Archives for January 2025

Zack Scott, former Mets Acting GM and four-time champion with the Red Sox, empowers sports operations and individuals to win through Four Rings Sports Solutions. He specializes in data-driven strategies and leadership development. His Sports Ops Launchpad helps aspiring sports ops pros break into the industry. Connect with him on LinkedIn here.  Zack will be contributing periodically to MLB Trade Rumors. 

The Dodgers aren’t ruining baseball with massive salary deferrals. They may be causing a perception issue for MLB, but focusing on deferrals for the next Collective Bargaining Agreement would be a misguided effort—a political gesture that won’t address the core competitive balance issues.

Deferrals serve two primary purposes: helping teams close deals and giving players a big headline to validate their market value and boost their status. They’re not a circumvention tool around the Competitive Balance Tax (CBT) rules. Spending power, not contract structure, drives baseball’s economic landscape. Teams with greater resources have always been able to outspend smaller-market teams. This dynamic is inherent in leagues without hard salary caps.

Over the past five years, the Dodgers have become a lightning rod for fan discontent by deferring over $1B to acquire many star players. Shohei Ohtani’s $680MM deferred salary is an extreme example, but their long-term contracts consistently feature deferrals.

Let’s consider a hypothetical scenario: What if deferrals were prohibited? Would the Dodgers still have offered Ohtani a $700MM contract? It’s highly unlikely. A league where deferrals are banned wouldn’t change the Dodgers’ desire to acquire Ohtani, but it would necessitate a different contract structure. Guaranteed dollar amounts would likely align more with the present value calculations we observe in current MLB contracts.

Ohtani’s contract (97% deferred) calculates to a $460MM present value using MLB’s 4.43% discount rate. This figure makes sense in historical context, as it surpassed Trout’s $426.5MM (no deferrals), which stood as the highest for nearly five years. However, it’s crucial to understand the discount rate’s role in these calculations. MLB uses a conservative rate, which limits the CBT benefits for teams.

This standardized rate doesn’t reflect team owners’ financial realities. Many owners, especially those directly connected to global investment firms, achieve significantly higher returns. Consider Guggenheim’s Mark Walter, the Dodgers’ owner, whose firm has generated approximately 10% average annual returns, or Point72’s Steve Cohen, the Mets’ owner, with around 14% average annual returns. The present value drops significantly if we apply these more realistic discount rates to Ohtani’s deferred contract.

Using Walter’s rate, the present value would be approximately $282MM. Using Cohen’s rate, it would be even lower, around $203MM. This substantial difference reveals that the perceived CBT advantages from deferrals are less significant than they initially seem. Although deferrals offer teams greater financial flexibility in managing cash flow, their present value is inflated by the conservative discount rate used for CBT calculations.

While the CBT benefits from deferrals may be overstated, they carry inherent long-term risks. Revenue declines or ownership changes could jeopardize those large future payments. However, the Dodgers’ deep pockets mitigate these risks. Guggenheim’s returns suggest they’re well-positioned to meet these obligations. Commissioner Manfred cited the early 2000s Diamondbacks as a cautionary tale. Still, Arizona’s spending outpaced revenue, and their ownership was less diversified than the current Dodgers group, making a similar outcome unlikely. LA’s bet on continued financial success is reasonable.

My experience negotiating MLB contracts in large markets has shown that various contract structures can be critical to reaching agreements. We used salary escalators, signing bonuses, player opt-outs, and, yes, those evil deferrals. When I was with the Mets, we signed Francisco Lindor to a $341MM contract, including $50MM in deferrals and a $21MM signing bonus. While the deferrals didn’t drastically alter our CBT payroll, they were instrumental in reaching a “magic number” for Lindor, pushing him $1MM over Fernando Tatis Jr. to secure the headline highest-paid shortstop.

The “magic number” concept is crucial in player negotiations. It represents the minimum financial threshold a player is willing to accept to validate their market value and status. These numbers are rarely explicitly stated, as agents are more likely to present significantly higher buy-it-now prices and counteroffers. Effective negotiation requires understanding the underlying motivations behind this elusive target. Athletes at this level are incredibly competitive, so their reasons for setting their sights on a particular “magic number” differ from the typical fan.

Perhaps they’re motivated to be the highest paid at their position, to push the market forward to benefit the union, or maybe it’s a number that just feels better (e.g., $2MM vs. $1.95MM). Sometimes, the gap between the player’s “magic number” and the team’s offer is too wide to bridge. However, in other cases, creative contract structures, including deferrals, can be the key to finding common ground. If this flexibility didn’t exist, reaching those critical “magic numbers” would become significantly more challenging. This could lead to longer, more drawn-out negotiations—a scenario that already frustrates many baseball fans.

Mookie Betts’ contract with the Dodgers offers another compelling example. He signed a $365MM deal with $115MM deferred. While the headline figure was impressive (second largest contract behind Trout!), the present value was $307MM, placing it below a few additional contracts (Bryce Harper, Giancarlo Stanton, and Gerrit Cole). This structure allowed the Dodgers to acquire a star player while satisfying Mookie and his agent’s desire to be seen as a top-two player. In Boston, we had tried to re-sign Betts, but our self-imposed $300MM limit wasn’t enough to meet this desire. A similar deferral structure to the Dodgers’ deal might have changed the outcome.

The Dodgers and other marquee franchises play an essential role in baseball. People are fascinated by greatness and love to root for or against the best, whether it’s Mahomes’ Chiefs, Jordan’s Bulls, Jeter’s Yankees, or Ken Jennings’ Jeopardy. Baseball’s “Goliaths,” as Scott Boras calls them, drive higher interest and TV ratings, ultimately benefiting all MLB teams. While fans of smaller-market teams may express frustration over the financial disparities, eliminating deferrals won’t solve their economic concerns.

The Dodgers are drawing all the attention because they added so many big names over the last five years. This is due to several factors: their superior financial resources, their ability to optimize player performance, their winning culture, and their West Coast location, which is a significant draw for Japanese players. These factors have raised their villain status, and that’s good for baseball. But along with that comes more noise, including misplaced outcries about deferrals.