What Just Happened?-UPDATED

The Yankees just announced that Derek Jeter has signed a $12-million contract for 2014. At first glance this looks like a terrible move. Jeter’s option in 2014 was for $9.5 million so why give him an extra $2.5 million when he is coming off a season where he played in only 17 games?

Two reasons seem likely. First, it provides cost certainty.  Jeter was going to exercise that option for $9.5 million, that is clear. If he had, he would have been eligible to earn an extra $7.5 million in bonuses. You can debate the chances that Jeter will finish in the top-6 of the MVP voting or win a gold glove, but the fact is that if he did it that would be counted as money earned in 2014 and therefore the Yankees could meet their $189-million payroll goal in March, but see it blow up in November.

Second, AAV is how salaries are computed in terms of meeting the $189-million and this deal actually helps the Yankees in that department. Jeter has earned $48-million on the first three years of his deal. If he exercised the $9.5-million option, that deal would have counted as $14.375 million ($57.5-million/4) in terms of AAV.

So, the Yankees actually lower their luxury tax calculation by $2.375 million while they end up paying Jeter an extra $2.5 million. Welcome to the strange economics of MLB.

UPDATE 3:40PM Joel Sherman says I am wrong about the AAV part. I’m not really sure where his number of $10.5 million comes from, and other columnists say I am right, but I wanted to link to it anyway.