Here’s a somewhat pretend scenario based on a true story. Let’s say you’re running a company, and hire a guy with a 3-year contract worth $300,000. You give him a $40,000 signing bonus, will pay him $50,000 in his first year, $90,000 in his second year, and $120,000 in his third year. Let’s furthermore say his occupation is such that his value can be measured in a very real and important number: dollars ($). A salesman would be a great example of this. Finally, let’s say the guy you hired – let’s call him Mitch… Brinks – had incredible sales elsewhere but some of his "reference" letters mentioned some attitude problems. So here’s the game: it’s currently nearing the end of year 1 and Mitch just got into a bit of a yelling match with someone, so you figure now is a good time to review the return on your investment.
When you look at the numbers, you see Mitch had a rough start. He had moved from the West Coast, and didn’t adjust to East Coast time (and your company’s early-to-rise schedule) for a while. His luck was pretty bad. There were quite a few deals he made that due to some bad luck, Mitch didn’t seem to close. So his sales were down. Waaaay down. To make matters worse, he also rubbed some customers the wrong way. (Fortunately they were the type to write a nasty letter but show up again tomorrow.) Finally, the whole company seemed to be in a rut. Not only were Mitch’s numbers down, but one of your other top salesman – Adolphus Scranton – has been sick all year and has seemingly cost the company money. Another salesperson, Alex Randley, was out sick for 3 months. The company has had a horrible year, and Mitch had been really, really disappointing.
But then you noticed something else… Around halfway through the year, something clicked for Mr. Brinks and he started getting the sales you expected. His luck turned around quite a bit, and most of his deals were closing. His attitude still didn’t agree with people at times… but Mitch has been a damn good salesman the past few months. In fact, he’s been such a good salesman that it’s only October and Mitch has already earned his salary for the year! In fact, he’s earned enough – $65,000 – to be worth his yearly salary ($50,000) plus the pro-rated portion of his signing bonus ($13,334)… and he’s still got 2 months to go!!
You start patting yourself on the back for hiring this guy, because you realize that you’re probably underpaying him for his sales performance this year. You’re also fairly confident that he can live up to the escalating portions of his contract because the past few months have been more in line with his career performance levels than the first half of the year were. This belief is reinforced by your knowledge that other employees have also had slow starts with the company, only to rebound late in the first year of their time with the firm.
So you look at all this, and are getting some unpaid advice from some blowhard "friends" of yours that don't know the first thing about sales but know a LOT about making their opinions heard. They tell you to cut bait with Mr. Brinks and fire him immediately because he hasn't gotten along with everyone. You start to consider their opinion, until you remember that they're blowhards and what's worse they're professional rabble-rousers that profit from the attention their loud (albeit ill-advised) opinions generate. (This action also has the unfortunate side effect of getting the neighbors to taunt Mr. Brinks whenever he tries to make a sale.) Given all this, do you take their advice, and fire your solid salesman? Of course you don't.
Here’s why this analogy works, using numbers: Milton Bradley signed a 3-year, $30M dollar deal that paid him a $4M signing bonus and will give him $5M in his first year, $9M in his second year, and $12M in his third year. Divide these numbers by 100 to get Mitch’s numbers. Bradley had a very slow start. He claims it was due in part to adjusting to Wrigley. Whether or not that’s a valid reason, we know many others including Derrek Lee, Moises Alou, Jacque Jones, and Ryan Dempster have had slow starts to their time with the Cubs. It’s also pretty clear that Bradley was the victim of some bad luck early on in the season. His BABIP is about average on the season, but look at how low it was in the first half:
Furthermore, Bradley has rebounded very well in the second half of the season. He’s hit .295 with an OBP of .416, a SLG of .467. He has been a one of the 10-best right fielders in MLB in the second half with a wOBA* of .388. He’s been worth $6.5M** this season, which is more than his $5M salary plus the $1.3M pro-rated portion of his signing bonus. In other words, he’s already been worth more in on-field production than his entire 2009 salary… and there’s over a month of baseball left in the season! In other words he’s overpaid.
What will the future hold? No one knows, but Bradley has been worth $40M over the last three years (2006-2008) combined. That’s about $13M/season, on par with what he’ll be making on average in the last 2 years of his contract. This, when combined with his bad luck in the first half and his rebound in the second make me confident he’ll be able to make good on the rest of the deal going forward.
* - wOBA is weighted on-base %. It’s easily the best single-number out there for measuring a player’s hitting results and .388 is very good. If you want to know more, ask in the comments or use google.
** - These estimated values from from www.fangraphs.com. Basically, they measure how many more runs this player produced in your lineup (or in the field) compared to your average AAA replacement player. They then convert the number of runs the player adds to your team (or costs your team) into wins, and convert those wins into $$$. The latter conversion is based on past free agent contracts. Basically, they use the free market value for talent in MLB and use that to calculate the value of a player’s performance in $$$$.