Why the Red Sox (Probably) Won’t Make it Rain

If you read my link around yesterday, you probably saw Matt Kory’s piece for Over the Monster on the effect the luxury tax is having on the Red Sox offseason.  In case you missed it, here’s an excerpt:

“With several holes still to fill on the roster, Rosenthal claims the Sox have already committed about $170 million to this season’s payroll. That leaves only [insert abacus joke here] $8 million to spend before running up against the threshold. Should the team cross that $178 million barrier, they would be subject to a 40% tax on each additional dollar spent…The tax kicks in because the team has exceeded the threshold the previous two seasons. If Boston remains under the $178 million spending limit this season, they’ll effectively reset the clock, allowing them to go over the threshold next season without penalty. But, if they spend over the tax threshold this season, they’ll not only be taxed as stated above, but they’ll also be subject to a 50% penalty on dollars spent over the threshold next season.”

Matt does a great job explaining the situation in layman’s terms as to why the Red Sox haven’t splurged on high priced free agents like C.J. Wilson and Jose Reyes this winter.  Simply put, even though the Red Sox have both the revenue streams and the on-field need to sign an expensive free agent or two, they have much to lose in doing so.  Practically every dollar spent on players currently not on the roster will be taxed, and therefore they should be viewed in terms of their salary plus the cost of the luxury tax.

Despite what some point people would like you to believe, the luxury tax is not a joke and the penalties are severe.  According to the latest Collective Bargaining Agreement, the luxury tax threshold will remain at the 2011 levels of $178M for 2012 and 2013 before increasing to $189M for the 2014-2016 seasons.  With salary inflation rapidly outpacing the tax thresholds for the next five seasons, teams near the luxury tax ceiling have incentive to remain under the line; especially with the maximum tax rate increasing from 40-50%.  So where exactly are all of the Red Sox payroll dollars going?

The chart below includes all of the players the Red Sox currently have under contract for the 2012 season.  I’ve included both their raw salaries and their projected luxury tax figures.  For those of you who aren’t educated in the ways of the luxury tax, their “Projected Tax Figures” are based on the average annual value (AAV) of their contract, not their current salary.  Their current salary is represented in the “Raw Salary” column.

Players Raw Salary Proj. Tax Figure
Adrian Gonzalez $21.86M $22.00 M
Carl Crawford $20.36M $20.42M
Josh Beckett $17.00M $17.00M
John Lackey $15.95M $13.83M*
Kevin Youkilis $12.25M $10.31M
Daisuke Matsuzaka $10.33M $8.67M
Dustin Pedroia $8.25M $6.75M
Jon Lester $7.63M $6.00M
Bobby Jenks $6.00M $6.00M
Marco Scutaro $6.00M $6.25M
Clay Buchholz $3.75M $7.49M
Jose Iglesias $2.06M $2.06M
Andrew Miller $1.40M $1.40M
Kelly Shoppach $1.35M $1.35M
Matt Albers $1.07M $1.07M
Totals $135.26M $130.60M

This figure represents John Lackey‘s AAV if the Red Sox agree to pick up his option for 2015 at the league minimum salary per the injury clause in his contract.  If the option is not exercised, his luxury tax figure jumps to $16.5M.

As you can see, the club has already committed $130.6M against the luxury tax for the upcoming season, leaving $47.4M to spend on the remaining 25 players on the 40 man roster.  While the vast majority of the remaining players will receive salaries at or near the league minimum of $480,000, players like David Ortiz, Jacoby Ellsbury, and Daniel Bard should all command significant raises from their respective 2011 salaries.  This will put a pinch on the club’s ability to add payroll.

So what should we expect the Red Sox payroll to look like once they sign all of the players on their 40 man roster?  For the sake of this example, I’m going to assume the Red Sox start the season with the same 40-man roster they have today, and project out their salaries accordingly.  All players not included on the 25 man roster will be given one year $480,000 contracts that will be paid out at a prorated rate based on their major league service time.

Players Raw Salary
David Ortiz $14.00M
Jacoby Ellsbury $10.00M
Daniel Bard $2.50M
Jarrod Saltalamacchia $2.00M
Alfredo Aceves $1.50M
Junichi Tazawa $1.00M
Mike Aviles $1.00M
Jed Lowrie $0.85M
Franklin Morales $0.75M
Josh Reddick $0.48M
Kyle Weiland $0.48M
Felix Doubront $0.48M
13 MiLB $6.24M
Totals $41.28M

Taking all salaries together, this brings the projected payroll to $171.88M, leaving the Red Sox only $6.12M under the luxury tax.  As you can probably see, this roster is far from complete.  They still need to add a right-handed corner outfielder, a starting pitcher, a closer, and probably another middle reliever before Spring Traning starts in February.  The front office could look to trade one or two of their higher priced commodities (Kevin Youkilis and Marco Scutaro come to mind), but I can’t imagine they’d provide much payroll relief.  The Red Sox would likely need to eat at least a portion of said player’s salary in order to get anything useful or substantial in return.  Then, on top of that, they’d have to pay the salary of the player they acquired; thus creating minimal wiggle room.  Honestly, free agency is the easiest way to fill those holes, but with the average cost of a win nearing $5M; it’s become incredibly expensive.  As a result, the Red Sox will almost certainly need to surpass the luxury tax in order to field a complete team in 2012.

For example, if the club were to sign Hiroki Kuroda and  Cody Ross, while trading for Andrew Bailey and Koji Uehara prior to the start of Spring Training, we’re probably looking at a net payroll increase of about $22M to around $194M, plus a $6M luxury tax fee.  While this isn’t particularly advantageous, each of the new acquisitions would likely see their current contracts expire at season’s end with only Bailey remaining under team control for 2013.  (I’m assuming Kuroda and Ross would only sign one year deals.)  Taking a tax penality in this particular case, would put the team in a position to win in 2012; give the youngsters a chance to develop (thus improving their trade value in the process); and create greater payroll flexibility to field a competitive team while staying below the threshold in 2013.  Furthermore, the Red Sox would stand to add to their considerable revenue base by making a serious playoff run.  If the Red Sox stand pat and miss the postseason for the third consecutive season, fans would likely become restless and frustrated; thus less likely to spend money on tickets, apparel, concessions, etc.  All of that said, it’s still not an ideal option because not only does it make it nearly impossible for the Red Sox to add anyone at the July 31st trade deadline, but also puts the Red Sox at risk of being levied with a 50% tax in 2013 should they breach the threshold.

As an alternative example, if the team were to decide to go for broke by adding guys like Carlos Beltran, Ryan Madson, and either Edwin Jackson or Roy Oswalt; we’re probably talking about adding an additional $30M in payroll, plus a $9.2M tax bill in 2012.  Since most of these signings would be long-term deals, they would also create additional financial liabilities for 2013 and 2014 that could hamstring the club going forward.  In essence, it would create more problems than it would solve.  So while it sounds like a nice idea to fill our holes with high priced, proven veterans; it’s probably not the best way to go at this time.

Instead, it looks like the front office will take more of a balanced approach to rebuilding the team.  I wouldn’t be surprised to see them sign at least one mid-tier free agent (preferably to a short term deal), while scouring both the undervalued and the recently non-tendered markets for low-cost/low-risk players capable of filling key roles.  Among the players Cherington and company could take a flyer on are:  Rick Ankiel, Ryan Spilborghs, Paul Maholm, Joel Pineiro, Joe Saunders, and Hong-Chih Kuo.

There are still a lot of viable options remaining on the market.  They’re not all sexy, but they’re certainly worth test driving.

Categories: Andrew Bailey Boston Red Sox Cody Ross Hiroki Kuroda Kevin Youkilis Koji Uehara Luxury Tax Marco Scutaro

After being slapped with a restraining order for stealing Nick Cafardo's mail, I was forced into retirement for a brief period of time. As fun as it was to lounge around the community pool and play shuffleboard with noted internet columnist, Murray Chass, I quickly felt a yearning to write again. Now in my second tenure with Fire Brand, I have set lofty goals of achieving world domination, ending the plight of the hipsters, and becoming BFFs with Mike Trout. I am fluent in two languages (Sarcasm and English, in that order); have an intimate relationship with M&Ms; firmly believe that Lucille is the best character on Arrested Development; and spend my spare time trolling select members of the Boston media. You can follow me on Twitter @Chip_Buck.

24 Responses to “Why the Red Sox (Probably) Won’t Make it Rain” Subscribe

  1. Gov December 14, 2011 at 8:41 AM #

    Fantastic analysis! Some sobering realities but this is where the better GM's earn their money….

    • ChipBuck December 14, 2011 at 9:03 AM #

      Thanks! I agree completely. It'll be really interesting seeing what Ben does. I'm really hoping he finds some interesting undervalued players to add to the roster.

  2. Walt in Maryland December 14, 2011 at 9:20 AM #

    From reports yesterday, it sounds like the Red Sox realize they'll probably go over the $178 million cap. The cost to the franchise of missing the post-season (again) would greatly exceed whatever luxury tax they had to pay.

    • ChipBuck December 14, 2011 at 11:19 AM #

      That's pretty much my thought. There are obvious potential long-term issues with going over the threshold, but they almost have to after two missed postseasons (and a three game sweep in 2009). If they can get a couple of players to agree to one year deals (or even two year deals), it's worth it. I'd rather they go $15-20M over the tax for good players than $5M over for mediocre guys personally.

  3. marcos December 14, 2011 at 9:34 AM #

    Very informative, great job. Let's be honest, isn't Marcos Scutatro a little redundant?????

    • marcos December 14, 2011 at 9:40 AM #

      I mean let's be honest middle infielders far more mediocre than Scutaro have been paid Scutaro-like contracts so far this off season. It should not be inconceivable to trade Scutaro without eating any of the money and also getting a substantial return

    • ChipBuck December 14, 2011 at 11:20 AM #

      Thanks Marcos! Honestly, I see them probably packaging Jed Lowrie in a deal. Maybe for Bailey or Uehara…or someone along those lines. He's not terribly durable, doesn't have a true position, and his offensive ceiling is in question. Still, he's young and has potential. Some team will take a flyer on him based on his Aug/Sept 2010 and April/May 2011 run.

      • marcos December 14, 2011 at 11:54 AM #

        I see your point and it's could very well happen. Yea i know Lowrie has his shortcomings as far as durability. But he's much cheaper than Scutaro, has a higher hitting ceiling than Scutaro. Despite the good offensive year Scutaro had they are both about average defensively. My point is they could take a chance on Lowrie while saving a lot money and they have depth in Aviles and Iglesias. By the way by "substantial return" for Scutaro i meant a couple of B prospects. Think about it it's about about maximizing Scutaro's value, he is coming off a very good season but he's 36 and his contract situation would be appealing for other team because it's 1 year for about the going rate for middle infielders

      • marcos December 14, 2011 at 12:45 PM #

        shit Evan just told me they traded Lowrie and Weiland to Houston for Melancon. wtf

        • Chip Buck December 14, 2011 at 1:57 PM #

          Yeah, I saw that. Charlie just posted something about it.

  4. TroyPatterson December 14, 2011 at 9:54 AM #

    I'm curious what the White Sox asked for to get Gavin Floyd. He seems cheaper in prospects than Danks, but has developed into a very solid pitcher and at $7 million due in 2012 he is a steal in terms of contract.

    • ChipBuck December 14, 2011 at 11:22 AM #

      The rumor I heard was that they were looking for prospects similar to what they were asking for Danks. Clearly, the prospects wouldn't exceed those being requeste for Danks, but it's unclear what they're expecting in return.

  5. marcos December 14, 2011 at 10:02 AM #

    At the beginning of the off season Cherrington stated that the team needs to reassess they way they approach free agency. i believe he was alluding to the fact that Theo Epstein handed out a bunch of long term contracts that ultimately didn't produce much bang for their buck and thus creating the nightmare reality they are facing with competitive balance tax. That being said i truly believe that the Red Sox want and will field a competitive team for this upcoming season. It's not an ideal situation but as you said they have to look at big picture. Long term success supersedes any current penalty

  6. Bruce December 14, 2011 at 10:37 AM #

    What a great analysis!! Really helped explain what is currently going on. Seems like Epstein left the club in a tough spot. Makes one wonder about the wisdom of the Crawford signing even more.

    • ChipBuck December 14, 2011 at 11:28 AM #

      I don't know if I'd say Theo left the club in a tough spot. The Crawford signing made a lot of sense at the time. Had Ellsbury developed into the player he was in 2011 in 2010, the Red Sox probably don't make that move. Also, Ellsbury is a Boras client which means he not only was/is unlikely to re-sign prior to hitting free agency, but also will be very overpriced upon hitting free agency. If Ellsbury puts together two more good seasons, we could talking about Matt Kemp money plus an additional premium.

      Also, the farm hasn't produced a legitimate impact prospect since Daniel Bard in 2009. Reddick, Kalish, Lavarnway, and Weiland could all be one of those guys, but they haven't proven they're legit major leaguers–yet. Lavarnway is as close to a sure thing as I've found, but even he needs another few months of development defensively.

      Lastly, keep in mind the luxury tax is remaining stagnant for the first time in it's history. I was figuring it would increase to $185M or so, thus creating a buffer. That didn't happen.

      • marcos December 14, 2011 at 11:38 AM #

        they outbid the angels by about 35 mil. was that really necessary???

        • ChipBuck December 14, 2011 at 11:47 AM #

          Keep in mind, the reported bid by the Angels was 6/108, which is an $18M AAV, which is identical to Jayson Werth's 7/126 ($18M AAV) contract with the Nats. The bidding really should have started at 7/126 and gone from there. I'm not saying I would have gone to 7/$142M per se, but it makes logical sense when you consider comparable contracts given by comparable players…plus a hefty dose of salary inflation after three years of stagnation. My projections had him being valued right around that salary mark (a little less) based on his previous history and expected aging curve. No one could have foreseen a replacement level season from Crawford. That sorta destroys the curve.

          • marcos December 14, 2011 at 12:12 PM #

            I have not given up on Crawford he is too young. But i don't know if you noticed, during the season he was constantly late against above average fastballs. Valentine might be right, that batting stance might be a detriment to his performance. Yea i realize it worked before but for some reason it's not working now. Baseball is a game of adjustments he need to correct this flaw instead of fighting back. A slow bat is not necessarily a sign of old age because Jacoby Ellsbury had this problem in previous seasons and he acknowledged this in interviews. I noticed he make a subtle change in batting stance and had a career year. My point is, i hope he doesn't brush it off as an off year because a player that young doesn't have such a drastic off year. He needs to fix something. I don't believe he was all psychological he needs to fix his swing mechanics

  7. steve December 14, 2011 at 10:53 AM #

    The relative salaries of Carl Crawford vs Pedroia/Lester makes me sad. I know he will perform better than last year going forward, but I just cant see him being a 20m/y player.

    • ChipBuck December 14, 2011 at 11:32 AM #

      Keep in mind that Pedroia/Lester signed deals in their pre-arbitration years, so their salaries probably exceeded true market value (but not performance value). Also, in some cases, their salary increased two or three fold in the early seasons of their deal. Crawford, on the other hand, was a free agent. After the Jayson Werth 7/126 deal, all bets were off. Crawford, being younger and more talented, was going to command at least as much, if not more. Per the inefficient free agent market, he was that valuable.

      Honestly, all he needs to be is a 4 fWAR player in 2012 to justify his salary–that is if you agree with Fangraphs WAR method and their value-to-dollars calculation. I'm projecting him at 4.5-5 WAR for next season.

  8. billy December 14, 2011 at 11:28 AM #

    if they field a crap team and come in 3rd again no one will care how much money they saved on luxury tax.

  9. Brian December 14, 2011 at 11:32 AM #

    How do mid seaosn trades work towards this seasons luxary tax? Last season they were able to avoid the luxary tax on Agons contract by waiting, couldn't the red sox stand pat like they did for the first month of the season last yr, iron out a trade or 2 now, and pull the trigger after the it would no longer penalize them this season?

    • ChipBuck December 14, 2011 at 11:38 AM #

      Mid-season trades don't impact the luxury tax, but they do impact overall salary. Keep in mind that the true payroll is the amount spent on player PLUS the amount spent on the luxury tax. If the player payroll is $194M, then the true payroll is actually $200M. Then, there's the cost of prospects to include. July 31st deadline deals tend to be more expensive than offseason deals since the urgency is greater. Not only are you giving up prospects, but you're giving up 6 years of cost controllability–assuming each player makes it. Then, they'll probably have to take on a sizable portion of the remaining salary because it's unlikely anyone will give the Red Sox a break on salary unless they're desperate.

      Also, you can't really iron out a trade and pull the trigger later. Each team's needs now are different than they'll be in February, April, or July. What makes sense now, may seem crazy later.

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