From the start of the offseason, the Red Sox remained consistent in their view that they were unlikely to spend heavily on a free-agent bat such as Edwin Encarnacion. Still, the true dimensions of what the team meant with such a claim went beyond expectations as the team sat on the sidelines while competitors struck relatively modest deals with Carlos Beltran (Astros, one-year, $16 million), Matt Holliday (Yankees, one-year, $13 million), and most notably, Encarnacion (Indians, three years, $60 million).
The Indians pounced on an opportunity to grab Encarnacion at a rate that suggested a discount relative to the market of just a couple of years ago, signing him for fewer years (three instead of four) and a lower average annual value ($20 million instead of $22.5 million) than the Red Sox invested in Hanley Ramirez after the 2014 season. Players of Encarnacion’s stature – including a star-caliber average of 39 homers and 4.2 Wins Above Replacement per year – are rarely available in free agency for the terms paid by Cleveland.
For a Red Sox team looking to move on from its lineup linchpin of the last 14 seasons, Encarnacion represented an attractive target – and one whose cost fell below expectations. Still, the Red Sox never really engaged his agent, Paul Kinzer, on talks. Why not?
Two basic reasons:
1. Encarnacion will cost a first-round pick. For a Red Sox team that just cleared its upper-levels pantry, that should matter. Conservatively, based on the performance of picks in the late first round relative to what such a player would cost over the life of his first six years of big league control, teams would peg such a pick as being worth a minimum of $5 million – with the possibility that the net value of that pick represents a lottery ticket that could exceed that mark by tens of millions of dollars. Yet beyond that financial valuation, there is now an absolute need for the Red Sox to build up their overall prospect base to avoid the emergence of potentially crushing holes that cannot be filled due to either a lack of depth options or the lack of prospect assets to trade for fixes.
2. The draft pick, however, appears secondary to the team’s desire to remain under the $195 million luxury tax threshold for 2017. Even working on the assumption that the Sox would have taken on less in-season payroll through trades by signing Encarnacion, he likely would have pushed them at least $10 million beyond that threshold – with a 50 percent penalty for money spent beyond it.
That’s well and good … but should the Red Sox feel constrained by the luxury tax threshold? Given the penalties attached to exceeding the threshold in the new Collective Bargaining Agreement, should the Red Sox have placed a premium on getting under the mark for the coming year? To answer that question, it’s worth examining the specifics of the penalties:
1. Money: The Red Sox have spent past the luxury tax threshold in each of the past two years. As a third-time offender, they’d have to pay a penalty of 40-50 percent on any overage beyond $195 million in 2017. That would mean Encarnacion would result in a tax, conservatively, of an additional $5 million or so in the coming year.
2. Money, part 2 – the reset: Beyond those initial savings, if the Red Sox get below the luxury threshold this year, they’ll reset their tax rates, allowing them to pay at a rate of 20 percent the next time they go over the threshold and 30 percent when they go over for a second straight time. With a roster that will see few big contracts departing in the next two seasons, the team – thanks to arbitration boosts for players like Mookie Betts (starting in 2018), Xander Bogaerts (second-time arbitration eligible in 2018), and Jackie Bradley Jr. (second-time arbitration eligible in 2018), along with Chris Sale’s luxury tax figure increasing significantly in the option years of his contract, the team will find it virtually impossible to stay under the luxury tax threshold in either 2018 or 2019.
There’s a chance that the team could sneak back under the threshold in 2019 if either David Price opts out of his seven-year, $217 million deal or if Ramirez’s fifth year doesn’t vest, but there’s a near certainty that the team will be well over the threshold in 2018 (a $20 million overage wouldn’t be shocking) and a good chance that the team will likewise fly over the threshold in 2019 – especially if it tries to take advantage of the free-agent markets of the coming two winters.
As an exercise, say that the team will be $20 million over the threshold in both 2018 and 2019. By resetting its luxury tax now, it saves $6 million in taxes in 2018 (paying at a 20 percent rather than 50 percent rate) and $4 million in taxes in 2019 (paying at a 30 percent rather than 50 percent rate).
Effectively, then, Encarnacion would have required at least roughly $15 million in additional taxes spent over the next three years – and realistically, more than that, given that he’d also have elevated the payroll. In some ways, then, the cost of Encarnacion to the Sox might have been more like three years and $75 million (or more) – before factoring in the value of the lost draft pick.
3. Amateur talent: The new Collective Bargaining Agreement creates draft-pick and international signing penalties, starting with the free-agent class of 2017-18, for teams that exceed the luxury tax threshold. However, those penalties — the forfeiture of a team’s second and fifth picks if they a) exceeded the luxury tax threshold and b) signed a player who received a qualifying offer, the loss of $1 million in international bonus pool money — only apply to teams that sign a player who receives a qualifying offer from another team. If they sign a player who a) received a qualifying offer but b) they do not go beyond the luxury tax threshold, those penalties diminish to being “just” the team’s second-highest pick and $500,000 in international bonus pool money.
The Red Sox are almost certain to spend beyond the luxury tax threshold in 2018 thanks to arbitration raises, so if they want to dive into the 2018-19 free-agent pool that could feature the likes of Manny Machado, Bryce Harper, Josh Donaldson, Clayton Kershaw, Price, Zach Britton, and others, they’ll likely have to incur the fullest extent of the amateur penalties.
By “resetting” this year, however, the team would be able to sign free agents in the solid but less-impressive 2017-18 free-agent classes while incurring the more modest penalties on amateur talent acquisition. For instance, if the team wants to make a run at Eric Hosmer – assuming he spends all year with the Royals and receives a qualifying offer from them – or Rangers catcher Jonathan Lucroy, their ability to land amateur talent would be less severely impacted.
That said, if the team doesn’t sign any free agents who receive the qualifying offer next winter, then there’s no real benefit in terms of amateur talent that the Sox will glean from getting below the threshold this year.
To a small-market team like the Indians, Encarnacion represented a rare opportunity to acquire an established middle-of-the-order bat at a price they could afford. The big-market Red Sox, on the other hand, had to view the cost of Encarnacion through different terms – primarily financial, and secondarily in potential future amateur talent acquisitions – leading them to choose another path for the next three years.
In this area, it appears that the Sox wanted to retain flexibility to determine whether players like Sam Travis and Rafael Devers can start to repopulate the roster with young, talented, low-cost options who allow them to chase the free agent big fish of future classes. For now, at least in the team’s eyes, that meant passing on Encarnacion, even at a cost that fell short of what anyone anticipated at the start of the offseason.
Whether that proves wisdom or folly will take years to determine, depending upon: The relative success of the Red Sox and Indians this year, how aggressively the Sox pursue free agents in the next two winters, the eventual performance of the Sox’ 2017 first-round pick, and the big league timetables of players like Travis and Devers. Nonetheless, the resolution of those variables will all circle back to an unexpected starting point: The Indians felt Encarnacion represented an unusually affordable commodity, while the Red Sox deemed him too dear an asset.