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Arbitration Break Down

Jay Jaffe on the Yankees not offering arbitration to Johnny Damon, Hideki Matusi or Andy Pettitte:

The Yankees’ only Type A free agent is Johnny Damon, who’s coming off an excellent season capped by a key role in the team’s World Series win. He made $13 million a year over the life of his deal, but just turned 36. A one-year deal for him to return via arbitration might have cost the Yankees $15 million, a figure that apparently was too rich for Brian Cashman’s blood. Damon’s got a strong enough hand that he can likely do better in length if not average annual salary, even from the Yankees (two years, $25 million with an option, perhaps).

What’s annoying is that because he’s a Type A, foregoing the arbitration offer costs the Yankees two high draft picks, one in the 16-30 range of the draft (the top 15 picks are protected), the other in the supplemental phase (31-50, roughly speaking). That’s a substantial amount of value; four years ago, colleague Nate Silver estimated those two picks as worth $9 million for the 16-30 and $3 million for the supplemental. Since then, the market has leveled off, inflation has occurred, and WARP has changed, but if anything, the value of those picks is probably higher. Apparently, the fear of being stuck with a pricey one-year deal — though really, it’s difficult to get too badly burned on such a pact — outweighed the return for the Yanks, offering further evidence that even Cashman is on a budget.

The Yankees also decided not to offer arbitration to Andy Pettitte and Hideki Matsui, but both of them are Type B free agents, meaning all the Yankees turned down was the right to supplemental picks worth about $3 million apiece. Weighed against the higher likelihood that both would accept and win their cases at prices out of Cashman’s control, again, the risk was apparently too great. It’s still a likelihood that at least Pettitte returns; the most recent Collective Bargaining Agreement struck down a provision that teams who didn’t offer arbitration to their free agents were prevented from signing them until the following spring. Now, the two sides can hopefully negotiate a more sensible deal.

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1 jonnystrongleg   ~  Dec 3, 2009 1:21 pm

Alex, it seems like it's well agreed upon that Damon stands to get a big # (15 million is often cited) in arbitration. Forgive my ignorance, but what's the rationale behind that?

2 Diane Firstman   ~  Dec 3, 2009 1:47 pm
3 Shaun P.   ~  Dec 3, 2009 2:04 pm

[1] A player in arbitration can't get less money than they made the year before. So, the starting point is Damon's $13M salary from '09.

In arbitration, the team and the player each suggest a salary, and the arbitrator picks one after hearing the arguments for and against. The incentive is thus for teams and agents to play fair; play too much hardball, and you likely lose.

So $13M starting point + great year with bat + horrible year with glove comes out to around $15M.

4 Shaun P.   ~  Dec 3, 2009 2:07 pm

[2] This is william's forte, not mine, but while the total accumulated value of that annuity will be $30M, its not going to be $30M in present-day value, and so its not really as bad as it looks. I understand the pain over paying Bonilla until 2035 though.

5 williamnyy23   ~  Dec 3, 2009 2:08 pm

[1] For starters, players can't receive greater than a 20% paycut in arbitration, so the least Damon could be awarded is $10.4mn, which is higher than the Abreu benchmark that many think should apply to Damon.

In Damon’s case, he had a very good season and has significant tenure, making his benchmark a lot higher than market value. In other words, a raise is likely and 20% sounds like a pretty good starting point. If that’s is so, then Damon becomes a $15mn+ player. I actually think the arbitration award would be higher, making it possible that the Yankees could wind up with Damon for one year at Holliday-like prices.

6 Shaun P.   ~  Dec 3, 2009 2:17 pm

[3] [5] D'oh. I completely forgot the 20% rule. My bad.

And of course since the Yanks didn't offer Damon arbitration, it really doesn't matter . . . I still would have liked those draft picks.

7 vockins   ~  Dec 3, 2009 2:24 pm

[4] That's assuming the currency revaluation after The Saturnian Wars works in the Mets favor.

8 jonnystrongleg   ~  Dec 3, 2009 2:24 pm

Thanks 3 & 5.

And I assume the arbiter would/could not have considered the current depressed market for comparable players over the last 2 years when awarding that likely raise?

9 williamnyy23   ~  Dec 3, 2009 2:28 pm

[4] Whether it ends up being a good deal depends on how the Mets used the $5.9mn they didn't pay Bonilla in 2000. If they could invest it at 7% over the 35 years, they would come out slightly ahead in terms of real dollars:

From 2000 to 2011 they could have grown the $5.9mn to $12.4mn and then continued to earn a declining amount of interest while paying the annuity. That would leave them with a positive balance from the $12.4mn "seed" money until about 2031, after which they would have to pay the $1.19mn from out of "pcoket". The outlays would total aout $5.5mn, compared to the $5.9mn in 2000.

Of course, you'd also have to determine the present versus future value of money. Assuming inflation, the $5.9mn in 2000 would be signiicantly greater than the $5.5mn in 2000, meaning that an even lower rate of investment return could still make it a good deal.

Then again, if you invested the $5.9mn with Bernie Madoff, well, let's just say it wouldn't be such a good deal.

10 williamnyy23   ~  Dec 3, 2009 2:58 pm

[6] [8] Actually, you are right. The 80% rule only applies to non-free agents offered arbitration. Still, the general concept applies. While the current market can be used a factor as it applies to current comparable salaries, the guidelines call for more extensive comparable analysis (i.e., going back more than one year) as well as significant consideration of the player's current and past performance as well as perceived contribution ot the team.

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