MLB Contract Incentives and the Incoherency of the Current Regime

Incentives in MLB contracts are likely a familiar concept for many followers of the sport, but they are rarely examined in much detail. In a broad sense, an incentive is a conditional term in an MLB contract that has two components:

1. A player or team acquires compensation or rights beyond those guaranteed in the contract upon the occurrence of a defined event; and
2. The triggering event is a contingency related to the player.

Incentives appear most often in the form of 'performance bonuses', which provide for additional potential earnings based on player usage during the contract (eg. how many appearances, at bats, or innings pitched a player has), and 'award bonuses', which provide for additional potential earnings if the player wins certain awards during the contract. However, these are not the only form of incentives, as many contracts contain incentives related to other contingencies, including player health and availability, whether a player is traded, and what position or role a player is used in. As discussed below, there are restrictions on what can be used as the contingency for an incentive.

Some incentives also have a more complex reward structure than a simple cash payment. For example, incentives may guarantee a player option, increase the value of a buy-out for a team option, or escalate salaries for all subsequent years in a contract.

The Rules

The world of incentives in MLB contracts is governed by a relatively limited set of regulations found in the Collective Bargaining Agreement and the Major League Rules. These regulations are aimed at establishing what type of achievements during a player's contract can be used as a basis for an incentive.

The main rule is Major League Rule 3(b)(5), which states:

No contract shall be approved if it contains a bonus for playing, pitching or batting skill or if it provides for the payment of a bonus contingent on the standing of the signing Club at the end of the championship season.

This rule is set in the context of Major League Rule 3(b)(3):

Except with the written approval of the Commissioner, no Major or Minor League Club shall enter into a contract with a player that differs from the forms described by this Rule 3(b). All contracts shall be in duplicate and the player shall retain a counterpart original. All contracts must be filed with the Commissioner or the Commissioner's designee for approval.

As such, the key aspects of the incentive regime are that a bonus cannot be paid based on a "playing, pitching, or batting skill" or on the standing of the signing club at the end of a season, unless this bonus is explicitly approved by the Commissioner. These terms are not defined in the Major League Rules or CBA, leaving a relatively vague regulatory scheme for how incentives can be used.

A Brief History of Contract Incentives

The history of incentives in MLB contracts is a somewhat unexplored area relative to other historical aspects of the business of baseball, but it provides important context for the current rules and incentive system. This brief history illustrates two main points. First, the rules regarding impermissible bonuses have remained remarkably unchanged over the last century. Second, there has been a consistent, but not overwhelming, tension between teams and the league regarding attempts to circumvent the prohibitions.

1920's: The Beginning of the Incentive System

The current regime appears to have started in 1924, when the National League reportedly approved a new rule banning performance bonuses based on a "playing, pitching or batting skill". Since its inception, the predominant reasoning for banning these forms of bonuses has been that a team has the ability to determine whether a player reaches a bonus in a contract, for example by sitting a player once they neared a particular landmark that would award them a bonus.

Research of player contracts from around this time by Michael Haupert found that bonus clauses were uncommon, with less than four percent of surveyed player contracts having bonus clauses in 1924, and just over 11 percent in 1934 and 1944.

1970's: Incentives Under Fire

The 1970's marked a significant period of focus on bonuses in contracts. Then-Commissioner Bowie Kuhn, who was Commissioner from 1969 to 1984, appeared to have a particular interest in how bonuses were being used, leading to an increase in enforcement action regarding these clauses. As an early indication of his focus on bonuses, Kuhn fined the Cleveland Indians in 1971 for violating the bonus rules in player contracts. However, the issue came to a head starting in 1976, when the New York Mets sought the Commissioner's approval for a contract with Tom Seaver with an unusual bonus structure. The Seaver contract contained a clause that would pay Seaver an additional $5,000 for each start he would be scheduled to make, regardless of whether Seaver actually made this start, after Seaver reached 19 wins on the season. While the contract was ultimately approved by the Commissioner, coverage of the contract at the time showed tensions regarding the bonus rules. For example, in a June 1976 article by the Associated Press, Mets General Manager Joe McDonald was quoted as saying that the league had initially taken the view that the bonus clause violated the prohibition on skill-based bonuses, and gave his own view as follows:

"I think we're out of that era. And if a player doesn't think the general manager will honor it, he shouldn't enter into a performance contract. But if a player wants it, and I want it, and he trusts me, what's wrong with that."

MLB owners were considering amending the bonus rules around this same time. A 1978 article by Red Smith reported that the owners had approved a rule allowing for new forms of bonuses in August 1976, but that it had subsequently been suspended by their Executive Council and then ultimately rejected at the Winter Meetings in December 1976.

The issue reappeared in 1978, when Mets pitcher Jon Matlack was traded to the Texas Rangers. In connection with the trade, the Rangers learned that the Mets had signed an agreement with Matlack outside of his approved contract, which provided Matlack with bonuses based on, amongst other things, Matlack's ERA and whether the Mets won a Pennant or the Division Championship. The Rangers brought this agreement to the Commissioner on the basis that it was an impermissible form of bonus. As reported in Red Smith's 1978 article, Kuhn's response was to impose a temporary moratorium on enforcement of the rules regarding impermissible bonuses, during which all teams with impermissible bonus agreements were expected to come forward and disclose any unapproved agreements they had entered into. Kuhn's reported reasoning was that, in his view, these undisclosed side agreements were very common, and that there was confusion in the league regarding what constituted an impermissible bonus.

2000's: Incentives and 'Marketing Agreements'

The next main wave of attention on the bonus rules came in the late 2000's/early 2010's, when notable players obtained bonus structures in marketing agreements that were separate from their player contracts. These marketing agreements were seemingly structured to circumvent the prohibition on bonuses based on batting skills in player contracts. The two main focal points for this issue were the 2007 contract between Alex Rodriguez and the New York Yankees, and the 2011 contract between Albert Pujols and the Los Angeles Angels. Rodriguez's marketing agreement provided that he could receive $6 million each time he achieved a historical milestone as designated by the Yankees — reportedly surpassing the career home run totals of Willie Mays, Babe Ruth, Hank Aaron, and Barry Bonds. This agreement resulted in a legal dispute, eventually resolved in 2015, when the Yankees refused to pay Rodriguez a bonus contemplated under the agreement, on the basis that these provisions were discretionary and that the Yankees had the right, but not the obligation, to make these payments. The Pujols marketing agreement provided that he would receive $3 million if he reached 3,000 hits, and $7 million if he surpassed the career home run total of Barry Bonds.

In March 2012, the MLBPA and MLB agreed to ban these types of marketing agreements moving forward, on the basis that they were prohibited by the bonus rules outlawing bonuses for hitting and playing skills.

Does the Regime Still Make Sense?

As the history above shows, the current regulatory regime governing incentives has stayed remarkably static even as the game around it has transformed, giving rise to the question: does it still make sense in the modern era? As set out below, it appears that the incentive regime in the MLB, and the traditional rationales used to support this system, are divorced from the realities of how incentives are actually being used.

Why Allow Incentives?

There are two main parts to the MLB incentive regime. First, and perhaps somewhat overlooked, is that incentives are permitted in all player contracts. This could almost be taken for granted, but it would theoretically be possible for the teams and players to agree to ban incentives for all contracts or for some types of contracts. The continued prominence and use of incentives over time indicates that the teams and players recognize some value associated with incentives. Common reasons given to support the use of incentives are that incentives serve to motivate players to perform at a high level during their contract, and that incentives can facilitate contract finalization when a team and player are slightly apart in terms of guaranteed money. As an example of the latter, agent Gavin Kahn was quoted by Kevin Baxter in a 2020 LA Times article as saying: "There are times where [incentives] could bridge the gap when you're apart in terms of dollars… It's a way to sweeten the deal for the player and to provide some additional value for them to sign."

Why Restrict Certain Incentives?

The second aspect of the incentive regime are the restrictions on the form that incentives can take. The main restrictions are the prohibition on skills-based incentives (eg. wins, saves, home runs, hits, etc.) and incentives based on team standing (eg. winning a division, pennant or world series), but there are also other prohibitions like the prohibition on using marketing agreements to create incentives around major milestones (eg. home run records). The most common reasons used to support the restrictions on incentives are that:

• Players and the MLBPA union prefer guaranteed money in contracts and don't want incentives to eat into guaranteed money;
• The restriction on skills-based incentives and incentives based on team-standing avoids incentives being based on events outside the immediate control of the player or team (eg. a pitcher can give up 0 runs in a game and not record a win, a player can hit the ball hard without recording a hit, a player can play very well over a season but the team may not finish high in the standings); and
• Players and teams benefit from the skills-based restrictions because they prevent the possibility that a team or player will manipulate statistical goals to secure an advantage relating to an incentive (eg. a team could sit a player once they neared a certain statistical achievement, players could somehow conspire together or otherwise artificially attempt to achieve statistical objectives).

With this context in mind, we can examine the ways that incentives are currently used in the MLB in order to determine whether the usage of incentives aligns with the rationales for allowing incentives generally and for restricting certain types of incentives.

Incentive Usage Varies Greatly

Starting with the reason for allowing incentives in general, it is clear that incentives are being used for a range of purposes, some with little connection to the traditional rationales for incentives.

Incentives in contracts for high-value, multi-year free agents are used in a way that most closely resembles the traditional rationale for incentives. Examples of these are incentives in contracts for Juan Soto and Dylan Cease. These contracts generally favour award incentives over performance incentives and reward the player for high finishes in major award voting. The quantum of the incentive payout is relatively minor in comparison to the guaranteed money under the contract. This usage aligns with the idea that incentives are a tool to motivate high performance over the term of a long-term guaranteed contract.

However, other incentive structures are not as clearly aligned with this rationale:

• Pre-Arb/Arb-Eligible Extensions: Multi-year contracts for pre-arbitration and arbitration-eligible players use award, and occasionally performance, incentives as salary escalators, offering the player significant monetary upside if the player reaches these targets. Examples of this structure can be seen in the contracts for Jackson Merrill, Roman Anthony, Samuel Basallo, Lawrence Butler, and others. The Unlike for the high-value free agents, who have a lower monetary payout associated with reaching incentives, the incentives in these contracts appear very important to the overall setup of the contract. In these circumstances, the incentives appear to be compensation for a scenario in which the player outperforms their compensation during the term of the contract. For example, all remaining salaries in Merrill’s deal increase by $1 million each time Merrill reaches 500 plate appearances and, from 2031 onwareds, Anthony can earn $2 million for winning MVP, $1 million each for second or third place MVP finishes, $750,000 each for fourth or fifth place MVP finishes, or $500,000 each for sixth to tenth MVP finishes. Incentive setups for these players serve to compensate the player for giving up arbitration and free agency rights, as the player could potentially receive compensation greater than the guaranteed money in their extension through free agency or arbitration if they perform well during the early years of their career. This rationale is logical, as early career players would presumably already be motivated to perform well through their term of the contract, given that they would likely have an opportunity to receive another significant contract during their career through free agency.
• One-Year Contracts: One-year contracts, particularly for players age 30 and older, show a different purpose for incentives. Many of these contracts contain incentive structures, predominantly through performance incentives based on usage, which offer the player the chance to significantly increase their one-year earnings. For example, in the 2025 and 2026 seasons, at least 40 players, or over one per team, received one-year contracts with incentives that were at least 25% of the guaranteed money. For the 15 players below, their potential incentive earnings were at least 50% of the guaranteed money.

2025/26 one-year contracts with max incentive payout / guaranteed money ≥ 50%%

Player	Position	Guaranteed ($M)	Max Incentive ($M)	Incentive / Guaranteed
Max Scherzer	SP	3	10	333.33%
Danny Coulombe	RP	1	2	200.00%
Kendall Graveman	RP	1.35	1.95	144.44%
Ramon Urias	IF	2	2	100.00%
John Brebbia	RP	2.75	2	72.72%
Luis Garcia	RP	1.75	1.25	71.43%
Luis Urias	IF	1.1	0.75	68.18%
Scott Barlow	RP	2	1.3	65.00%
Jon Berti	IF	2	1.3	65.00%
Brooks Raley	RP	1.85	1.15	62.16%
Paul Dejong	IF	1	0.6	60.00%
Griffin Canning	SP	2.5	1.5	60.00%
Tyler Alexander	RP	1	0.575	57.50%
Clayton Kershaw	SP/RP	16	8.5	53.13%
Alexis Diaz	RP	1	0.5	50.00%
Miguel Andujar	OF	4	2	50.00%
Sean Newcomb	SP/RP	4.5	2.25	50.00%

For players under these one-year, high-incentive contrats, the incentive structure seems to reflect the uncertainty related to how these players will be used during the season, and serves as a mechanism through which the player can be appropriately compensated if they are used in a meaningful manner during the year of the contract. As such, the guaranteed money in these contracts appears to be more of a salary floor for the player, with the incentive offering upside that the player can obtain if the season goes well for them. The traditional rationale for incentives, being to motivate good performance during the term of the contract, again does not seem applicable here, as the one-year term of the contract means the player would already be motivated to perform well in hopes of earning another contract after the season.

• Position/Role Incentives: Certain contracts contain incentives which allow a player to earn additional money or rights (through player options) based on the position or role that they are used in during the contract. These incentive structures are used in the contracts for catchers (incentive tied to games played at catcher), pitchers who may be used in a relief or starting role (incentive tied to games started), or relief pitchers who may be used as closers (incentive tied to games finished). Examples are Austin Hedges' 1-year 2026 contract, under which Hedges will receive $125,000 for each of 70, 75, 80 and 85 games he plays at catcher, and 1-year contracts for pitchers Keegan Thompson, Sean Newcomb and Jacob Waguespack, who have been used in relief and starting roles and have incentives tied specifically to how many games they start. The contracts for Edwin Diaz, Tanner Scott, Mark Leiter Jr., Hunter Harvey, Jorge Lopez, Alexis Diaz, and John Brebbia are all examples of contracts with incentives specifically tied to games finished. In these contracts, the basis for the incentive appears to be recognizing the premium value associated with playing at catcher relative to DH'ing, and the premium values associated with being used as a starter or closer relative to being used as a middle relief pitcher.
• Injury/Health Incentives: Other contracts contain incentives tied to a player's health during the term of the contract. These incentive structures either reward the player for remaining healthy during the term of the contract, or give the team additional rights (through conditional team option years) in the event that the player is injured during the term of the contract. They are most frequently found in contracts for players with significant injury histories, and the Dodgers often use this structure. Here the rationale for the incentives appears to be downside protection for the teams in relation to their investment in the player. Examples include Drew Rasmussen's 2025 contract with the Rays, under which Rasmussen's 2027 option-year salary can increase by up to $6 million based on how many days he spends on the injury list for arm-related reasons in the 2026 season, and the Dodgers' contracts with Blake Snell, Tanner Scott, Edwin Diaz, Teoscar Hernandez and Yoshinobu Yamamoto, all of which give the Dodgers additional team-friendly option rights which are triggered if the player spends a specific amount of time on the injury list due to specified injuries during the term of the contract. One could view these incentives as motivating the player to stay healthy during the term of the contract, but, unfortunately, health is largely outside of a player's control, meaning the purpose of these incentives being to protect the team is a much more plausible rationale.

As can be seen from the above, the use of incentives shows much more complexity than simply motivating players to perform well during the term of their contract. Two specific trends are notable. First, many incentives are tied to contingencies that are not within the control of the player. A player does not control how many times they are used, the role that they are used in, or their health, but incentives are used in relation to all three of these contingencies. Second, there is notable stratification between incentive purpose and types of players. Top-end free agents, pre-arb/arb-eligible players, players in the market for one-year contracts, relievers, and players with injury histories all face substantially different incentive models, all of which have little substantive similarity to each other. As such, it appears that while all of these structures can be called 'incentives', the considerations, particularly from a players' interests standpoint, vary greatly between them.

Incentive Restrictions Are Ineffective

Turning to the restrictions on incentives, there is a clear disconnect between the goals of these restrictions and how incentives are being used.

One reason underlying the restrictions on incentives is that the players and MLBPA Union prefer guaranteed money, instead of having variable compensation based on whether incentives are achieved. While this seems to be the case for top-end free agents, it arguably does not hold in other situations. As detailed above, significant portions of the possible compensation for players on one-year contracts is dependent on incentives. Certain contracts for pre-arbitration and arbitration-eligible players also show this, as, instead of guaranteed money, salary escalators based on incentives make up a significant portion of the player's potential compensation.

Another major reason given in support of the restrictions arises from the issue that skills-based objectives, such as wins, hits, and saves, rely on factors and contingencies outside of how the player performs. Put another way, the player's performance does not dictate whether they will achieve the objective. This logic again does not apply to how incentives are actually being used, as many incentive structures rely on variables outside the control of the player or both the team and the player. For example, incentives related to health are largely out of the control of the player and the team. Award incentives, which are based on where a player finishes in voting for certain awards, reflect a player's contribution but are based on how third parties, outside the team or the player, view that player's contributions relative to other players. In terms of incentives based on player usage, either in general or in a specific role, this is fully in the control of the team. If there are concerns that teams may manipulate a player's playing time or role in order to prevent the player from achieving skills-based incentives, then these concerns should apply equally to incentives based on innings pitched, plate or pitching appearances, or games finished/games started.

Moreover, and perhaps more importantly, there is a logical inconsistency between banning skills-based incentives and allowing some types of incentives that are currently commonplace. This inconsistency is most notable for award incentives. Award incentives are skills-based incentives; they provide a player with potential additional compensation based on a player's skill. However, due to the prohibition on statistical skills-based incentives, teams and players use an imprecise proxy, based on third-party voting, for skill-based performance. Using award incentives is similar in principle to using WAR as an incentive marker, as is done in the pre-arbitration bonus pool, but would clearly be prohibited under the current incentive rules, as both attempt to assess and rank players based on their performance. Awards use human judgment for this analysis of skills-based performance, while WAR uses statistical models (albeit with human judgment built into the models).

The analysis above is not intended to be a criticism of how teams and players are using incentives. Rather, it is intended to highlight that the rules for incentives lack a coherent purpose or organizing principle and are disconnected from the realities of incentives in the modern MLB. They are a set of rules ripe for modernization in a manner that can benefit both teams and players.