Introducing Expected Contract Value Part 3: Contract Comparison

ryan kalil

In order to expand upon Part 1 and Part 2, and demonstrate how Expected Contract Value can be helpful in comparing contracts, let’s take a look at an article from overthecap.com in June 2014 in which Jason compared the recent large contracts of centers Maurkice Pouncey, Alex Mack, and Ryan Kalil. This article is the archetype of the insightful subjective analysis we identified in Part 1 that could be enhanced by Expected Contract Value.

Jason first correctly points out that the face values of contracts can be misleading, and that they should not be determinative in the comparison at hand. He then goes on to refer to “dead money protections” for the various deals. This is a concept addressed by Expected Contract Value through the inputs Save:Cap and Save:Avg. Jason goes on to refer to Kalil’s three-year payout as “virtually guaranteed.” While that may be true, Expected Contract Value allows us to assign a numerical value to the descriptive term “virtually.”

Throughout the article, the reader gets a sense of Jason’s thought process as he analyzes all of the various characteristics of the three contracts. One can imagine that a team executive would go through a very similar thought process when initially negotiating a contract, and then again each year as the player and his contract are evaluated. From our perspective, the key quote comes in the 5th paragraph:

“Between Pouncey and Kalil the results are a bit muddled.”

Exactly! Comparing contracts is very difficult, as there are many variables that must be simultaneously considered without giving a single variable disproportionate importance. The human mind is not particularly well suited to performing this task, as there will be a tendency to focus on certain variables to the detriment of others. A formula, on the other hand, is perfectly suited for weighing numerous variables with the appropriate degree of importance given to each. Let’s take a look at the Expected Contract Value outputs for each of the three contracts:

Ryan Kalil

Face Value: $49.116 million

Guaranteed: $19 million

Three-Year Payout: $30,750,000

Year

Salary

Expected Outcome

Expected Value

Adjustment

2011

99.9%

$19,000,000

2012

$1,750,000

99.4%

$1,739,500

2013

$10,000,000

90.4%

$9,040,000

2014

$5,000,000

83.9%

$4,195,000

2015

$5,616,000

62.5%

$3,510,000

2016

$7,750,000

27.0%

$2,092,500

Subtotal

$20,577,000

$19,000,000

Total ECV

$39,577,000

Expected APY

$6,596,167

Age at Conclusion

32

Alex Mack

Face Value: $42 million

Guaranteed: $18 million

Three-Year Payout: $26 million

Year

Salary

Expected Outcome

Expected Value

Adjustment

2014

99.2%

$10,000,000

2015

95.6%

$8,000,000

2016

$8,000,000

64.0%

$5,120,000

2017

$8,000,000

40.5%

$3,240,000

2018

$8,000,000

20.6%

$1,648,000

Subtotal

$10,008,000

$18,000,000

Total ECV

$28,008,000

Expected APY

$5,601,600

Age at Conclusion

34

Maurkice Pouncey

Face Value: $47 million

Guaranteed: $13 million

Three-Year Payout: $26,500,000

Year

Salary

Expected Outcome

Expected Value

Adjustment

2014

$1,000,000

99.8%

$998,000

$13,000,000

2015

$5,500,000

97.1%

$5,340,500

2016

$7,000,000

88.4%

$6,188,000

2017

$7,500,000

70.9%

$5,317,500

2018

$7,000,000

58.3%

$4,081,000

2019

$7,000,000

33.5%

$2,345,000

Subtotal

$24,270,000

$13,000,000

Total ECV

$37,270,000

Expected APY

$6,211,666

Age at Conclusion

31

As you can see, Mack’s contract is inferior from an Expected Contract Value standpoint in comparison to Pouncey’s contract and Kalil’s contract. Despite having more guaranteed money and an almost identical three-year payout as Pouncey, Mack can expect to earn $9 million less over the course of his contract than Pouncey can.

Despite having $6 million more guaranteed money and $4 million more three-year payout, Kalil can only expect to earn about $2.3 million more than Pouncey over the course of their respective contracts. One of the major reasons for this was that Pouncey saw much more money in year two of his contract than Kalil, a year in which Expected Contract Value places a very high likelihood that both players will remain under contract. Pouncey’s higher salaries than Kalil in year four and year five also outweigh the lower likelihood that he has of remaining under contract for those seasons.

While Mack trails by a considerable margin in Expected Contract Value, his deficit in Expected APY is not as significant due to the fact that his contract only spans five seasons, rather than six as in the case of Pouncy and Kalil. If Mack was younger than the other two, and would therefore have a greater likelihood of signing another significant contract, sacrificing Expected Contract Value in favor of Expected APY would arguably be justifiable. However, Mack will actually be older than Pouncey or Kalil at the conclusion of each of their respective contracts, and at age 34 he will be unlikely to sign a large contract. Conversely, Pouncey has a colorable argument that his contract is superior to Kalil’s, despite trailing in both Expected Contract Value and Expected APY, as he can plausibly expect to sign a relatively sizeable contract at the age of 31.

The results of these analyses aren’t particularly different than when Jason conducted it, but the useful thing about Expected Contract Value is that it allows us to place a numerical value on the conclusions that we might otherwise draw from subjective analysis. We are also able to ensure that we have placed the appropriate amount of importance on each variable that we may consider important in the analysis. Furthermore, analysis such as this can be instantaneously performed on a mass scale with spreadsheets.

In Part 4, we will demonstrate how Expected Contract Value can be extended one more step to aid teams in budgeting their salary cap payrolls. In Part 5, we will address feedback received throughout the week.

Expected Contract Value was created by Bryce Johnston and Nicholas Barton.

Image courtesy of panthers.com

Bryce Johnston
Georgetown Law Class of 2014
Email Bryce: bryce.l.johnston@gmail.com
Follow Bryce on Twitter: @eaglessalarycap

Nicholas Barton
Georgetown University Class of 2017
Email Nick: njb50@georgetown.edu

Follow GSABR on Twitter: @GtownSports
Like GSABR on Facebook

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