Play Now Pay Later

Baseball has always been about teamwork. It is a 162-game grind of a regular season, and players are expected to sacrifice for their teammates for the greater goal of winning the World Series. Over the last few years, sacrificing for the team has increasingly meant players are asked to defer chunks of salary to free up cash, giving team ownership more flexibility to spend on prospects and free agents. The concept is simple: the player takes a contract, often for the same reported value that they otherwise would have, but structured for the team to pay them over a longer period than their obligation to play. For example, the deferred contract that has garnered the most attention belongs to the Los Angeles Dodgers' two-way superstar, Shohei Ohtani. Under the terms of Ohtani’s contract, signed before the 2024 season, “$680 million of Ohtani’s compensation would be deferred and eventually paid out from 2034 through 2043.” With the massive deferral, one of the league’s best players will be paid only about $2 million in cash per season. The apparent discount is striking and has reinvigorated a debate about salary fairness that has bubbled up from time to time over the last few decades in Major League Baseball (MLB).

Every aspect of professional sports is about competition, whether it is teams competing on the field, a superstar competing to secure generational wealth, or a role player competing for a spot on the roster. If a team can convince a player to take less cash up front so they can sign other players, they have one more weapon to wield in their competition against other teams. Likewise, a role player can demonstrate their commitment to the team’s broader goals by taking less money during the playing period of their contract, allowing them to outcompete more expensive players. Further, a star player can defer and free up cash for their team to sign others to increase their odds at a championship in the short term. The option is available to all teams and has been a central strategy of the Los Angeles Dodgers over the last few years, while the positive results they have achieved have caused an outcry from others around the league.

Deferrals are not new to the MLB, in fact, a deferred contract helped to start the free agency process. When the Oakland Athletics failed to pay half of Jim “Catfish” Hunter’s salary into a long-term annuity, Hunter argued that team ownership had violated their contract, and arbitrator Peter Seitz agreed, making Hunter one of the league's very first free agents. Once freed from the Athletics, Hunter went on to sign a contract with the New York Yankees, under which he would defer $150,000 each year. Hoping to avoid another Catfish Hunter catastrophe, the Collective Bargaining Agreement (CBA) requires player’s contracts to “be fully funded by the Club, in an amount equal to the present value of the total deferred compensation obligation, on or before the second July 1 following the championship season in which the deferred compensation is earned.”

It is easy to understand why a franchise would push for deferrals. Each franchise is a business pursuing profits, so if a tactic doesn’t make financial sense, then it doesn’t make strategic sense. Convincing a player to defer any portion of their salary is essentially a win-win for the franchise; they get the player now and have more money to spend before the bill comes due each July. One financial planner called the concept “essentially an interest-free loan to the team.” The MLB has no salary cap, only a Competitive Balance Tax (CBT) “designed to limit spending through an additional fee that teams have to pay for every dollar they spend over $241 million.” Repetitive violators of the CBT are subject to consequences such as increased taxes and even the loss of draft picks, so deferrals such as Ohtani’s enable franchises like the Dodgers to spend big while minimizing their CBT penalties. This is where the central controversy around fairness lies, as many fans view the deferrals as a circumvention of the spirit of the CBT.

While fans and analysts cry foul over the headline numbers of these contracts, less concern is raised for the players who may be getting the short end of a very expensive stick. Inflation peaked around 9% in June 2022 and has remained above the Federal Reserve’s target rate of 2% ever since. It is impossible for a player and their advisors to predict so many of the relevant variables that might impact the true value of a contract years into the future, such as tax rates and inflation. Colin Fisher with the Michigan Journal of Economics noted “[a]pplying the financial concept of the time value of money, it is readily apparent that Ohtani’s contract is not as valuable as it initially appears. This principle provides that an amount of money today is worth more than the same amount of money in the future.” Fisher estimated that the true value of Ohtani’s contract was “approximately $460 million” rather than the reported figure of roughly $700 million. With this in mind, the issue becomes a question of each individual player’s motivations, whether they want to get the most money upfront or would rather take a gamble with the tradeoff being a higher chance of winning a championship.

In terms of fairness, it would seem the focus is misplaced. There is no limitation on which team is allowed to negotiate deferrals, the strategy is available to all 30 teams in the MLB. While it is easy for fans of small-market teams to decry the tactic as unfair or a circumvention of the spirit of the rules, it would appear that if anyone is being hurt by these deferrals, it is the players themselves. While Ohtani was schooled on the implications of such a deal by his representation, he is certainly in a unique position compared to most. The utility player hoping to secure himself one more chance in the big leagues is increasingly likely to be put in a position where deferral is his best option. In such a case, that last opportunity may come at the cost of each paycheck being worth less than the last. Contracts are often about tradeoffs, and as of now, it would appear that despite the drawbacks for the less advantaged players, deferrals are here to stay.

*The views expressed in this article do not represent the views of Santa Clara University.