Analyzing Zito's Contract

by oelayat on Dec 30, 2006 11:57 AM PST Comment 21 comments

I think an important factor that's being ignored regarding Zito's contract is general salary inflation across MLB. (Note: Inflation is not really a proper term to describe MLB players' salaries, but let's just use it here to simplify discussion). While 7/$18 m is a a large committment regardlesss of inflation, MLB salary inflation has averaged about 10% over the past decade. With that in mind, Zito's contract is really worth more around 7/$12m (today's dollars).

Again, with a payroll in the range of $90m (today's dollars), spending 13% of your payroll on a top-of-the rotation starter is a bargain. Most of the negative comments on the site have been regarding the length of the contract and the size of the committment, weighed against the risks of injury and general skill decline with age. However, considering the Giants are in the top 10 of team spending, a seven year comittment at $12m is not a significant risk. On the other hand, if we were the Twins or the A's, the contract would be a huge financial risk.

To put these numbers into more perspective, consider that seven years ago (2000) the Giants total payroll was only $53m. If the Giants (back in 2000) had signed a Zito-type player to a similar contract, we would be looking at something worth $9m/year (today's dollars), which would be a bargain, especially for a player that some (not all) project into a Glavine/Maddux type starter as he ages.

To summarize my point, general payroll inflation actually self-corrects Zito's contract (assuming it's paid in equal payments) for age-decline and increased injury risk. We're not actually paying him $18m a year for the next seven years in terms of financial actual dollars. But rather, $18m/$16m/$15m/$13m/$12m and so on, when total payroll and player inflation is considered. And for someone with consistent career numbers, a healthy history, and enough star power to attract fans to the gate, I don't think it will develop into the disaster that many on the site are predicting.

This FanPost is reader-generated, and it does not necessarily reflect the views of McCovey Chronicles. If the author uses filler to achieve the minimum word requirement, a moderator may edit the FanPost for his or her own amusement.

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Re: Analyzing Zito's Contract

I don't think it's the contract in isolation that is bad. Paying $18 million a year for a frontline starter in this market is (unfortunately) what it's going to take. If we had given this contract to, say, Johan Santa or Chris Carpenter, I'd be fine with it.

The problem lies in the player evaluation. We didn't pay this money for a frontline starter, we paid it for an above-average-but-declining innings eater. There's no doubt that he's an upgrade over anything we could have done internally, but all signs point to Zito being overvalued. His peripherals are poor and getting worse, suggesting recently he's been getting by on luck, defense, and an enormous foul territory (in that order).

In 2001, Mike Stanton signed an enormous contract, second now only to Zito. He had been close to winning the Cy Young a couple of years earlier, and had consistently posted good ERA's despite declining peripherals. We all know how that one turned out - guys with K's/BB's like his are at risk to suddenly fall apart. It should say something that Zito's most comparable pitcher through age 28 is Mike Hampton. The stats of both players prior to signing their big contracts:

Hampton '00: Age 27, 217 IP, 151K/99BB, 194 Hits, 3.14 ERA
Zito '06: Age 28, 221 IP, 151K/99BB, 211 Hits, 3.83 ERA

See anything familiar? This move may work out for a year or two (there are some factors in his favor), but unless he recovers those missing strikeouts, we may be paying a large chunk of the payroll - despite inflation - for someone who's no better than a 3rd or 4th starter.

by MiddleRaven on Dec 30, 2006 12:42 PM PST reply actions 0 recs

Wow..

I never knew Stanton had such a long contract. :-P

Here's to a good 2007. Or 2008. Or 2009. Or 2010. Or...

by WalrusMan on Dec 30, 2006 12:49 PM PST up reply actions 0 recs

Re: Wow..

Haha, Stanton Hampton...what's the difference? It would almost read like an article from The Onion, though: "Giants sign 40-year old pitcher Mike Stanton to 7-year deal".

by MiddleRaven on Dec 30, 2006 1:25 PM PST up reply actions 0 recs

From A to Z

Here is hoping Zito pitches well in SF and leads the Giants to many victory parades.

My concern is the signing of player, let alone a pitcher, to a minimum of seven year gauranteed contract. And on top of that make him the highest paid pitcher in the history of the game. And on top of that, once again outbid yourself by millions. And still again a complete no trade contract.

Makes no sense. If you are giving him a minimum 7 yr deal why throw in no trade clause? Why does Sabean continue to outbid himself either by monies, years or perks?

by wilriv21 on Dec 30, 2006 1:25 PM PST reply actions 0 recs

Re: From A to Z

I don't think he bid against himself here at all, nor did he give Zito anymore than he had to. It was pretty clear that Zito was going to go elsewhere if the money or years were even close. We heard all year that Zito wanted to go to New York and pitch for the Yankees or Mets, and we didn't hear of his great desire to stay in the Bay Area until the Giants came in with their huge offer. Omar Minaya said after the fact that the Mets would have matched the Giants 18 million per year, but weren't willing to go over 5 years, and we also heard about Zito's father possibly offering a better deal to the Yankees at the last minute. The Giants didn't pay Zito a dime more than they had to. That was what it took to get him to sign, and they weren't going to sit around and wait for the Yankees to move Randy Johnson and decide they wanted to get involved even more. Did you hear Zito's conference call when he was asked if he had signed with the Giants if the money elsewhere was equal?? He paused and said, "you guys are good." What do you think he meant by that??

by rxmeister on Dec 31, 2006 7:33 PM PST up reply actions 0 recs

Re: Analyzing Zito's Contract

I'm not sure if anyone has mentioned this, but Zito's contract calls for an $18 million incentive based option in 2014 with a $7 million buyout. So, with that in mind, here are the likely payments.

$14 million
$15 million
$16 million
$17 million
$18 million
$19 million
$20 million
$7 million or $18 million

"When the power of love overcomes the love of power the world will know peace." - Jimi Hendrix

by GiantJim on Dec 30, 2006 1:33 PM PST reply actions 0 recs

I thought I heard someone say..

Zito is getting $10 million next year.

$10
$13
$15
$18
$21
$24
$26?

Here's to a good 2007. Or 2008. Or 2009. Or 2010. Or...

by WalrusMan on Dec 30, 2006 1:40 PM PST up reply actions 0 recs

Also...

I thought the $7 million buyout or $18 million player option both only kicked in with the 600/400/200 in 3/2/1.

Here's to a good 2007. Or 2008. Or 2009. Or 2010. Or...

by WalrusMan on Dec 30, 2006 1:42 PM PST up reply actions 0 recs

Re: Also...

7yrs @ 17m per year = 119m + 7m buyout = 126m

7yrs @ 17m per year = 119m + 8th yr @ 18m = 137m

by wilriv21 on Dec 30, 2006 1:47 PM PST up reply actions 0 recs

Re: Also...

The Giants currently hold an $18M team option with a $7M buyout. It becomes a player option with a $3.5M buyout if Zito qualifies. Judging by the Chronicle this morning, we're probably looking at something like this:

'07 - $10 million
'08 - $14 million
'09 - $18 million
'10 - $19 million
'11 - $19 million
'12 - $19 million
'13 - $20 million
'14 - $3.5 or $7 or $18 million

Basically, it's two contracts: a brilliant little 2/24 deal, and a brutal 5/102 deal (or 6/120) starting in 2009.

"Robb Nen is going to get you" - Benito Santiago to Chipper Jones, 10/7/02

by Pants Man on Dec 30, 2006 3:47 PM PST up reply actions 0 recs

Re: Also...

$20.4 million/yr from 09-13. Yikes! The other Barry would have gotten $40 million/yr under the same circumstances.

Looks like their new player payroll is $90 million, as that is now where they are at for 07.

"When the power of love overcomes the love of power the world will know peace." - Jimi Hendrix

by GiantJim on Jan 1, 2007 4:26 PM PST up reply actions 0 recs

Re: Analyzing Zito's Contract

Actually, according to today's Chronicle, the numbers are as follows:

"$10 million in 2007, $14 million in 2008 and $18 million to $20 million in each of the five guaranteed years thereafter, totaling $119 million, plus a $7 million buyout of the team's $18 million option for the eighth year."

Link:

http://sfgate.com/cgi-bin/article.cgi?f=/chronicle/archive/2006/12/30/SPGFRNAG9D1.DTL

by English Professor on Dec 30, 2006 1:47 PM PST up reply actions 0 recs

Re: Analyzing Zito's Contract

Thanks for the link. I was wondering what the yearly breakdown was. Also enjoyed the rest of the article.

by Snof on Dec 30, 2006 3:11 PM PST up reply actions 0 recs

Re: Analyzing Zito's Contract

Maybe it's just me, but as someone who works in the financial industry, I am finding it hard to get my mind around the concept of an option that you have to pay not to exercise.

In the world of finance, at least, an option is worth money, so if say the Giants had the option to pay Zito $18M in 2014, then the buyout would have to be on Zito's side, ie he could pay $7M to take away the option from the Giants. To force a team to pay to not exercise an option seems antithetical to the whole concept of optionality.

Anyway, the way it's written, the value of that $7M option is significantly more than the $7M in 2014 dollars that it is advertised as, since the sunk cost of the $7M means the Giants would exercise the option and pay Zito the $18M if his actual value (as the Giants perceive it) at that time is greater than $11M. Since the probability that Zito will be be worth more than $11m and less than $18m is greater than zero and also greater than the probability that he will be worth more than $18m (pray that he is), the value of the option to Zito is more than $7M 2014 dollars -- difficult to say exactly how much more (it depends on the probability you assign to various events), but definitely more.

Not much point to this comment other than to say that 7/$126M actually understates the value of the contract.

by taliesin on Dec 31, 2006 12:03 AM PST up reply actions 0 recs

Re: Analyzing Zito's Contract

It might be more logical to think of it as an eight-year, $137M contract. The Giants have the option of getting $11M of that back by terminating the last year of the deal. Hmmm... maybe that isn't more logical. Or, maybe, consider it a seven-year, $126M contract (as has been reported), which the Giants have the option to extend for one year at $11M. Okay, that way makes a little more sense.

You have trouble with that logic... me, I have more of a problem with what happens if the option becomes Zito's. He gets the right to leave or come back for an eighth season (which is fine with me), but if he does choose to leave, the Giants have to pay him $3.5M. "I'm leaving, you can't stop me, and you're going to have to pay me millions of dollars." It's the Ivana Trump clause.

"Robb Nen is going to get you" - Benito Santiago to Chipper Jones, 10/7/02

by Pants Man on Dec 31, 2006 3:25 PM PST up reply actions 0 recs

Re: Analyzing Zito's Contract

I don't think the option amounts to much. If the option reverts to Zito's because of the IP clause, he'll probably take the buy-out, and if it remains the Giant's option (he's not pitching so many innings at the end of the contract), they'll probably exercise the buy-out.

The best way to look at the contract is the stated 7-year $126 million.

"When the power of love overcomes the love of power the world will know peace." - Jimi Hendrix

by GiantJim on Jan 1, 2007 3:49 PM PST up reply actions 0 recs

Anal-izing

Okay. First off, I am in the wait-and-see camp with regard to this signing. I am definitely excited for the team and can only pray that Zee-toe will at least bring us to 5 of the next 7 postseasons.

That said, I did a little fuzzy math that works out something like this:

Over the last 6 seasons, Zito has averaged 34.67 starts (35 four times and 34 twice). Assuming that he can maintain that average (and I will concede that this is a huge assumption), and he averages 110 pitches per start, he will throw about 3813 pitches per season. Finally, if you divide the average amount of money he's getting (18 mill) by the number of pitches thrown, you find that he will receive approximately $4720 every time the ball leaves his hand on gameday. I have no idea how this compares to other top-tier guys, but I think it's pretty silly.

Now, if you assume that Zito will average 30 starts a season (still a high average), that number balloons to $5455 per pitch thrown.

Finally, if you assume that he has a serious injury at some point in the next SEVEN years (almost inevitable), and his average number of starts drops to 25, you can add another $1000 to that average.

Once again, none of this math means anything. It means less than nothing. I am relatively certain that most of you would be more interested in a post concerning the number of pullups Marvin Benard continues to do in a given day, but it is something that was on my mind.

Chulk angry! CHULK SMASH!!

by CystedTwister on Dec 30, 2006 1:37 PM PST reply actions 0 recs

Re: Analyzing Zito's Contract

Damn, I hope the Giants feel, come '14, they just have to throw that $18 mil at Zito. Actually, I hope they feel like they just HAVE to sign him to a three year extension for $25 mil PER.

by allfrank on Dec 30, 2006 2:44 PM PST reply actions 0 recs

Re: Analyzing Zito's Contract

BTW, thanks for the post, oelayat. It does help to put the contract into perspective.

by allfrank on Dec 30, 2006 2:45 PM PST reply actions 0 recs

Re: Analyzing Zito's Contract

I think the overall point of my post was not throw out useless fuzzy math, but rather to illustrate that a team in the upper echelon of team payrolls (like the Giants) can afford to take a $18m/year risk on a pitcher like Zito, at least from a financial perspective. If he continues preforms at or near his current level, I think it will prove to be a bargain in future free-agent markets. How reasonable does Manny Ramirez's contract seem now compared to in 2000?

If he totally flops, it will be a very expensive mistake, but one that the Giants can afford to make and remain competitive.

by oelayat on Dec 30, 2006 2:56 PM PST reply actions 0 recs