Free Agent Contracts Ruin People's Perceptions
The same arguments over and over
It feels like a bit of deja vu.
This time last year people were freaking out about the big salary that Eddie Nketiah was getting himself as he was able to negotiate as a free agent. This year it is Reiss Nelson and his reported contract (supposedly in the 100k a week range but with very little detail about how much is bonuses vs base) is getting people wondering if that is too much.
How much a player makes is obviously important to them. It is important to the team, but this is also roughly half of the equation for what a player costs a team with the cost of acquisition making up in many instances a hefty share.
I believe that money is fungible. From a team’s perspective, it all essentially goes down as a cost to have the player on the team. This glosses over things like the timing of transfer payments, agent fees, or many other items and oversimplifies things but I think as a framework it is accurate enough to help think through things.
To help illustrate things I did some quick and dirty estimations of the per-season costs for the players on Arsenal’s roster. The data on salary is not good and I know this but hopefully, it is not good in similar directions as to not totally screw things up and the transfer fees for players are broken down on a fee per year of the initial contract length basis.
As you can see, for the vast majority of players the transfer fee makes up roughly 40-60% of the total cost to have the player on the team per season. Players that have been with the team longer than the initial contract or came in on a free deal or through the academy end up having a significantly lower cost to the team.
If we go back the Nelson example and tweak it slightly, so he has 2 years left on his deal at 40k a week and Arsenal were looking to sell him, what fee would we expect?
Let’s say it was a 15m fee and he get’s a bump to 60k a week at his new club on a five-year deal. That team is committing 6.7 million to him in total cost per season. If instead, he runs his contract down to where he is a free agent (like he did) and instead a team pays him 100k a week with 0 transfer fee, they are only committing 5.2 million to him. He is getting paid more but costs less, and I think this is probably a pretty realistic scenario for what Nelson could have seen in the market and it is a big reason why players SHOULD start looking to use free agency more, to capture a larger share of the money that clubs commit towards them.
But what about selling him, isn’t that harder? Let’s think through that situation too.
If he is not worth his salary with his performance, selling him is going to be hard regardless of anything. In the basic sense, a player’s transfer value is the surplus value that they are worth in the future above what they are being paid for the years ahead of them.
If you expect a player to be worth 50 million in value in the coming seasons you would gladly pay that player 100k a week plus a 20 million transfer fee and come out feeling good.
If you expect a player to be worth 25 million in value over the coming seasons you would perhaps reluctantly pay 100k a week but also demand that you get them on a free transfer and feel the same, with the total cost coming to roughly the same in this oversimplified scenario.
So, in the end it still comes down to the player’s performance and the expectation of what he can provide to a future team. If a player is playing well selling is easier, if they are not, regardless of the salary that becomes harder (and it is really more you take a loss on transfer fee/subsidize future wages).
But doesn’t that screw up the wage structure?
I think this is something that it could end up being a potential issue. If a player is lower in the squad pecking order but is being paid more than a more pivotal player that can cause strain, even if from the team’s perspective the more pivotal player is costing more.
A player’s agent could help explain the situation more and this probably pushes players to be more likely to want to run down contracts to capture more of the total cost as wages.
Ultimately the team needs to work hard to ensure that they have a good balance between contract length and wage that reflects what they expect a player to produce compared to market value. It is always a tough balance and this isn’t unique to a player who is on a free transfer.
Good writeup, Scott. Was thinking about this during the recent AV Podcast. The way I think about this is the opportunity cost. If we needed to replace Nelson with a winger who was 1) good enough to play in our squad, 2) Arteta trusted to play 750+ min next season, and 3) was English/homegrown.....what would that player cost?
To me, we’d play a Trossard-type number in terms of transfer fee and wages. Instead, it’s much cheaper to retain Nelson. And he’s an Academy kid (like Eddie) who is earning a good wage, which helps sell our Academy to young, highly touted players. “Join Arsenal, if you are good enough, you will get minutes and we will pay you.”
This seems like a smart piece of business.
Great job, Scott. You started at the end examining a question I've always wondered about...why don't more players run out their contracts so that they can receive in compensation or sign-on bonus the full value of their expected contribution?
For instance, we demonstrated 4 years ago that Pepe was worth ~£110m to us for 5 years, and so we paid £72m to Nice and ~£38m to Pepe in salary (plus probably a sign-on bonus...the precise numbers aren't important for my question). The reason we paid Nice all that money was bc Pepe still had time on his contract. However, if his contract had just ended, then Nice gets £0, and Pepe should capture the entire £110m value instead of the much smaller amount. As you say, who we pay is fungible, so it shouldn't matter to us if we pay Nice £72m or pay that £72m to Pepe as a signing bonus.
So...why don't players like Pepe run out their contracts more often? Arsenal undoubtedly offered him more in wages than he was receiving from Nice, but certainly not enough to make up for the £72m that Nice received to give up his services. And I imagine he was already making more than enough to live comfortably, so it's not as though he was desperate for money then/there.
And I don't think it is entirely explained by risk aversion...ie, that someone like Pepe takes the guaranteed increase in compensation (by leaving immediately) instead of waiting to run out their contract to take the guaranteed much much greater increase in compensation. Indeed, if that were the case, then you'd expect to see some sort of insurance market (there are a few famous cases, such as Neuer's hands, but my impression is those are the minority).
Another story that I don't buy is that somebody like Pepe is willing to forego a much larger payday in order to start playing with a club like Arsenal. That might be a little bit, but I'm skeptical it's significant.
You likely have much better insights, but what are the compensation structures for agents? Don't players' agents get a lot more for transfer fees than for wages? And they're presumably pretty smart, persuasive individuals who can convince their athletes that a certain move is in their best interest, whereas it's really only in the best interest of the agent.
Any other explanations? Or maybe my premise is wrong? Anyway, love what you guys are doing!