As the off season draws on, it’s becoming increasingly clear that the Yankees are operating under self-imposed fiscal restraints. As a result, examining the team’s 2014 commitments has become a required part of analyzing Brian Cashman’s blueprint for this winter. However, there are several variables that are hard to quantify, not the least of which is Derek Jeter’s intentions for next season.
When the Yankees signed Jeter to a four year deal, the player option for 2014 was looked upon as a formality. Considering the aging short stop was already in an apparent decline, it seemed unlikely that he would be in a position to exercise the buyout. Following a resurgent season in which Jeter won the silver slugger, that eventuality has now become a distinct possibility.
If Derek Jeter has a phenomenal season in 2013 and hits all of his performance incentives, his 2014 salary would jump from $9.5 million to $17 million, increasing his AAV all the way to $23 million. Although that would auger well for 2013, it could have dire consequences for the team’s budget in 2014. This ironic circumstance illustrates the delicate balance the Yankees face in shifting from Mission-28 to Mission-$189 million.
Although a career year from Jeter seems like an ironic worst case scenario for the 2014 budget, another event could have an even more negative impact: Jeter deciding to opt out. By virtue of his silver slugger award in 2012, the short stop’s salary for 2014 is currently $9.5 million. However, he also has a $3 million buyout, effectively making his player option worth only $6.5 million. Assuming he doesn’t hit any more contractual bonuses, Jeter could be put in a position where opting out makes the most sense (and cents).
Derek Jeter’s Potential AAV in 2014 ($mn)
|Current Contract||$ 15.00||$16.00||$17.00||$ 8.00||$14.00|
|If Jeter Takes Buyout||$ 15.00||$16.00||$17.00||$ 3.00||$17.00|
|If Jeter Exercises (Current Salary)||$ 15.00||$16.00||$17.00||$ 9.50||$15.50|
|If Jeter Exercises (Max Salary)||$ 15.00||$15.00||$15.00||$17.00||$23.00|
Note: Jeter has a $3 million buyout for 2014. He has already earned a $1.5 million bonus payable in 2014. If Jeter takes buyout, calculated AAV would be used to determine luxury tax underpayment from 2011-2013.
Source: salaries from Cots Contracts
At first glance, Jeter’s decision to decline his 2014 option seems beneficial to the Yankees because it would remove $15.5 million in annual average value from the team’s payroll calculation. Unfortunately, that obligation doesn’t just go away. Because Jeter’s option year is considered guaranteed by Article XXIII; Part E of the new CBA, his AAV has been calculated by adding all of the base salaries ($56 million) for each season and dividing by the number of guaranteed years (4). Should he take the $3 million buyout, however, the final value of his contract would have turned out to have been $51 million over only three years, making the AAV a much higher $17 million. The Yankees’ resultant $9 million underpayment of the luxury tax would then be applied to the 2014 payroll.
AAV Penalty if Derek Jeter Opts Out in 2014; Breakeven Analysis ($mn)
|If Jeter Opts Out?||$/Year||Years||Total||Total AAV|
|Underpayment||$ 3.00||3||$ 9.00|
|New 2014 Salary = Current AAV||$ 6.50||1||$ 6.50||$ 15.50|
|New 2014 Salary = MAX AAV||$ 14.00||1||$14.00||$ 23.00|
|Potential Extension||$ 11.00||2||$22.00||$ 15.50|
Note: Potential extension considered above is two-years, $22 million transacted after a buyout.
If Jeter opts out, that probably means he had a good season in 2013, and, therefore, would command a salary in excess of $6.5 million on the open market. In other words, there would be pressure on the Yankees to retain him. Under such circumstances, the Yankees would actually be better off signing a long-term deal, which would allow them to spread out the $9 million in back taxes over the length of a new contract, because that penalty combined with a likely salary for 2014 could single-handedly blow up the budget. However, by waiting until after 2013, the Yankees might not be able to defray the cost. After all, a modest two-year extension at $22 million, plus the $ 9 million penalty, would basically be breakeven at the “best case” scenario that would likely induce Jeter to accept such a sum.
Instead of waiting until after next season to offer Jeter an extension, the Yankees could simply do it now. Granted, by extending Jeter past age-40, the Yankees would be taking on significant risk, but, if their priority is getting below the luxury tax threshold in 2014, there may be no other choice. By being proactive, the Yankees would prevent Jeter’s high 2013 salary and low, unpaid 2014 salary from combining to inflate the luxury tax penalty owed on the contract. Tearing up the current deal after two years would mean Jeter was paid $31 million, or an AAV of $15.5 million, which would only result in a combined $3 million underpayment that the Yankees could still spread out over the new deal.
Breakdown of a Potential Derek Jeter Extension ($mn)
|Salaries||$ 17.00||$ 15.00||$12.00||$ 8.00||$13.00|
|Underpayment Penalty||$ 0.75||$ 0.75||$ 0.75||$ 0.75||$ 0.75|
|Contract Comp||Old Deal||New Deal|
|Guaranteed||$ 26.50||$ 52.00|
|Max||$ 34.00||$ 61.00|
|Guaranteed/Year||$ 13.25||$ 13.00|
|Max/Year||$ 17.00||$ 15.25|
Note: Underpayment penalty is difference between AAV allocated to 2011-2012 and the amount actually paid.
Would Jeter accept a new contract that guarantees him two more years and pushed his current player option out to 2016 (with the same incentives)? Considering his recent injury, even Jeter, who has never accepted his mortality, would have to be enticed by the security of an extension. Meanwhile, for the Yankees, such a deal would give them cost certainty through the crucial 2015 season (at an AAV that is significantly less in 2014) and push off the uncertainty of the option year until 2016, when the team will not be as constrained by budgetary considerations.
If the Yankees are determined to get below the luxury tax threshold in 2014, every penny counts. Extending Jeter would not only help achieve that goal, but also remove the possibility of another contentious contract negotiation with the iconic short stop. The Yankees will already be fighting a public relations battle over the budget next winter, so another showdown with Jeter would be like entering into a two-front war. The alternative for the Yankees is to hope Jeter struggles in 2013, but that would be “cutting off your nose to spite your face”. Of course, that’s exactly what the concept of budget seems like in the first place.