Mike Trout signed a one year, $1 million contract with the Angels last week, the highest contract paid to a player not eligible for arbitration (previous high was $900,000 to Ryan Howard in 2007 and Albert Pujols in 2003). I first saw this on Tom Tango's blog, which linked to this article regarding a potential contract for Trout. As Trout and the Angels discuss a long-term deal, it can be safely assumed it will be for a decent length of time and at a fairly steep price level.
This article will discuss the true cost of any long-term Trout contract and introduce two variables:
- Discounted future cash flows, to show the true "cost" of a future salary in today's terms
- FanGraphs Dollar Values, which places a dollar amount to production
Using these terms together can help show how Trout (and any other newly-rich player like Freddie Freeman, Robinson Cano or Clayton Kershaw) is more affordable than might appear at first glance.
This is what Trout's contract would look like using the values referenced in the Tango post and assuming a 5 percent discount rate as well as a 5 percent increase in the $M/fWAR per year:
In 2014 Trout will be paid $1 million. Since this is the current year, his contract is worth $1 million in 2014 dollars. I decided to use a $M/fWAR value of $6 million (read more about how this value is calculated here and understand the value was around $5 million in 2013). In order to justify his $1 million salary, Trout would need to deliver a fWAR of .2. Anything above a .2 fWAR and Trout is outproducing his contract. Given his past production, this should not be a problem.
In 2015 his contract increases to a hypothetical $13 million, which is discounted by 5 percent to reflect around $12.4 million in 2014 dollars. Assuming the value of an fWAR point also increases by 5 percent, in 2015 each fWAR point would be worth around $6.3 million, meaning Trout would need to deliver around 2 fWAR to justify his contract, and so on through the end of his contract.
By the time 2019 ends Trout will have been paid $139 million, with a 2014 value of just over $117 million, a significant amount of money no matter what. However, to justify that contract, the numbers necessary to do so are surprisingly attainable. In his short career Trout has produced a fWAR of 21.1--he's already out-produced this potential contract, and did so in around 1500 plate appearances. Imagine if he stays healthy and maintains or increases this level of production over around 3500 plate appearances.
I must emphasize the discount rate and value of a fWAR point are flexible, but no matter what values are used, they tell a simple story--just because a contract looks big doesn't mean it automatically is a bad deal. I performed a similar analysis as part of my first submission to Beyond the Box Score when discussing Robinson Cano, but his case is different--he's older and nearing the decline phase of his career. Trout isn't--he's produced almost immediately upon entry to the big leagues, and nothing suggests this will stop anytime soon.
Chances are Trout will soon sign a long-term deal with terms similar to the ones used, and even if it's substantially different the methods described can help evaluate who "won" the deal. At his age and production to date, it's hard not to think that it won't be a matter of whether Trout will outperform his contract as opposed to by how much. When people use the term "once in a generation," they're describing players like him.
It will be very interesting to see what the out years in a long-term deal will look like for Trout, because even getting near to $35 million a year is terra incognita. The race is on to the first $50 million player and could be a close one between Bryce Harper, Yasiel Puig and Trout. Trout has the advantages of sensational production over time, no injury history and a window of opportunity as well as a team not scared to pay big money. In his case, he has the chance to deliver every penny in value--and then some.