The Carmona Extension

I was going to write about this on Thursday but (understandably) got caught up in the Miss USA odds. By the way, Crystle Stewart (Texas, 8:1) was the big winner.

The Indians signed Fausto Carmona to a lengthy contract extension last week. Let's Go Tribe has the details:

Signing bonus: $750,000 in 2008, in addition to $500,000 salary.
Guaranteed salaries: $2.75 million in 2009, $4.9 million in 2010, $6.1 million in 2011.
Club options without incentives: $7 million in 2012, $9 million in 2013, $12 million in 2014.
Club options with incentives: $9 million in 2012, $11 million in 2013, $14 million in 2014.

And the details on the incentives, from Cot's Contracts:

• 2012 option may increase by $1M based with top 5 finishes in 2010-2011 Cy Young voting
  
• 2013 and 2014 options may increase by $2M each with top 5 finishes in previous two years' Cy Young voting

It's my understanding that there are no buyouts for the three options years.

The guaranteed part is pretty standard- certainly not the first time the Indians have signed a young player to a contract of this type. For that portion, the MORP analysis and Carlos Silva comparisons are useless, since Carmona would have been under the Indians' control that entire time- very cheap this year and next, and arbitration eligible beginning in 2010.

The three option years are the interesting part. 2012 would've been his final arbitration year, so they are increasing their control of him by two years. It is likely- though certainly far from guaranteed- that Carmona will be worth more than $25MM over those two years. This is where the Carlos Silva comparisons become relevant.

I think you have to look a little deeper than that to appreciate this contract though. Subtracting his salary in those years from his value is fine, but it doesn't tell the whole story. Carmona will turn 29 in December 2012. Without this contract, he would've hit the market at this point. So if the Indians wanted to retain him, they would've been forced to give him at least five years. Not only would the first two years of the contract likely cost them over $25MM, but they'd have to commit to him for at least his age 31, 32, and 33 seasons. As with all free agent pitcher contracts, that's where you really get burned- the second half of the contract, when you're not getting the same performance that you signed up for. To me, that is the best part of this deal. The Indians have the option of keeping him at reasonable salaries in '13 and '14 without having to overpay him after that.

This contract, which has been praised pretty much across the board, may seem a little too good to be true. That sentiment was echoed by Keith Law in his chat last week:

Here's the thing, though: You know that of all of these lock-up deals, a good portion of them are going to go sour. Otherwise, why would agents be signing them? There's a nice short-term PR boost from locking up these guys, but as I said, they're not all going to work out.

There were three parties directly relevant to these negotiations- the Indians' front office, Carmona, and Carmona's agent (Jorge Brito). All of them have different agendas, but the ones I am interested in are those of Carmona and his agent.

As of last Wednesday, Carmona had made somewhere under $2 million in his career. I think it's clear that this contract decreases the expected value of his career earnings. The reason he signs it, obviously, is for security- if he blows out his arm tomorrow, he's still got $15MM coming to him. The marginal value of millions 1-15 is much higher than that of millions 16+, since you could probably get by on that first 15 mil for awhile.

I have no idea who Jorge Brito is, but I'm going to go ahead and assume that he has other clients. For Carmona, this is the contract of his life; for Brito, it's just another (fairly lucrative) business decision. The analysis from Carmona's perspective does not hold for Brito- from a purely selfish standpoint, he should be trying to maximize the amount of money Carmona makes, rather than locking in the first $15 million.

The Carmona view is why I think it's entirely possible that these contracts will continue to work out for teams, since they work out for the players as well. The agent's perspective is what causes me to second guess that a bit, since their goal is essentially the opposite of the team's. In the end, I think these are consistently excellent financial moves from the club's perspective. The key lies in the benefit the Indians get from the last two options. That allows them to not have to overpay Carmona in his 30s, but certainly won't prevent another team (read: Brian Sabean) from doing so. It's a plus for the team, yet not really a negative for the agent/player. If everything goes as planned, he'll still be rewarded handsomely when he eventually hits the market- it just won't necessarily be the Indians doing the rewarding.

Photo: Here.