Acquisitions

Lackey’s Contractual Quirk and Phillies Deals

John Lackey wasn’t at his best Wednesday night but he has pitched effectively for the Red Sox this season. Lackey, signed to a five-year, $82.5 million contract prior to the 2010 season, had a rocky start to his Boston tenure. After posting solid peripherals with poor run prevention marks in 2010, he posted a 6.41 ERA in 2011 before undergoing Tommy John surgery. He missed the entire 2012 campaign and is now finally combining the solid peripherals and run prevention the Red Sox expected when doling out the lucrative contract.

However, the Red Sox understood that Lackey, like all pitchers for that matter, represented an injury risk. In order to hedge against that risk the Sox included a clause in Lackey’s contract that, if he underwent Tommy John surgery, an option for 2015 would automatically trigger at the league-minimum salary. With five years and $82.5 million on the table, that clause might not have seemed all that important to Lackey’s camp, as he is guaranteed that money regardless of his health status. But now, with the surgery on the backburner, that 5-yr/$82.5 million deal effectively became a 6 yr/$83 million deal.

There are two implications here that impact, or could have impacted the Phillies in their subsequent big-ticket free agent signings.

First, if Lackey remains effective beyond next season, the Red Sox could have a league-average or better pitcher at a pittance. Second, the automatic triggering of the option reduced the average annual value of the contract. Most option years are not included in the average annual value calculation for luxury tax purposes, but if a future vesting option is triggered before the existing deal expires, the contract itself changes.

The original contract carried a $16.5 million AAV while the “new” deal has a $13.8 million average annual value. That reduction would prove significant if the Sox were up against the luxury tax threshold.

It’s impossible to know how contract negotiations with Roy Halladay, Cliff Lee and Cole Hamels went down without having first-hand knowledge, so we’ll never know if similar clauses were discussed. But for a team consistently concerned about the luxury tax because of large annual sums paid to players at an inherently risky position, that type of creative clause could have gone a long way towards hedging risk.

The Phillies acquired Halladay with one year left on his existing deal with the Blue Jays. The deal was predicated on the Phils’ negotiation of an additional three years and $60 million, with a vesting option for a fourth season. That option was in some ways a hedging mechanism, as Halladay would only reach the innings pitched totals if he was healthy and productive. He hasn’t been over the last two seasons and the option will not trigger.

The extension was considered well below market value for a pitcher of his stature, but the Phillies face an interesting dilemma this offseason. Do you re-sign a Halladay that, if healthy and cured by this surgery, could once again join the ranks of the very good?

Had a Lackey-esque clause been negotiated into his contract, the Phillies wouldn’t have to worry about their future relationship with the Hall of Fame righty, nor would they find concern with an appropriate price to pay him. The automatic triggering year wouldn’t even have to be at the league minimum. I would take Doc at $2 million for next season in a heartbeat. If this was a clause for concern — pun absolutely intended — perhaps Halladay would have accepted a greater average annual salary during his guaranteed years.

Wouldn’t you have paid Doc 3/$75 if a fourth-year option at $2-$3 million was triggered if he underwent certain elbow or shoulder surgeries? From a luxury tax standpoint, there is a big difference for the Phillies between a $25 mil AAV ($75 mil / 3 yrs) and a $19.5 mil AAV ($78 mil / 4 yrs). This is obviously a hypothetical example but it should become evident how incorporating these types of clauses could prove valuable to a team with so much money tied up in so few assets that is hamstrung by a desire to avoid the tax.

The Phillies then signed Lee and Hamels to substantial multi-year contracts that also could have included a similar clause. It’s easy to think that Lee is impervious to long-term injuries or that Hamels may be past the age when younger pitchers typically experience elbow problems. But if Hamels tweaks his elbow in his next start and has to miss over a year due to Tommy John surgery, the Phillies will pay over $20 million next season for literally nothing. Obviously, this is a risk associated with all pitchers up for lucrative deals, but now there is a tangible example of a safeguard against that very situation.

It will be very interesting to see if other teams begin to utilize these types of clauses. The Phillies haven’t yet but it could be a very useful tool for them moving forward if they pursue big-ticket pitching and want to recoup lost value from time spent on the shelf.

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