In Search Of The Perfect Josh Hamilton Contract

I admit that I don’t always have the best feel for the general tenor of the Rangers' fan base at any given moment, but the impression I get is that the one of the major concerns for the fan base at large is the ability of the Rangers to sign Josh Hamilton to a long-term contract this coming off-season. It’s not hard to see why; Hamilton’s arrival coincided fairly closely with the Rangers' return to relevance in Major League Baseball; his fantastic 2010 AL MVP season highlights a tenure with the Rangers that has been filled with awe-inspiring displays of power, great baserunning, and highlight reel defensive plays. His general story of redemption has especially endeared him to local fans, as have his efforts in the community.  

However, to focus on this ignores the elephant in the room -- Hamilton’s health. Injuries, and the depth needed to combat them, are an issue easily overlooked by fans at this time of the year, when every team has fans who believe they could be a contender (well, except the Astros). If Hamilton had the injury history of Michael Young, he would likely be in line for the 2013 version of the Carlos Beltran contract. Instead, over what should have been his peak years of athletic ability (age 27-30 seasons), he averaged 124 games per season, ranging anywhere from 89-156 games.

Fortunately for Hamilton, though, it doesn’t seem that any of the injuries were in the same location, suggesting there should not be much concern as far as him being slowed by some sort of degenerative condition going forward (such as, say, Colby Lewis’ hip). Still, there is little doubt that Josh Hamilton is not going to get as much money as he could get because of his injury history and the high probability that he will be spending a significant amount of time on the disabled list during future contracts.*

In fact, some have reacted to the ‘do everything possible to sign Hamilton’ camp by suggesting that the Rangers should not attempt to sign Hamilton at all because of his injury history, and to maximize the long-term value of what Hamilton is worth, they should have traded him this past off-season. In my opinion, this is a severe overreaction. The Rangers are one of the elite teams this year, in no small part because of Hamilton, and while they have not bet their future on this year like say, the Brewers, the goal of a front office is to maximize the number of the chances at a championship.

Sometimes, the chances at a championship are so remote that it makes sense to trade away players in hopes of gaining future value. This is not one of those times. The odds that the Rangers could trade Hamilton for enough talent to make up for the lost value this year, especially given how few holes the team has (limiting the number of spots you could play the new players in), are quite small. Furthermore, the Rangers have a decent backup to Hamilton in David Murphy (assuming one of their center field options work out), making them ideally situated to take a risk on a player like Hamilton (or Nelson Cruz). And while I think the Rangers are better than the Angels this year, I don’t think the gap is so big that you could afford to trade Hamilton away for future talent and still be expected to win the division this year.

So what does the ideal contract for Josh Hamilton look like? Before we get into that, what does an ideal contract for any baseball player look like? Unfortunately for front offices around the league, baseball contracts are basically guaranteed.  This means that, unlike in the NFL, general managers need to be especially cognizant of risk. The best contracts are the ones that result in excess value (which can be hard to define) and the ones that limit risk. The most obvious way to sign players to contracts that provide excess value is to find skills that are undervalued in the market, ala the Moneyball approach. 

But when it comes to limiting risk, it gets a bit trickier. Obviously, insurance can be purchased by teams. Another of the (minor) ways that contracts can limit risk is to extend the number of years that the deal covers. Most free agent contracts end up providing surplus value in the early part of the contract and then providing negative value in the later years. For example, Adrian Beltre or C.J. Wilson are likely to provide the entire value of their contract before the last years of their respective contracts, but it benefits the team to spread out the $80 million or $75 million, respectively, over five years instead of four.

You will often see contracts like those Evan Longoria and Matt Moore signed with the Tampa Bay Rays held up as the ideal. These contracts were signed while the players were still in their cost-controlled years, and they did give more guaranteed money to each player than they would have received if they suffered a career-ending injury. The benefit to any team that offers these extensions is that they keep the players after their rookie contract ends. The reason the Longoria and Moore contracts, specifically, are thought of so highly is that they add in option years. The value of this is quite high to the teams because they reap the benefits of additional years of service without (much of) the risk inherent to most baseball contracts. Jon Daniels and company are, of course, familiar with the concept of limiting risk, and you can see examples of their attempts to do so in the contract of Adrian Beltre (sixth year not guaranteed), Colby Lewis (in his option year), and Ian Kinsler (option year next year). 

Now that we’ve covered the ways that teams can limit the risk of long-term contracts, let’s get back to Josh Hamilton.  What type of contract makes sense for him? The most obvious way is that he is not going to get paid commensurate with his ceiling in terms of average annual value (AAV) or in terms of years, because he is not going to be a safe bet to play 150 games in any given season. If you could guarantee that, he would probably be looking at a contract that resembles the ones signed recently by sluggers Pujols, Fielder, and Votto. Instead, he will likely be seeing contract offers in the $20-23 million range for 5-7 years. 

Honestly, I think even that is more risk than I am willing to take on for him. It’s possible he provides lots of surplus value over the early part of the contract if he can post an MVP-caliber season or two again, which would provide around $20 million of excess value each time it happened. However, it seems more likely to me that the surplus value is going to be less than that (say, $5-10 million). If that is what happens, then Hamilton’s long-term risk of age-related decline or career-altering injury is not going to be mitigated to the necessary degree, and the ‘lucky’ team that acquires him is very likely to suffer the Winner’s Curse.

If you told me that I had to sign Josh Hamilton, the ideal contract would be one that includes team options after the third year (completely unrealistic) or fourth year (probably unrealistic). Given the rumblings that have been emanating from the Hamilton camp on this, it seems unlikely to me that he signs for anything other less than five guaranteed years unless this year goes horribly wrong.

[* Some may point to his previous drug use as the cause of his propensity for injury, but there doesn’t seem to be much data from what I can see when you consider the nature of his injuries. More realistically, the injuries are a result of his playing style rather than his previous drug use. The one exception to this is his bout with pneumonia last off-season that resulted in his hospitalization. There is some evidence that drug abuse can result in a partially impaired immune system and, given that you don’t often see professional athletes in the primes of their careers hospitalized for pneumonia, there may be some hard-to-discern cause for worry there. ]