Max's Headroom, $180m? Stars Deserve $40+m/yr, So $180m is Fine for Scherzer (& Was for Sabathia) – Despite the Ugly End of Such "Deferred Comp" Deals

MaxH"The Yankees have been adamant that they have no interest in adding another nine-figure salary to the books, resisting the outside cries … [for] Max Scherzer." Yet the "Is Max Scherzer worth it" debate won't stop. Dueling opinions are all over our comment threads and the whole internet, with folks declaring, "signing or not signing Scherzer will decide whether the Yankees are playing in October," or proudly "rail[ing] against long-term contracts" of $20m+/yr because they are "gamble[s] that can cripple an organization…. [M]ost of the Yankees’ $20M busts are in the last years of long-term contracts, and you should no longer be surprised that they passed on Scott Boras’ $200M, longer-term contract demands" for Scherzer. Despite the strongly varied views on Scherzer, there's little debate on three key points.

(1) He will require a costly seven-year deal. Fangraphs estimates $168m-$175m/7yr, i.e., $24-$25m/yr. Boras may want $200m, but that demand has left Max unemployed a month after the almost-as-good Jon Lester signed for $155m/6yr. Let's say $180m/7yr.

(2) Short-run: he'd improve the Yankees about 5 wins a year. Since coming into his own three years ago, his WARs have been 4.2, 6.7, 6.0. Adding Scherzer's 4-6 WAR replaces the 0ish WAR of Chris Capuano (5 yrs of 650 IP: 2.9 WAR).

(3) Long run: eventually he'll be worth nowhere near $25m. A 7-year deal extends through 2020-21; by age 35-36, few (non-juicing) hard-throwing starters retain much value. Realistically, you'd hope for Mark Teixeira's mid-30s: no star, but a passable regular. Pessimistically, you'd suffer Sabathia's ugly mix of inability to pitch and (worse) sub-replacement pitching. Optimistically, you'd hope for Mike Mussina's mid-late 30s, but (a) Mike (unlike Max) had superior control, allowing longevity as the pitches weaken, and (b) even Mike declined, averaging 3.5 WAR in his mid-late 30s after 5-5.5 in his prime.

But Max is worth it, just like I think Robinson Cano would've been and C.C. Sabathia probably was. The average free-agent value is about $7m per WAR: a year ago, Dave Cameron estimated $6m; another estimate found it's more like $7m; and prices have ticked upward yearly. But $7m is an average, and a win is worth more to the Yankees, for reasons Vince Gennaro noted. First, extra wins are worth more to a mid-80s-win team: five more wins likely make the postseason-or-no difference to the Yankees, but would take, say, the Diamondbacks only from 64 to 69 wins. Second, unlike, say, my hometown Rockies' fans, who grumble but keep showing up for losing baseball (I plead guilty to that...), New York fans demand winning, and have the force of numbers and income for their (dis)satisfaction to swing revenue wildly; later work by Gennaro showed (as summarized by Ben Lindbergh), "the Yankees – because of their market size and the fact that their attendance figures are unusually sensitive to on-field performance – have 'the steepest and richest win $ revenue curve' (the amount of incremental value generated from improving regular season wins).” That study showed the difference between making the postseason or not could, for the Yankees, easily be well over $50 million; four years ago, when the revenue curve was lower, Gennaro found the difference was $45m for making the playoffs, or $60m for the World Series – with extra revenue gains continuing for years.

So it seems fair to say additional wins are worth, say, $8m to the Yankees; they're well above the $7m average value because they're a high-revenue-variance, almost-playoff team. That sounds about right: if postseason presence adds easily $50m in revenue, then an elite free agent (Cano last year, Scherzer this year) is easily worth $40m, because adding his 5-6 WAR very likely takes the team from non-playoff to playoff – an analysis noted by an investment website that called passing on Cano a "basic investing blunder … [that] probably cost the Yankees a playoff spot -- and Derek Jeter's last shot at October."

With a 5-6 WAR/yr player like Scherzer worth $40-$48m/yr, he's easily worth $180m/7yr. His recent prime (2013-14) featured 13.7 WAR over 2 years, but let's assume the following WARs for a seven-year contract covering ages 30-36: 6.0, 5.5, 5.0, 4.5, 0 [an injury year], 2.0, 2.0. That's not optimistic: it assumes (a) gradual but imminent decline from his elite level, (b) a whole year lost to injury, and (c) a very weak last three years (4 WAR/3yr). Even this scenario gives Scherzer 25 WAR; at $8m/WAR, that's worth $200m. Sure, pitchers can be unpredictable, so he easily could be worse – but easily could be better. It's not crazy to hope for a more gradual decline – say, 6.5, 6.0, 5.5, 4.5, 3.0, 2.5, 2.0 – yielding 30 WAR. That's worth $240m. I didn't invent this kind of analysis ($X per WAR, plus gradual annual decline); it's what Dave Cameron, for example, did to estimate Cano's value at $210m/7yr last year, assuming $7m/WAR. But Cano's value was $240m/7yr – his actual price – if you assume the Yankees' $8m/WAR.

This thinking definitely supports the recent long-term $24-30m/yr superstar deals (Cano, A-Rod, Kershaw…): they're underpays for the early years of elite performance worth $40-50m, and overpays for the later years of replacement-level-to-average performance worth $0-15m. Which is the broader point: most long-term contracts are really deferred compensation – early-career underpayment, then late-career overpayment. Scherzer would earn most of his $180m in just three elite years, or in two elite years plus two above-par years.

Take the most comparable Yankee cautionary tale: Sabathia's similar $180m/8yrs (he was one year younger, but signed for one more year, so the length/age comparison is a wash). Sabathia's first four years produced 21.8 WAR; at $8m/WAR, that's worth $174.4m. He provided no real value above replacement-level in years 5-6; let's assume nothing in years 7-8 either. Even if he had value only in years 1-4, he was only a 3.2% overpay – $180m for $174.4m in value. His value was just heavily front-loaded: worth almost double his pay the first four years; worth zero the last four.

In 2009, if you thought Sabathia was worth about $180m for the next 4 years, but worth little for the years after that, would you rather pay that $180m for just four years, or for eight years? You'd take eight: if you're paying for four years' worth of elite value, it's better to get eight years than four. Deferring payments is smart business, in case he's still modestly useful in his mid-late 30s, it's better to have those years locked up too.

I'm not saying every star is worth $25-30m just because elite performance is worth close to double that. The biggest caveat is age. A long-term deal starting in a player's mid-20s (Mike Trout, Clayton Kershaw, Giancarlo Stanton) very likely yields enough elite years to balance out any weaker years at the end. Not so for deals extending near (or after) 40. Miguel Cabrera's eight-year deal covers ages 33-40 and, worse, was inexplicably signed two years in advance, risking a commitment to down years right away. Alex Rodriguez's ten-year deal covered ages 32-41 for a guy at a position (3B) almost nobody can really play by his late 30s (even long-lasting elite-defense 3B like Nettles, Rolen, and Robinson remained plus defenders only until 34, 36, and 38). Those deals extending to AARP age cover few remaining elite years – not enough to outweigh all the zeroes at the end.

In between the Trout/Stanton/Kershaw safe deals and the Cabrera/A-Rod stinkers are closer calls like Sabathia in '09, Cano in '14, and Scherzer in '15. Cano's age 31-37 likely will include some great years followed by weak ones, because age 31-37 at a defensively demanding position (2B/SS/C) is like age 34-40 at 1B; he could stop being a viable 2B in a hurry, and even a modest hitting decline drops him below what you want from a 1B/DH. Better calls are 29-30 year-old elite starters with no major injury history – Sabathia in 2009, or Scherzer/Lester now. Guys like that can be expected to remain elite for a few years, then to decline to above-average, then to have little use by their mid-late 30s.

Does a few years of stardom, followed by the decline years, deserve $180m? Yes, and the widespread complaint that such deals are overpays at the end totally ignores how they're actually substantial underpays at the start. You pay the $25m/yr, you enjoy the underpaid elite years worth $40m+, and, as with Sabathia now, shrug off the later overpaid years as deferred compensation that keeps the player on call just in case he's still a useful spare part, worth something more than $0, in middle age. That's why some of the wealthiest businessfolk in the world, folks who don't spend money without expecting a good rate of return, are willing to pay the likes of Scherzer and Lester at least $25m/yr. That much is certain; let's just hope it's a Steinbrenner's signature on that contract we know Scherzer will get.