The Major League Baseball league minimum salary is $545,000 per year. The highest paid player this year is Mike Trout, who will make a tick over $34 million. The second-highest salary in baseball is Clayton Kershaw, who will make $33.2 million this season. Trout is the best position player in baseball, and Kershaw is the best pitcher in baseball. Their status as the highest-paid players in baseball is appropriate.
So, considering that context, let me present a question to you: how much do you think Jose Altuve is making? How much do you think he has made in his career? You know, Jose “five-time All-Star, reigning American League Most Valuable Player, World Series champion, Silver Slugger and Gold Glove winner” Altuve?
The answers: Altuve is making $6 million this year, and has made $12.7 million to date.
For most of America, where a six-figure job is unattainable and a seven-figure job unthinkable, Altuve has made an awful lot of money. And he has, at least compared to the average American (or Venezuelan, for that matter). But goods, services, and jobs have different monetary values, and in the context of professional baseball $6 million for a star player is an unbelievable bargain.
Of course, they way baseball’s salary structure is constructed, young stars are vastly underpaid according to their talents and older players who achieve free agency are usually overpaid. Though there are varying wrinkles, once a player makes the major leagues he is under team control for six full seasons. Players are capped at the major league minimum for the first three seasons. For the second three seasons, players go through a process called arbitration, and they get increasingly higher salaries in each successive year and are paid in accordance with their performance.
By the final year of arbitration, salaries can get pretty high. Eric Hosmer made $12.25 million in his last year of arbitration before free agency, Lorenzo Cain made $11 million, and Mike Moustakas made $8.7 million.
There is of course a reason why Altuve entered this year under such a cheap contract, though. In 2013, less than two years into his big league career, Altuve signed a four-year, $12.5 million extension with team options for a fifth and sixth year worth another combined $12.5 million.
The reason why extensions exist is because, at the right price, they benefit both parties. Players get financial security out of extensions. When Altuve signed his deal, he was making $500,000 a year with no guarantee of continued development, employment, or payment. If Altuve had broken every bone in his body and became unable to play baseball the very next day after he signed the deal, he would still have been guaranteed $12.5 million. Make no mistake—$12.5 million is life-changing cash, especially for a guy like Altuve whose initial signing bonus with the Houston Astros was only $15,000 (seriously).
For baseball clubs, the benefit is pretty clearly exemplified by Altuve. Young players have lots of promise, and every so often the guy you guaranteed $12.5 million and had under control for two more years after that thanks to options, you know, turns into the second coming of Ichiro and provides an unthinkable amount of surplus value.
There is also risk on both sides, obviously. Players get security but leave money on the table if they become great, and teams who offer early extensions to players are on the hook even if those players turn into lemons. But the risk can be mitigated with a second, more lucrative extension if a player succeeds beyond wild expectations. In fact, this just happened to Altuve and the Astros when they agreed to a second extension just this March, worth a total of $151 million from 2020-2024 and converting the club options in 2018 and 2019 to guaranteed years.
Kansas City Royals fans are actually quite intimate with both parts of the Altuve-esque extension sequence. In February 2012, the Royals signed Salvador Perez to a five-year, $7 million extension after his 39-game 2011 debut. Three team option years upped the total to $19.75 million over eight years. In March 2016, the Royals and Perez negotiated a new extension, worth $52.5 million an buying out an additional year of his free agency.
Even beyond young guys signing extensions quickly out of the gate, General Manager Dayton Moore has signed many of his players to extensions. Zack Greinke, Alex Gordon, Billy Butler, and Danny Duffy are four of the highest-profile guys to sign extensions with the Royals, and those extra years from Greinke, Gordon, and Butler were crucial to the success of the 2014-2015 Royals.
If they Royals are going to succeed in their rebuild and make a return to the World Series, it is imperative that they offer extensions to their young players like candy.
Teams should probably offer way more extensions than they already do. The downside for teams is that they could be on the hook for dead money if a player crashes and burns, but the reality is most MLB teams are already on the hook for dead money spent on free agents (cough Alex Gordon cough).
By this point in baseball history, everyone knows that free agency is inefficient. A vast majority of free agent years cover players in their 30s, when they are in their decline phase with their best years behind them.
You might as well shift that money towards younger players with more promise so that your window of contention is longer. Extensions lock up players still in their 20s, buying out the precious early years of free agency when a player is still in their prime. They are cheaper and yield a higher return on investment than signing free agents. It is impossible of course to avoid free agents entirely, but by controlling more of your locally-developed players for longer the need for free agents goes down.
The 2018 Royals actually have a few players that could make great extension candidates. The first is Jake Junis, who in his short career has been an effective middle-of-the-rotation guy. If he continues to be effective, the Royals should try to offer an extension a la Chris Archer, who when at the same age as Junis is now signed an extension worth $25.5 million guaranteed.
The other guy who comes to mind as an extension candidate is Jorge Soler. Soler still has upside and isonly in his age-26 season. In March 2012, after an age-27 breakout season, Gordon signed a four-year, $37.5 million extension with the Royals. The deal bought out two years of his free agency. If Soler has a breakout season of his own, a similar deal buying out two years of his free agency could work.
But the idea of offering extensions extends (see what I did there) beyond Junis and Soler. Eric Skoglund is in a similar situation to Junis, though obviously hasn’t been nearly as good and needs a longer string of good starts to get into the same kind of boat. If Hunter Dozier is called up this year and does well, the Royals should look to lock him up this winter, which is also the same approach they should take to a successful 2018 by Adalberto Mondesi, Bubba Starling, and Ryan O’Hearn.
The Royals will never be a large market team, and they need to do everything in their power to get back to the top of the baseball world. They got there last time on the back of their farm system products and through a few key extensions. They ought to lean into that strategy this time around.