A Quick Reaction to Gerrit Cole’s Contract Update

A new photo of Cole with The Sign™. Get used to it.

The Yankees introduced new ace Gerrit Cole today in a press conference at Yankee Stadium, which Randy covered here. A few hours later, though, we got a new piece of information from The Athletic’s Ken Rosenthal. It is a doozy:

I don’t remember ever seeing a contract clause like this before. Definitely not with the Yankees, at least. (Please correct me if I am wrong here. I will update accordingly.) This is a really interesting development that I want to quickly expand on here with a quick reaction. Let’s get right to it.

1. The Clause Favors the Yankees: I feel confident in saying that the Yankees are hoping that Cole exercises his opt-out clause, which becomes available after the 2024 season. That’s because there is no way that a then-34-year-old Cole would leave four years and $144 million on the table without providing baseline production at or near his last two years. If he shows major signs of decline or is a complete bust (however unlikely that may be), he would never get a contract that big on the market, obviously. So, the only way he opts-out is if he dominates. In other words, if he does exactly what the Yankees are signing up for — and I think you could even argue that the team expects him to opt-out. They did just give him a third of a billion, after all. They’re not doing that for just some guy.

That’s where the new clause comes in. Per Rosenthal, the Yankees can void the opt-out and guarantee Cole a 10th year at a $36 million salary, which is functionally an extension. This is good for the team because it removes Cole’s negotiating leverage in this scenario. (If he doesn’t opt-out, that probably indicates the contract isn’t working out the way the Yanks had hoped anyway.)

If Cole continues to pitch as he has since joining Houston, we can reasonably expect 25-30 WAR from him over the next five seasons. That’s a rare level of talent — one worth the hundreds of millions they’re paying him — and the Yankees haven’t had a pitcher at that level since prime-age CC Sabathia. By exercising an opt-out in such a scenario, Cole would have New York right where he wants them: in need of pitching, unlikely to find a suitable replacement, and he’d have a preexisting relationship with fans. He’d be in a position to ask for a two or possibly even three-year extension to his deal. Sure, he’d be 39 or 40 in those years, but the Yankees just did commit nine years to him.

What the one-year club option does is remove that uncertainty. If Cole wants to leave, and the Yankees want to retain his services, they’ve already agreed to a one-year, $36 million extension. (If he opts-out and the Yanks don’t want him back, then they just don’t pick up the option, but I find that an u likely possibility.) It works out for Cole, too — the Yankees will pay him close to $400 million if this plays out — and makes his already record-setting deal worth $360 million. Not bad. Not bad at all.

2. The Aroldis Chapman Situation, In Writing: This is interesting because we’ve seen the “leverage the opt-out into an extension” scenario play out a few times in recent memory, mostly with CC Sabathia and Aroldis Chapman.

Sabathia was able to turn that leverage into an extra year and $30 extra million after the 2011 season. A similar situation just played out with Aroldis Chapman, as you surely all remember. He was able to leverage his opt-out into a one-year, $18 million extension. That was basically the same annual value as his previous deal. This is definitely a trend now. (Masahiro Tanaka did not exercise his opt-out following the 2017 season. His injury and inconsistent performance make him a unique case, though.)

I wonder if this will create a new trend in the game. Not with every player, mind you. But with the top-of-the-market guys, like Cole, Chapman, Sabathia, Strasburg, etc. It’s certainly possible. Opt-outs feel like a common thing now but they really didn’t happen before Sabathia signed with the Yanks. These things quickly become trends. It makes sense when you think about it. Scott Boras represents so many clients — remember the weird contract structures for Kikuchi and Arrieta? — and it only makes sense he’ll reuse the same tricks to land his clients big paydays. Who knows, though. It might be a while before we see another player like Cole hit the market and test this out. I bet we’ll see it again, though.

Also, this means that Cole might be a Yankee for the next decade. A Yankee today, tomorrow, and forever, indeed.

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4 Comments

  1. RetroRob

    No downside here as it gives the Yankees additional control, but it is also a smart addition by Boras.

  2. Steve W

    It’s a similar idea to Britton’s contract. It’s equivalent to saying that after five years, Cole has a 4-year player option, and if he doesn’t exercise it, the Yankees have a 5-year team option.

    • Steve W

      I would love to see the math behind how to properly value such options. That is, presumably Cole took a discount on AAV in return for the opt-out. If the contract had no opt-out, how much more would the Yankees have had to pay him? Is there a Black-Scholes-type formula for this kind of contract? I wonder if Boras has, or thinks he has, figured out how to value such options better than the teams, and thus negotiates them for his clients in order to gain a competitive advantage?

  3. Dan

    Isn’t this just the Britton/Arrieta contract on a larger scale? What Boras once termed the “swell-opt”?

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