So here's a brief thought experiment. Pretend you're the general manager of a major league baseball team. And pretend one of your star players is still productive but past his peak. Let's say he reaches free agency. And let's say you have a secret crystal ball in your desk drawer that reveals that over the next three years, this player will decline. In fact, the crystal ball tells you the precise WARs that he will post each year: 5.0, 2.5, and 0.5. Let's say that you do not expect to have any clear-cut sub-market options at his position over the next three years. And let's say the fair market value of 1 WAR is about $5 million. And let's say we're living in an inflation-less universe.
Let's say the player's agent calls you up one day and tells you that his client is demanding a three-year deal worth $35 million. Should you give it to him?
For the benefit of those of you who aren't big on rhetorical questions, the answer is yes, you should. The player will produce 8.0 WAR over his contract. Those 8.0 WAR will be worth $40 million. If you have no choice but to fill the position through free agency, then $35 million is a good deal.
But what about the final year of his contract? Won't you be paying through the nose for a player who isn't very good anymore? Well, first of all, you have no way of knowing that right now. The only things you know about this player's contract demand are the total salary and the average salary, not the salary for each year. For all you know, the deal could be structured so that it pays $24 in the first year, $10 in the second, and $1 in the third.
But why would you even care about how it's structured anyway? If, instead of structuring it as suggested above, you just pay this guy $11.67 million in each of the three years, then you can just take the money you saved in the first year, stick it in a two-year CD at your local Citizens Bank, wait for it to mature, and finally use it for your "overpayment" in the third year. What difference would it make? (And mind you, that's in an inflation-free world. On Planet Earth, we have inflation most of the time, perhaps even more so in MLB than in normal sectors of the economy.)
Now, obviously, this doesn't mean that the final year's salary doesn't matter. Of course it matters. If the player demands a three-year deal with the final year's salary pushing its total value to $45 million, then you shouldn't give it to him. But that isn't because he would be drastically overpaid in the last year of his deal. It's because he would be overpaid in total.
Lately, I've been seeing way too many people make the following bad argument for why Jimmy Rollins shouldn't be re-signed: (1) Jimmy's old and declining. (2) He'll probably get a four-year deal somewhere, worth an average of $X million per year. (3) By the time he gets to his fourth year, he'll probably be shot. (4) So whoever signs him will really regret it when they find themselves paying him $X in Year Four. (5) Therefore, the Phillies should abandon the idea of re-signing Rollins and instead give a shorter contract to Rafael Furcal or Alex Gonzalez.
That argument has a lot of problems even apart from the one I'm focusing on. For one thing, while Jimmy's certainly declining (aren't we all), he isn't that old. For another, just because he'll be old doesn't mean he'll be shot in Year Four of a hypothetical deal. "Shot" is fine as a worst-case scenario, but you're not supposed to conduct contract negotiations based solely on worst-case scenarios. You do it based on expected values, and whatever you think a reasonable expected value of a Rollins Year Four might be, I'm pretty confident it isn't zero.
But the main problem with the argument is the one already articulated above. I completely agree that Rollins probably won't be worth $15 million (or whatever the average salary in his new contract will be) in the year 2015 - at least not if 1 WAR still costs only $5 million then, which it very well may not. But if you're specifically pointing to that issue as a key basis for your argument, then you're not evaluating the situation properly. The value of the final year is only relevant insofar as it impacts the value of all the years put together.
As a final aside, I would observe that when Cliff Lee signed a contract one year ago that will pay him $25 million in 2015 when he's 36 going on 37, nobody complained about it, even though there's a pretty fair chance that he'll be more overpaid that year than Rollins will be. That's because everyone understands intuitively - at least when they want to understand it - that just because a contract overpays you at the end doesn't necessarily mean it's a bad contract. Everyone knows that contracts that underpay players at the beginning and overpay players at the end are the norm, not the exception, and therefore, over the long run, it all evens out. But too many people can't seem to apply that intuition to the present Rollins situation, which is very frustrating. It sure looks to me like there are a good number of folks out there in media-land who began their thought processes by deciding, for whatever reason, that they were going to be on Team "Let Jimmy Walk" and are now straining post hoc for rationales to justify that stance.