In late 2000, the Colorado Rockies coveted Mike Hampton. They were ready to take the team to the next level. They tired of watching the LA Dodgers dominate the division. The telecom boom was the best thing that happened to the Colorado economy since the gold rushes of the 1800s. With a baseball dynasty, the Colorado Rockies would tap into this new found wealth.
However, Mike Hampton was not a well-kept secret. After all, he had just been named MVP of the 2000 National League Championship Series. Bottom line—the Rockies were among many who wanted Mike Hampton to wear their uniform in 2001. Yankees? Mets? Cubs? Red Sox? Angels? Phillies? No question most were sniffing around.
Imagine if you approached Hampton’s agent with the following idea? “We are proposing a success-based contract. For every win, we will pay you $3M. But for every loss, we will deduct $1M. If you average just five more wins than losses, you’ll make $10M a year. We will even guarantee a minimum of $5M in each of the first two years.”
Does that sound reasonable? After all, $10M is a ton of money in any circumstance. Moreover, Hampton’s job includes several months off a year and, during the work week, he is expected to work only 1 or 2 days. And he can take side jobs—commercials, autograph signings. And if he has another 22-4 year, he will make $36M in that year alone!!!
My guess is Hampton’s agent would not have found such an offer worthy of a response. Nope. The agent knew that others would offer more. Hampton was a uniquely valuable asset. He was entering the prime of his career. His impact on attendance, TV ratings, merchandise, etc. would be in the millions. Why would he consider a success-based contract that, if things go astray, could result in him receiving only $10M? The agent would set expectations early. Only a contract with many guaranteed years would be considered. And if the aggregate guarantee wasn’t in the nine figures, no need to waste time in the bidding war.
How much is Hampton worth? Is $90M over six years a good deal? $100M over seven? $122M over eight? How much more valuable will the Colorado Rockies franchise be with Hampton? If the value goes up by $200M, the Rockies owners will be glad to have spent the $122M. What are the alternatives? If we spent $50M on a decent pitcher and another $50M on a solid shortstop, perhaps we would be just as valuable.
Excel spreadsheets were hard at work. Not just in Colorado, but in New York, Chicago, and plenty of other major league cities. The math they did undoubtedly was about making money for the stakeholders. It did NOT factor in pride, ego, community benefits, etc. The spreadsheets were aimed at comparing the value that would be gained if Hampton was signed as compared to other alternative ways of operating the baseball team.
The math factored in the possibility of injury. The equations used baseball’s decades of statistics on how to project future performance based on past results. Assumptions were made. NPV’s were tabulated. Negotiators were given parameters. Some teams decided not to bid. Others dropped out when the bids hit $90M. Others at $100M. At the end, the Rockies were willing to offer the most—and Mike Hampton donned the purple and black.
Did emotion factor into the decision? No question it did. Baseball owners are driven by the pride of winning. Maybe this influenced certain assumptions. Maybe their motive to make as much money as possible for their stakeholders was somewhat compromised. At the end of the day, the decision-makers are human, not computers. However, this is not unique to baseball.
Tomorrow, let’s ponder a related question “How much is “The Best Operating CEO Jack Welch Has Ever Seen” Worth?”
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