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Contracts & Salaries, Part 2: The Big Picture

This is the second of a series of articles examining the Indians' offseason decisions from the perspective of roster-wide contractual issues. In Part 1, we went through the entire roster to look at every player's contract and roster status. Much was said about salaries and contracts and options and reserve players and long-term deals. The word "arbitration" appeared about 74 times.

In Part 2, we're going to take a step back, to attempt to answer the question, why should we care about any of that stuff? What does it mean? Some of you may already know this stuff. One could easily fill 40-50 pages going into every detail of how these things work, but I'm going to try to stick to the big picture, and not get caught up in the details too much. Plenty of time for details later.

You Got To Grow Your Own

The baseball economy is all built around the Reserve Clause. You might think that the Reserve Clause is dead ? after all, we're always being told how powerful the MLB Players Union is. But the Reserve Clause is alive and well, it's just been tempered a bit by arbitration and free agency. It still allows a team to control a player for the first 10 to 12 years of his professional career. And that is why Jhonny Peralta made one-tenth of what Omar Vizquel made last season. And why he will next season, too. And the season after that. No matter how many home runs he hits.

We are told, especially as Shapiro-era Indians fans, of how important it is to build a team through the farm system, yet few actually understand why this is so. The obvious part is control: you get to keep the players you develop for a while before they can become free agents. The more subtle part is cost containment ? players that haven't reached free agency are far less expensive than players that have. And incredibly, players that haven't reached free agency aren't just cheaper, they're usually better, too. That's why it's possible for a low-budget budget team to perform on a par with the highest-paid teams.

For one example, let's go back to early 2004. Jason Varitek, leader of the world champion Red Sox, is a free agent. He's represented by the Big Bad Scott Boras?, but he really does want to stay. The two sides agree to a four-year deal that guarantees Varitek $40 million.

Now zoom ahead a few months to April. The Indians announce that like the Red Sox, they too will be signing their All-Star catcher to a long-term contract. Victor Martinez's deal is for five years and guarantees him $15.8 million. And the year after that, the Indians can choose to pay him another $7 million if they want to, or else they can let him go.

What the heck is going on here? Martinez is 26 and entering the prime of his career. Varitek is almost seven years older, nearing the age when most catchers start to deteriorate quickly. There is no one, and I mean no one, in the baseball industry who would predict that Varitek will be better than Martinez over the next four years. So why does Martinez get only 40 percent of the guaranteed money, and 32 percent of the annual salary, that Varitek gets? And how come Martinez is in a position where he has to also give up an option year to get the money, while Varitek is in a position to demand a no-trade clause?

Believe it or not, the answer is not that Martinez didn't have the BBSB?. Well, that may be part of the answer, but only a very small part. The main reason is that teams have amost complete control over player salaries until they've been in the major leagues for a few years -- and significant control after that, too. That gives the team tremendous leverage in contract negotiations -- but only if you drafted the player, or signed him before he was an established major leaguer.

And of course, if all goes well, one day Martinez will be just like Varitek. When his current contract expires, it's very likely he'll be past his prime and on the decline. And yet, he'll be more expensive. Think about Manny Ramirez ? who has been, in terms of performance, a very successful signing for Boston. Yet he has never quite achieved the same numbers in Boston that he had in his final years in Cleveland ? and the $20 million Boston pays him every season is more than he made in his entire career as an Indian.

And Manny's not even a very good example of this trend. In fact, he's one of the worst examples. Have you seen Jim Thome's numbers lately?

In general, you can only get a talented, cheap young player if you develop him in your own farm system. In theory, you can also trade for them ? the way the Tribe acquired Lofton, Baerga, Vizquel, Crisp, Sizemore and Lee ? and about ten other guys who were lousy, by the way. But the market appears to have finally caught up and ended that party ? young talents are now recognized by almost all teams as the most valuable assets a team can have, and they don't part with them as readily as they used to. And sadly, there won't be any more threats to contract the Expos, and Steve Phillips may never be a GM again.

A Brief History Of One Player's Contracts

And by "brief" I mean "vastly oversimplified." You're the GM, and you sign a prospect and give him his signing bonus, and then ...

Years 1-4. Prospect works his way through the minor leagues. After a few years, you decide whether he's important enough to use up a space on the 40-man roster ? or whether he's unimportant enough that you can live with losing him in the Rule 5 draft. Then ...

Years 4-6. Once he's on the 40-man roster, you have another three or four years to bounce him between the majors and minors, hoping he'll stick in the majors eventually. These are called "option years." Once those option years are gone, you have to keep him in the majors, or you might lose him to the waiver wire. Even if he stinks, like Brandon Phillips. (Side note to Brandon: Please don't take this personally. I like you, I believe in you, I'm rooting for you. But you stink.)

Years 6-8. The player is settling into the big leagues. Maybe he's doing it quickly, maybe he's doing it slowly. As long as he's better than Brandon Phillips, you don't really mind too much, because he's making peanuts ? relatively speaking. And even if he's threatening to win the MVP, he's still making peanuts ? it's great! But if that's the case, you better think about giving him a long-term deal, because pretty soon ...

Years 9-11. The player is now eligible for arbitration. He still can't leave unless you non-tender him, but a three-man panel is going to make you pay him something remotely fair. The first year is still quite cheap, the second feels reasonable, but the third ... well, you're practically paying him like a free agent now, so if you haven't signed him to a long-term deal already, maybe it's time to move on ...

And that, in a nutshell, is how a team with a tiny budget can compete with a team with a big budget. Is your All-Star catcher making $2 million or $8 million? Is your slugging shortstop making $350,000 or $19 million? Is your 17-win starter making $350,000 or $20 million? And have you managed to avoid having $60 million sitting on the Disabled List?

It adds up, particularly if you strip down your whole roster and attempt ? attempt ? to fill every single roster spot with players who fit that mold. And particularly if you consider: the $2 million young catcher is at the start of his prime, while the $8 million version is at the end of his. And all those $350,000 players are getting better, while the $20 million players are getting worse.

That may sound like a vast generalization, and it absolutely is. But it's also a fundamental truth of the game, and one that must be understood in order to build a roster effectively.

And Now, Back To Our Tribe

With that overview as a backdrop, let me fill in just a few of the arcane details, ones that will help explain better some of the situations the Indians face heading into the 2006 season. (That was our original topic, remember?)

Prior to arbitration, teams can dictate just about any salary at or above the minimum, which is $400,000 as of next season. Arbitration eligibility is based on major league service time, which includes time on the Disabled List (if the player was in the majors at the time) but not time in the minors. Thus Tallet and Stanford racked up a lot of service time while recuperating from Tommy John surgery, but not once they came off the DL and were optioned to Buffalo. Likewise, Billy Traber has two full years of service time from 2003 and 2004, but none for 2005, because by that point he'd been removed from the 40-man roster. Traber needs to get another five months in the majors before he can reach arbitration, and that may or may not happen before 2007.

The cutoff for first-year arbitration is roughly 2.8 years of major league service time, but it's slightly different every year. For most specific players, it's pretty obvious whether they'll make it, but Josh Bard is right around the cusp with two years and 133 days (out of 172). Coco Crisp is definitely in with 2 + 158, yet Cliff Lee is almost definitely out with 2 + 124. That will be a big factor in negotiating long-term deals with them. Keep in mind that a first-year arbitration case with mediocre stats is still not going to get paid very much; Bard and Broussard will get raises, but even Crisp won't break the bank -- this year.

And here we come full-circle. Young players have a strong incentive to negotiate multi-year deals, for two reasons: (1) they can't go anywhere, (2) if they don't, they're not guaranteed anything at all beyond their current contract ? one year at minimum salary. So one injury could end it all for them tomorrow, and Victor Martinez could easily have limped away from the game with only a few hundred thousand ? instead of $15 million.

So it's easy for the team to approach a player and say: "Hey, what do you say I guarantee you an extra $15 million, and you don't take me to the cleaners in arbitration for the next few years?" And this is actually a pretty good idea for both sides, and most players recognize this. The rules give teams the leverage to lock up young players through their prime years at affordable prices, and those long-term deals make it possible to build and maintain a highly talented young team and keep it together for at least a little while.

One final thought. Viewed from the opposite perspective, the reason free agents are so much more expensive than homegrown players is because they're available immediately. So let's say that you, as the GM, forgot to do something important when you were building your team. Could be anything, but just to pick something at random, let's say you forgot to develop a slugging right fielder. Can we order one of those up for 2006? No? How about 2007? 2008? Maybe ... but maybe not? Well, then I guess we're just going to have to see what the open market has to offer us. And it's a seller's market out there, and I'm not talking about the A-Rods and the Konerkos. I'm talking about the Corey Koskies and the Cristian Guzmans.

For that matter, I'm talking about Aaron Boone.

Next: Long-Term Contracts and Short-Term Budgets.