One of the quietest major free agent negotiations in recent memory is coming to an end today. The Mariners and Yusei Kikuchi agreed to a unique four-year contract earlier this week and it’ll be made official today, at some point before his 30-day negotiating period closes at 5pm ET. Kikuchi spent the last few weeks meeting with teams in Los Angeles and there were no leaks or rumors whatsoever. It was very quiet.
Kikuchi’s contract is unusual. For all intents and purposes it is a three-year contract, and one of three things can happen after year three. One, the Mariners could exercise a four-year club option to keep Kikuchi. Two, Kikuchi could pick up a one-year player option. Or three, Kikuchi can become a free agent. It has to happen in that order too. The Mariners get to decide on the club option before Kikuchi gets to decide on the player option.
The contract structure is unusual but it is not unprecedented. The Phillies signed Jake Arrieta to a similar contract last offseason. Arrieta got what amounted to a two-year contract, and, after year two, the Phillies have a three-year club option and Arrieta has a one-year player option. The common thread: Scott Boras. Both Kikuchi and Arrieta are Boras clients, so that’s now two of these unique contracts he’s brokered.
For the player, the contract structure allows him to either test free agency again in the not-too-distant future or force the team to keep him long-term, with the player option serving as an insurance policy. Could Kikuchi have received seven guaranteed years with an opt-out after three? Could Arrieta have gotten five guaranteed years with an opt-out after two? Almost certainly not. This contract structure at least gives them a chance at that long-term commitment.
For the team, the contract structure creates flexibility. They can walk away if things aren’t working out or keep the player long-term without the hassle of another free agent bidding war. The Mariners could keep Kikuchi for seven years or they could dump him after four. The Phillies could keep Arrieta for five years or they could dump him after three. I’m not sure I’d call it a win-win, but both sides do seem to come out okay here.
Baseball is a copycat sport and nowhere is that more true than in free agency. Opt-outs are now commonplace — they’ve been around a while but it wasn’t until CC Sabathia that they really became popular — and, soon enough, these unique contracts with multi-year club options will catch on around the league. Boras is no dope. Long-term deals are becoming harder to find and he came up with a way to give his clients a chance at those years.
Boras represents Bryce Harper and I’ve assumed Harper’s contract would include opt-outs and salary escalators and all sorts of complicating factors. Perhaps it’ll be structured like Kikuchi’s and Arrieta’s. The Yankees have not been connected to Harper much at all this winter, but, at some point, a contract structure like this will find its way onto their payroll. It’s inevitable. We’re going to see more and more contracts like this going forward.
The obvious question: What are the luxury tax implications? Well, it’s a tad complicated. For starters, the fourth year of Kikuchi’s contract and the third year of Arrieta’s contract are considered a “dual option year,” which is treated like a player option for luxury tax purposes. From Article XXIII(E)(5)(a)(iii) of the Collective Bargaining Agreement:
A “Dual Option Year” shall mean a championship season covered by a Uniform Player’s Contract in which the amount payable pursuant to paragraph 2 of the Contract becomes due or guaranteed at the election of either the Player or the Club. Salaries under any such Contract shall be calculated as if the Dual Option Year is a Player Option Year.
For a mutual option to kick in, both the team and player have to exercise their part of the option. For a dual option, only one side has to exercise their option. The Mariners could lock in the fourth year of Kikuchi’s contract by exercising the four-year club option. Kikuchi could lock in the fourth year with his player option. Only one needs to happen. Not both. Got it? Good.
That dual option year is treated as a player option year for luxury tax purposes. Here’s what the CBA says about player options. The relevant text from Article XXIII(E)(5)(a)(ii):
A Player Option Year shall be considered a “Guaranteed Year” if, pursuant to the Player’s right to elect or subject to his right to nullify, the terms of that year are guaranteed within the definition in Section A(8); provided, however, that a Player Option Year shall not be considered a Guaranteed Year if the payment the Player is to receive if he declines to exercise his option or nullifies the championship season is more than 50% of the Base Salary payable for that championship season.
In English, that means the player option year is considered a guaranteed contract year for luxury tax purposes as long as the buyout is less than 50% of the money the player is walking away from. That’s why the 2021-27 seasons of Giancarlo Stanton’s contract are considered guaranteed years for luxury tax purposes. The buyout ($0) is less than 50% of what he’d leave on the table, so they count in full.
We don’t know the year-to-year finances of Kikuchi’s contract. We do know Arrieta’s though, and his player option includes no buyout. That means it is less than 50% the player option year salary and thus a guaranteed season for luxury tax purposes. Let’s lay this out using Arrieta as an example since we know the financial terms of his contract. Here are his year-to-year salaries:
- 2018: $30M (guaranteed year)
- 2019: $25M (guaranteed year)
- 2020: $20M (one-year player option or first year of three-year, $60M club option)
- 2021: $20M (second year of three-year, $60M club option)
- 2022: $20M (third year of three-year, $60M club option)
During the first three years of Arrieta’s contract, his luxury tax hit is $25M ($30M + $25M + $20M divided by three years). The 2020 dual option year is treated as a player option year and is considered guaranteed because the buyout is less than 50% of the salary. If Arrieta exercises his player option, his 2020 luxury tax hit is unchanged. But, as I understand it, if the Phillies exercise their three-year club option, his luxury tax hit in 2020 gets recalculated and becomes $20M (the first year of $60M divided by three years), so the team gets away with $115M in real salary only counting as $110M against the luxury tax ($25M + $25M + $20M + $20M + $20M across five years). Hey, every little bit counts.
In Arrieta’s case, the club option would lead to luxury tax savings down the road because the option year salaries are lower than the guaranteed year salaries. In Kikuchi’s case, the club option would lead to a luxury tax increase down the road because the option year salaries (reportedly $16.5M annually) are higher than the guaranteed year salaries (reportedly $14M annually). This can work both ways. You can manipulate these multi-year club options into a lower luxury tax hit now or later. MLB will flag anything that appears to be blatant luxury tax circumvention, so you can only push this so far.
Also, that note about the buyout having to be less than 50% of the money the player is walking away from for the player option to count as a guaranteed year? Adding a huge buyout (at least 50% of the base salary) doesn’t help the team’s luxury tax situation at all. Let’s hypothetically restructure Arrieta’s contract, shall we? Check out these year-to-year salaries:
- 2018: $25M
- 2019: $20M
- 2020: $20M player option ($10M buyout) or first year of a three-year, $60M club option
- 2021: $20M (second year of three-year, $60M club option)
- 2022: $20M (second year of three-year, $60M club option)
All we did was take $5M from 2018 and $5M in 2019 and convert it into a $10M buyout for the 2020 player option. Since the buyout is at least 50% of the total value of the player option, it does not count as a guaranteed year now. The money counts! But the year does not. Arrieta’s luxury tax hit goes from $25M (the original $30M + $25M + $20M across three years) to $27.5M ($25M + $20M + $10M across two years). For the team, losing the guaranteed year for luxury tax purposes hurts more than reducing the salary that is considered guaranteed for luxury tax purposes helps.
There’s also this: What if Arrieta picks up the player option in this scenario? Under his current deal, he’d get $75M across three years ($30M + $25M + $20M). Under our restructured deal above, he’d only get $65M across three years ($25M + $20M + $20M). The buyout goes away. The only way Arrieta doesn’t lose money with the restructured contract is if the team declines the club option and he declines the player option, and what are the chances of that? The CBA is pretty airtight. The 50% thing doesn’t help the team any with their luxury tax situation.
Alright, so what does this have to do with the Yankees? That was all a very long way of saying there is a new contract trend in baseball, and eventually it will hit the Yankees. There is some luxury tax wiggle room here but not much, which applies to every contract, really. This contract structure doesn’t really result in significant luxury tax savings but it is a potential avenue to acquire talent. Again, Bryce Harper is a Boras client, and Boras is the mastermind behind these new contracts. It may be only a matter of weeks until we seen another deal like this.
For now, these contracts are just a new way of doing business, and they don’t have an immediate impact on the Yankees. Not unless they trade for Kikuchi or Arrieta. At some point though, the time will come for the Yankees to negotiate a deal like this, and perhaps they’ll find a way to make it work to their advantage with regards to the luxury tax. Trading increased flexibility for having to make a decision about the player’s long-term future with your organization sooner than you’d probably like will become the new normal, and eventually the Yankees will get hooked in.