Gerrit Cole's $324M and 9-year deal makes financial sense for Yankees

Some teams balk at contract's length but MLB's competitive balance tax is a key factor

The New York Yankees may have economic incentives to stretch superstar ace Gerrit Cole’s record-setting $324 million over a nine-season term – even if it means risking an albatross on their payroll in the deal’s final years.

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Cole’s contract established Major League Baseball records for the richest deal awarded to a pitcher in terms of overall value and annual average value. A lengthy deal was the required cost to secure Cole, a dominant talent in the prime of his career, without a clear alternative left on the market following Stephen Strasburg's deal with the Washington Nationals.

MLB teams have shown a willingness in recent years to sign top starting pitchers to long-term, record-setting deals despite the risks injury and age can pose to their investments. Aside from the obvious boost to their immediate odds of competing for a championship, longer deals can relieve some of the strain associated with MLB’s competitive balance tax, which requires freewheeling teams to spend more if they exceed a certain payroll threshold.

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“If you’re prepared to pay him $300 million-plus, the last thing you’re going to do is pay it over five years, because the average annual value is going to crush you,” Vince Gennaro, an MLB team consultant and author of “Diamond Dollars: The Economics of Winning in Baseball,” told FOX Business. “So what you end up doing is you end up spreading it.”

FILE - In this Oct. 15, 2019, file photo, Houston Astros starting pitcher Gerrit Cole (45) delivers against the New York Yankees during the first inning of Game 3 of baseball's American League Championship Series, in New York.

Under MLB’s competitive balance tax system, team payrolls are determined by the annual average value of their players. A nine-year, $324 contract equates to a $36 million annual average value. For the 2020 MLB season, the competitive balance tax threshold is $208 million. The Yankees exceeded the threshold last season and are on track to surpass it again in 2020, barring further transactions.

Over the last several decades, MLB’s highest-paid pitcher has regularly signed a contract of seven or more years in length – with mixed results for their teams.

Mike Hampton’s eight-year, $121 million contract with the Colorado Rockies in 2000 and Barry Zito’s seven-year, $126 million contract with the Giants each ended in disaster, with both pitchers posting mediocre numbers.

Meanwhile, CC Sabathia’s seven-year, $161 million deal with the Yankees in 2008 and Clayton Kershaw’s seven-year, $215 million deal with the Los Angeles Dodgers yielded better returns. Sabathia played a key role on the Yankees’ 2009 World Series team, while Kershaw anchors the Dodgers rotation to the present day.

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“We can go back now and audit historical free agent deals and many of them work out quite poorly. Not all, but many,” Gennaro added. “I do think that there’s less of them, and I think what we’re seeing is that a very select few players are going to get iconic deals like you’re seeing.”

Pitchers aren’t the only players signing marathon contracts. Star outfielder Mike Trout’s record-setting $426.5 million contract extension with the Los Angeles Angeles last offseason stretches over a 13-year term. Slugger Bryce Harper’s $330 million deal with the Philadelphia Phillies is also for 13 years.

The potential financial impact is less of a concern for the Yankees, who have the backing of a deep-pocketed ownership group. With Cole, the Yankees add, arguably, baseball’s most dominant pitcher to a roster that already includes sluggers Aaron Judge and Gary Sanchez.

If Cole can lead the Yankees back to the World Series in the short-term, a few weaker statistical results at the back end of his contract may seem like a small price to pay.

“If the Yankees can win two world championships in the next five or six years, that just adds to their legacy, it adds to their brand,” Gennaro said. “It has the chance to drive broadcast ratings significantly up, with new distribution models coming into play and streaming and so forth. It gives them all sorts of options."

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