Qualifying offers and options: The hitchhiker's guide

Barry Zito's contract option decision seems obvious, but is it really that simple? - Ezra Shaw

The period between the end of the World Series and free agency is a window of time designated for teams to make important decisions. With qualifying offers and options up in the air, teams must decide what they are going to do leading into the free agent period. This post will look into the nature of both qualifying offers and options as well as look into some of the decisions that have already been made.

Free agency is defined in the end by the dollars and years handed out to each off season's biggest names. While that part of the process gets all of the attention, the pre-free agency process is what takes the market from looking fuzzy to looking clear. In the window prior to free agency, teams--and sometimes players--must decide whether to exercise contract options or make qualifying offers. While using a dollar per WAR metric to analyze whether to do either of these things is helpful, it doesn't do enough to tell the whole story--and it certainly shouldn't be the deciding factor in whether or not to make a decision.

Qualifying Offers

One of the major changes to MLB's Collective Bargaining Agreement (CBA) was the change of the league's free agent compensation system. In the past, players were assigned what I call a "compensation tag" based on merit. This resulted in Type A or Type B free agents that came with different penalties. After several teams learned to exploit the hopelessly flawed system, qualifying offers were born. Essentially, a qualifying offer is a one-year contract offer for the average salary of the 125 highest paid players in the game. If an offer is not made, there is no restriction on a player's free agency status. If an offer is made and the player accepts, the player will essentially be signed to the one-year deal. If the player declines, the player gets a compensation tag attached to his name--meaning the signing team surrenders its highest available non-protected pick to the team that lost the player.

What the system hoped to create was a scenario where only the absolute best free agents would receive these offers--and teams who lost said players would be very heavily compensated. What the system fails to account for is the fact that free agent wins are currently valued anywhere between five and nine million dollars. What this means is that the $14.2 million offer is a lot more average value than one would anticipate--essentially, the number of included players in valuing a qualifying offer should be dropped from 125 to a smaller number--with the end result hopefully being a one-year value in the neighborhood of 16 million dollars.

However, the system exists as such and teams must deal with it. To understand the impact of a qualifying offer on a free agent deal, consider this:

Bob Roundingthird is a free agent on the open MLB market. He is projected to produce a steady 3 wins per season every year for the next five years--a total of 15 WAR. If Roundingthird's old team does not make a qualifying offer, it would make his expected contract an even multiplication of market value and expected wins. Should his team make the qualifying offer, Roundingthird is faced with two options. If he accepts, he would be giving his old team a great deal--three wins would be valued at more than $20 million in one season by some models. If he rejects, his market value needs to consider the value of the pick his signing team will have to give up. This means the dollars go down as teams will want to keep the overall value the same--as you can see, players get hurt by this compensation system and it simply shouldn't work that way. That being said, let's look at some examples.

Case Examples

Robinson Cano

This one is a bit of a no-brainer. Cano's projected value for the 2014 season alone is more than double what the qualifying offer is worth. On top of that, Cano is in a position to get a big long-term deal and will not want to give up that security. Cano will receive and decline a qualifying offer--leaving him to test free agency at the cost of a team's highest unprotected pick.

Stephen Drew

This one has been fascinating to see discussed by journalists, because this decision is a polarizing one. The Red Sox have made the decision to give Drew a qualifying offer, and there are good arguments all over the place. To start, there's the decision by Boston to offer. If one is to believe Drew's defense is good--which DRS and Rtot suggest is not the case--then having Drew come back on a $14 million deal would be fair--and if his defense doesn't tickle your fancy then the decision is a bad one. On Drew's side of things, there's a real debate as to whether or not he should accept. By my projections, Drew should produce around two wins next season--making his production roughly within the ballpark of free agent value. If Drew shows more confidence in himself and seeks a multi-year deal--thus declining the offer--he will be worth less on the open market due to the compensation attached to his name.

Last Word on QO

Determining the impact of a qualifying offer is tough for several reasons. Firstly, the pick lost in compensation is not set in stone--it's a dynamic variable that depends on the draft position of the signing team. If a team in the top ten picks in the draft--the protected slots--were to offer Robinson Cano a deal, they would be able to feel confident in offering more than a team outside of the top ten. Another bugaboo in determining the value of QO is the fact that they haven't been around all that long, so it can't yet be determined how QO impact a team's willingness to pay--which impacts the all-important dollars/WAR in the argument over the value of a win.

Contract Options

Options are not a new aspect of the pre-free agency scene, but they help define the market as much as anything. Contract options come in all shapes and sizes as well. While player, vesting, and mutual options are still in use--where something outside of a team's control makes the decision on whether to exercise--common practice among teams is to utilize team options. While some team options are free of cost, most team options come with a buyout clause that a team must pay the player in order to nullify the deal--popular buyouts are $500,000 and $1 million, though buyouts can vary from $50,000 to more than $7 million. Since anything said here about options will be a carbon copy of many other discussions, let's get into case examples from this year.

Mark Ellis ($5.75 million team option w/$1 million buyout)

The discussion over the value of a win has led to one conclusion: wins are probably worth more than $6 million on the free agent market. In the last two years Mark Ellis has produced 3.5 fWAR in 236 games. At the very least, Ellis--at 37 years old--is a very good bench utility player who would be making typical bench utility dollars. From a value standpoint, keeping Ellis would have been a great deal for the Dodgers--even if they played him in a limited bench role behind Alexander Guerrero. With Skip Schumaker, Jerry Hairston, and Nick Punto all hitting free agency the Dodgers even have a need for infielders. Dee Gordon's place in the organization is a blur and there is certainly no guarantee that Guerrero can start and play well next year, so it's hard to argue that Ellis had no room in the organization. The best possible explanation for declining the option is that they believe they can find a better get on the free agent market.

Ubaldo Jimenez ($8 million team option--may be voided by player due to trade--$1 million buyout if player doesn't void and team declines)

The number of words in the parentheses suggests this option is complicated, but it really isn't. Since Ubaldo was traded from Colorado to Cleveland, his option basically converted into a player option--which Jimenez swiftly declined. This is something that happens with many options--their nature can change if it is written into the language of the deal--while this decreases value in a trade, it increases the odds of signing a better deal. In this case, Jimenez was smart to decline as he projects to be worth more than $8 million next year.

Jose Veras ($3.25 million team option w/$150,000 buyout)

Relievers create a lot of controversy in terms of assessing their value. While relievers carry a dime-a-dozen aura when it comes to value, it is also difficult to find a reliever who can be consistently good--even if it's not at an elite level. The last three seasons, Veras has produced half a win in value consistently. Even though his game changed a bit this year--far fewer strikeouts and far fewer walks--he still has the ability to produce as a solid set up man. Given the Tigers' bullpen problems recently, it is rather astonishing that they declined the opportunity to get a 0.6 fWAR player for roughly a million dollars less than he is actually worth. Editor's Note: There is some debate among industry sources at the time of publication regarding the value of Veras' option due to unknown incentives.

Barry Zito ($18 million team option w/$7 million buyout)

On the surface, declining an $18 million option on Barry Zito seems like a painfully obvious decision, but let's do some math. It would not be a real surprise to see Zito pull off a decent season and produce a win in value--before laughing, consider how common one-win seasons from pitchers are and how much luck impacts baseball. That would mean the Giants pay $18 million for one win--which is very, very bad. Now let's consider the alternative--buy Zito out for $7 million and get zero wins. While that sounds like a horrible decision as well, a roster spot is gained. To match the value or come out better, the Giants need to find a single win of value for less than $11 million. While that seems like a breeze on the surface, consider that Tim Lincecum made $18 million to produce 0.9 fWAR in value in 2012. Pitchers are unpredictable, so while it seems like a good decision to decline the option on Zito it should not be assumed that the Giants will absolutely be better off because of it.

Last Word on Options

Contract options--in business as well as in sports--are an interesting negotiating tool. One side gives up something--usually money--in exchange for the ability to have control over the contract at a later stage. As teams have become more involved in in-depth business and statistical analysis, more and more team options are being handed out--thus giving teams more control. As analysis continues to grow and develop, it will be interesting to watch options continue to grow and adapt as they have over the last 15 years.

All statistics courtesy of Fangraphs.

Ken Woolums is the Transactions Editor at Beyond The Box Score. You can follow him on Twitter @Wooly9109

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