What is Fair Compensation for Theo Epstein?

When the Boston Red Sox gave their GM, Theo Epstein, permission to interview with the Chicago Cubs for the position of president of baseball operations, they were certainly aware that, should he leave, the Cubs would be required to compensate them for the loss. Similarly, when the Cubs hired Epstein, they knew he would cost them at least one player in compensation. Both teams were aware that some compensation would be involved, but the two sides clearly had extremely different positions on what the value of a top tier GM is in relation to a player. After more than three months of getting nowhere in this debate, the two sides have been forced to enlist Commissioner Bud Selig’s office to determine the price.  While the Commissioner has not yet set a timeline for his decision, we can now expect that some resolution is on the way.

The battle over the compensation to be paid for Epstein has been surprisingly under-covered by the baseball media. Both teams have made news in other ways and helped to push the debate to the back burner. There has also been a distinct lack of urgency on both sides, deflating the drama from this conflict. It is surprising, however, that this story hasn’t attracted more attention because at its heart it is about the value of the men who decide who takes the field. With the intense scrutiny that their deal-making, drafting, developing and strategizing gets, it is amazing that nobody seems to really know what a Theo Epstein, Andrew Friedman, or Brian Cashman is worth.

Not surprisingly, the Red Sox started by assigning a very high value on the man they were giving up, asking for Matt Garza in return. The Cubs, presumably lead by Epstein at this point, found this ridiculous. The Red Sox next player request was top prospect Brett Jackson, and again Epstein argued he wasn’t worth that much. You certainly can’t blame the Red Sox for trying to secure either a top of the rotation pitcher or a number one hitting prospect, but that a high a valuation seems dubious, to say the least.

In the past, there has only been one compensation payment of this kind; in 1994 the Cubs hired Andy MacPhail away from the Minnesota Twins and sent a pitching prospect, Hector Trinidad, back as compensation. At the time, Trinidadwas a 20 year old who had just completed a solid season at the high A level, with a 3.23 ERA in 175 innings and a strikeout to walk ratio of 3.55. He was ranked 30th in the Cubs farm system at the time, however, and he never reached the majors.

The Red Sox certainly do not see this single instance as a precedent and with good reason. According to Michael Lewis, the Oakland A’s management was preparing to ask for Kevin Youkilis in compensation for the Red Sox signing away star GM Billy Beane. In the 2002 off-season, Youkilis was not as highly touted by scouts as Brett Jackson currently is, but he was the organization’s AA player of the year and the Sox number 3 ranked prospect by Baseball America entering the 2003 season. As a major leaguer, Youk has been outstanding; the Red Sox current third baseman has won a gold glove at first base, been named to three all-star teams, and finished 6th in the 2009 MVP voting and 3rd in the 2008 MVP voting. He has complied 28.1 wins above replacement (fWAR) thus far in his career. This is very close to the bar that Boston would like to set for negotiations with the Cubs, though since Beane never did take the job, it remains unclear if this really would have been the price paid.

The two somewhat established prices set a wide range for the possible compensation Chicagocould pay in this case. Using the excellent research done by Victor Wang we can see what the value of these two extremes would be in dollars per WAR based on their prospect status. Hector Trinidad could be assessed as being a C prospect when he was dealt for MacPhail, giving him an expanded surplus value of $2.1M from his expected contributions while under team control. For Youkilis, the expected surplus value would be closer to that of a top 100 hitting prospect, which Wang has shown to be around $12.5M. Of course,Trinidad produced no value at all for the Twins and Youkilis was worth around $31.9M in production before he reached arbitration, illustrating the risk here for both sides.

In the current free agent market, we would expect one fWAR to cost around $4.5M, on average. Prior to his leaving the team, the Red Sox valued Theo Epstein to the tune of $3M a year or less than one win from a free agent player. The Cubs have valued him at $3.7M for the next five years, $18.5M over all. This would seem to indicate that both teams’ true valuation of Epstein is closer to the Hector Trinidad model than the Kevin Youkilis model. However, though few GM salaries are reported, both teams have definitely been willing to pay top dollar for Epstein. While players command tens of millions of dollars routinely, at $3.7M million, Theo Epstein is one the highest paid, if not the highest paid GM in the sport.

It is, therefore, impossible to quantify his value with the same model because the scale of GM salaries is entirely different than the players’ model. The GMs may be paid less, but they certainly influence team wins as much or more than any single player. In determining their value in relation to a compensations player’s value we would need to go beyond the dollar value of their contracts and put their contributions into a win-based scale. This presents a problem as the team’s performance on the field does not always reflect the value of the GM’s process.

Problematic as it may be, using the run differential based Pythagorean record, a comparison of Theo Epstein and his processors would supportBoston’s aggressive stance on his compensation. In the nine years before, Theo took over the Red Sox the team’s average Pythagorean record was 83-79, under Epstein it rose to 92-70, a difference of nine wins a year on average. If that was an accurate assessment of Theo’s impact, Matt Garza, who was worth 5 fWAR last year, would be very reasonable compensation. Put on the same scale as players, that would make Theo worth approximately $36.8M a year, well above Garza’s $22.5M estimated value.Boston may be using some variation on this type of logic in their thought process and ignoring the singular precedent of the MacPhail deal.

Even if you think that method does not give the GM an inappropriate amount of credit for a team’s record (which it certainly does), there is another issue to contend with- replacement level. Theo Epstein doesn’t deserve credit for all of the front office’s decisions, let alone the team’s record, the farm system’s value or the team’s net worth. Epstein was the head of a massive baseball operations system that made evaluations and guided his decision making process. The central reasonBostonwas comfortable letting Epstein go was his replacement, Ben Cherington, was there to step in and take over. The Red Sox ownership is confident that Cherington can do as well, if not better than Epstein in his place. Had he not been a suitable replacement, another former assistant GM under Theo Epstein, Josh Byrnes could have been brought in, or the team could have hired another of Epstein’s protégés, Jed Hoyer, away from the San Deigo Padres (as Epstein did himself shortly after landing in Chicago).

The baseball community has become extremely good at “putting a dollar sign on the muscle,” but the Theo Epstein compensation proves teams and baseball analysts are nowhere near as confident in putting a dollar value on the game’s greatest minds. Whatever decision Bud Selig’s office hands down, one side will probably feel that they have not received a fair value. The one thing Theo Epstein or Ben Cherington can’t seem to correctly value is their own services.

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  • DarrellB

    It seems to me that Ben Cherington is in the unenviable position of saying that Theo is more valuable to the Red Sox than he is.

    If Cherington is capable of taking over and doing a good job without missing a beat, it becomes hard to argue that it was a significant loss losing Theo.

  • Matt Sullivan

    Precisely. On the other end, Theo is now arguing on behalf of his new employers that he isn’t worth much. Both sides are making the case for their own ineffectual-ness. The commissioner’s office needs to make a more formalized system of compensation and avoid these ridiculous circumstances in the future.

  • Arendell

    What many have failed to say and see in this is the Ricketts lack of backing up there word with actions. The agreement was for a player of high value. The offer of a few mill or a nice A ball player dose not equal that. Any player out side there top 8 to 12 prospects dose not cut what this man is doing for the fans and team. There is hope again in Chicago.
    Yes, you will have a solid baseball team that can and will make a few runs at being #1. So what would it be worth for that. As far as your low life owner goes. NOT much!! He thinks only a maybe,if,a how about 1 or 2 mill at best.
    In Boston we know you make that if ya just get a team that wins more than they lose. We like seeing our team on top of it all and if it cost us a great young talent who would be around for 5 to 7 years so what. He can always come back here when he is a free agent. Nothing wrong with that.
    NO all teams MUST and do understand when dealing with the CUBS’ get every thing down and on paper befor you even think you have a deal. As the Cubs do not back up there given word.

    • Kevin

      Theo is not Babe Ruth, let’s not get too greedy!
      Let’s show the Cubs we can and will win without Theo.