucks yet. His highest AAV compensation up to that point was the $6.5 million he was set to make in 2006. That’s a nice number, but in 2004, the year Ortiz became BIG PAPI, Alex Rodriguez, Derek Jeter and Manny Ramirez made $26, $24 and $22 million respectively. Ortiz was constrained by his relatively limited service time and the (relatively) modest extension he inked with Boston in May of 2004.

And that’s where Boston had leverage. With a club option after the 2006 season, Boston could have sat tight and made him play out his contract. Sure, he then would have been a free agent after the 2007 season, he would probably still be productive, and he had the precise make-up that any number of teams would have overpaid for. Had Ortiz hit the market after 2007, he was probably gone. But Ortiz wasn’t young and he did not have the body type that figured to age well. Ortiz would have been risking future earnings by not entertaining Red Sox extension offers at the time.

Ok, so here we are in Spring Training of 2006. The Red Sox have Ortiz through 2007 if they want him for a total of $14.25 million. But they get it, and they want to reward the big guy. Not only that, they want him around for a while too. In many ways, he had become the face of the franchise. So they sit down.

Fern Cuza (Papi’s agent): Guys, we have to get David a lot more money. I know a contract is a contract, but he’s an icon and one of the game’s greats now.

Theo (et al): We don’t disagree, we’re here at the table, what are you thinking?

Fern: How about a five-year extension, 2007-2011, $75 million? It’s not A-Rod or Manny money, but it gets him closer to those guys.

Theo: A few things. First, David’s under contract for two more years with us as is. Second, he’s a DH. Third, I did not sign Manny to that contract. Finally, paying David $15 million to DH for us at the age of 35 scares me a bit.

Fern: I understand all of this. Well what are you thinking?

Theo: $10 million per through 2010. 4 years, $40 million and we tear up his 2007 club option.

Fern: I need five years, and I need a higher AAV than that, Theo. Look around the league at some of the guys making ~$10 million. You know what David means to this franchise.

Theo: $12.5 million?

Fern: That gets us a lot closer, but I need that fifth year.

Theo: I am not doing the fifth year, Fern. It’s just too risky for us. Tell you what: we’ll give him a $12.5 million club option. That way, if he plays well in 2010, he gets his fifth year.

Fern: Deal.

I have no idea how the negotiations went, mind you, but you can see where each side had its leverage. And that final line from Theo is the crucial one for our purposes: “if he plays well in 2010, he gets his fifth year.” A club option is a concession that the franchise offers. The player wants an extra year, the club does not want to offer one but goes back to the player and offers the option as a way to show commitment to the player provided he holds up his end by performing.

Within this framework, you can start to see why the Red Sox sort of had to pick up the option. It’s just good Human Resources policy to keep your word on such things, even if it amounts to an overpay for a season. Ortiz coming into 2010 had a chance to earn his option by playing well, and he went out and was a top-3 DH last year. Had the Red Sox declined the option, well then word starts to spread.

Boston negotiates in bad faith. A club option is meaningless to them if you don’t project to outplay your contract. They’re cutthroat – don’t ever think you owe them anything as a player.

The $3-$6 million extra they will pay Ortiz is (1) a thank you for all he has meant to the organization and (2) a signal to the rest of Major League Baseball that Boston gives a shit about its employees and will reciprocate performance and commitment with generous pay. It’s a good investment, and one that will pay dividends in future negotiations.

{ 4 comments… read them below or add one }

Mig November 12, 2010 at 11:41 am

Patrick, this is very well done. Very few of us appreciate the business side of baseball and it’s impact on future players when we demand that our teams pick-up or dump a player.

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B-Rando November 12, 2010 at 11:49 am

I gotta disagree with your article. This pickup of a club option is not a thank you to David Ortiz, its a “cop out”. David wants more years, he wants to finish his career with the Sox, but the Sox really don’t need/want him past this year, MAAAYYBEEE next year. So the Sox are making the right play from a business sense. You pay over market value for Ortiz for one more year and he walks away from the Sox at the end of the year and probably ends up DHing for the Tigers or something.

I don’t disagree that it was the right move for the Sox, but to say it was a thank you for your years of service is laughable in my opinion.

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Sully November 13, 2010 at 5:48 am

I don’t understand, B-Rando.

You pay over market value for Ortiz for one more year

There’s absolutely no need to do this absent some of the forces I discussed in the post. Boston could have declined the option, and negotiated a one-year deal for Ortiz. If he received a better offer elsewhere, guys like Jim Thome and Hideki Matsui would have been available much more cheaply.

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facebook June 25, 2013 at 10:18 am

Unexpected, victory over France. Tabarca Island is situated off the ‘evil eye’.

Does Kim need to go to the highest level.

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