Desperate GM can cripple a franchise By Keith Law
A general manager's primary objective, no matter what he may say, is to keep his job. GMs typically make $300,000 or $400,000 a year at a minimum, with several earning a million or more. The job also carries tremendous authority and, within a small circle of people, prestige. It is not an easy job, and it can be a 24/7 job, but given the money and perks, it's one that current holders don't want to lose.
The problem is that the best way to keep a GM job when you know you're in danger of losing it is to produce results in the short term, sometimes in the very short term. This idea of trading a dollar in the future for 10 cents in the present often manifests itself in moves like trading prospects or young players for "proven" veterans, signing well-known free agents whose name value exceeds their on-field value and back-loading deals to maximize disposable payroll in the current year without regard to the payroll consequences for future years.
At times, this aligns itself well with the best interests of the organization as most baseball team owners are in the business to make money, with a small number in the business to win; most economists agree that the best way to increase team revenues is to win more games. But most organizations with GMs who are on the verge of a firing are in that situation because of more fundamental and often systemic problems like poor scouting, inability to develop players or the most fundamental problem of all -- insufficient talent. For those teams, a baseball strategy built around winning more games this year, this month or this week is wrong. Trading away young talent, eliminating long-term payroll flexibility and alienating a portion of the fan base can set the team back several years.
Economists have a name for this problem: moral hazard. It refers to any situation where an agent (in this case, a GM) can take a risky action for which he will not have to face the full consequences if the action turns out badly. A GM who hands a player a seven-year deal knows that if the deal works out, he'll probably keep his job (and even earn a raise), but if the deal doesn't work out, he might lose his job. But he'll still earn the money he was guaranteed under his contract, and he won't have to deal with the albatross contract, or the restrictions it places on payroll. A GM who gives multiyear deals to his cronies to serve as special assistants, or in other high-paying roles, knows that if he's fired he doesn't have to pay for those contracts. It's the next GM who has to clean up the mess, fire the cronies and has less money to bring in his own people, forcing him to scrimp on payroll, or to restock the farm system.
Moral hazard problems may explain the big moves by several GMs this offseason:
• Jim Hendry, who may be one of the three GMs most likely to lose his job, has made the Cubs better -- it would have been hard to avoid doing so, given how awful they were in 2006 -- but at an enormous cost, with deals that are somewhat back-loaded. The Cubs' four major offseason signings (Alfonso Soriano, Aramis Ramirez, Ted Lilly and Jason Marquis) will earn a total of $26.75 million in salaries in 2007, but will earn $53.525 million in salaries in 2009.
• Bill Bavasi, another of the troika of GMs most likely to see the ax, just gave away two promising, inexpensive young players for has-been Jose Vidro and signed 36-year-old pitcher Miguel Batista to a three-year deal.
• Brian Sabean, whose contract is up after 2007 and who may retire for personal reasons, went on a rampage among older free agents, signing Rich Aurilia, Ray Durham, Bengie Molina and Dave Roberts. All are players in or facing their declining years, meaning that the contracts are going to look significantly worse after 2007 than they do right now. He then handed Barry Zito one of the longest deals ever given to a pitcher, even though Zito's fastball was down last year. Projecting him as a front-of-the-rotation guy four or five years out is unwarranted.
(The Giants last month signed Barry Zito to the richest deal ($126 million over seven years) ever for a pitcher.)
Toronto Blue Jays
2006 SEASON STATISTICS
GM HR RBI R OBP AVG
154 32 106 91 .357 .303
You can even see moral hazard appearing in contracts handed out by GMs who aren't on the hot seat. The Blue Jays gave Vernon Wells a heavily back-loaded extension through 2014 (assuming Wells picks up his three-year, $63 million player option), but more than two-thirds of the money comes due after GM J.P. Ricciardi's contract expires in 2010. By deferring most of the payments due, Ricciardi keeps more payroll in the 2007-10 years available to pay other players, even if it means killing the team's financial flexibility in 2011 and beyond.
This is not to say that all GMs who sign players to big-money, multiyear deals are suffering from moral hazard problems. The Red Sox signed three players to deals of four or more years this winter, but there's no reason to believe Theo Epstein is going anywhere. It's also not to say that GMs acting under moral hazard are evil or dumb or even wrong; they're acting rationally by acting in their own best interests. And sometimes, if the extremely short-term outlook results in a playoff appearance or World Series championship (which is part of the logic of the Vernon Wells deal), ownership does get what it wants as well.
The problem is that a club owner or president who is considering making a change in the GM chair should not allow the current GM to sign players to long-term or heavily back-loaded contracts, or to trade long-term assets for short-term assets. It is in the GM's interest to spend all kinds of future money that might let him keep his job but won't be his responsibility if he's fired, but it's definitely not in the club's interest to let him do so.
Solving this problem is not easy, and it's one that plagues owners of all kinds of businesses. Professor J.C. Bradbury of Kennesaw State University, the author of the upcoming book "The Baseball Economist" and the man behind the Sabernomics blog, points out how difficult it is to overcome the moral hazard issues inherent in the GM role:
"Whether it's through tying bonuses to stock options or hiring outside auditors, it's something that owners can only hope to mitigate, not solve. I wouldn't be surprised if owners began to give bonuses that are good even if you're fired. If you sign a free agent or draft a certain player who reaches a certain level, you get a share of that, whether you are with the team or not. This would encourage the GM to focus on the long term."
Some teams could choose to give their GMs ownership stakes, as Oakland has done with Billy Beane, but doing so also represents a much firmer commitment to the GM than most teams are willing to make.
The moral hazard issue isn't the main driver of this winter's spending spree -- labor peace and soaring revenues have a lot more to do with the extravagance -- but it affects the shapes of contracts, and it does explain why certain teams dove into a pool in which they shouldn't have been wading. It also means that owners considering making big front-office changes shouldn't be dithering for long periods of time or giving extra latitude to those GMs to make long-term commitments. It won't stop the rapid escalation in offers that we saw free agents receiving this winter, but it would slow the process and prevent the basket-case situations we're going to see soon in places like San Francisco.