Written by Colin Fisher
“Give him a blank check” is a plea frequently made by sports fans when referring to a star free agent in hopes that their team will sign him. However, front offices do not literally follow this advice since they have historically set a limit on the maximum compensation they are willing to pay regardless of the player. This approach was tested by the impending free agency of Shohei Ohtani, whose unparalleled success as both a hitter and pitcher resulted in him signing a record-breaking contract prior to the 2024 season. For the first time, the phrase “give him a blank check” was not hyperbole when it came to describing the contract of the game’s most talented player.
When news broke in the summer of 2023 that Ohtani had a torn UCL in his elbow, the lofty expectations for Ohtani’s new contract were in jeopardy. As a result of the injury, Ohtani would be able to only hit for the 2024 season, and his future as a pitcher was called into question. The discussion in the off-season focused on how Ohtani’s injury would impact his new contract. Would he be paid only as a hitter? Or would teams look past his injury, as well as concerns about his future viability as a pitcher? These questions were answered this past winter when Ohtani announced on Instagram that he was signing with the Los Angeles Dodgers for $700 million over ten years.
With an average annual value (aav) of $70 million, Ohtani’s deal significantly surpassed the previously highest aav of Max Scherzer’s contract, which was $43.33 million. However, shortly after the signing was announced, the terms of his deal were released – a significant portion of Ohtani’s salary would be deferred until after the contract’s ten-year term had expired. In fact, $680 million of Ohtani’s compensation would be deferred and eventually paid out from 2034 thru 2043, with an aav of $68 million a year during such period. As a result, the game’s best player would make a mere $2 million per year during his actual tenure with the Dodgers.
Many baseball pundits questioned the Dodger’s ability under the league’s collective bargaining agreement (cba) to defer such a large amount of Ohtani’s salary. However, a close examination of the cba reveals that it provides that “there shall be no limitations on either the amount of the deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide” (Feinsand, 2023). Moreover, other teams had previously deferred portions of their players’ salaries, such as the now famous contract of Bobby Bonilla, pursuant to which the New York Mets agreed to pay Bonilla $1.19 million a year for the next 25 years rather than the $5.9 million owed to Bonilla for the upcoming season (Cleary, 2018). Although the act of deferring a player’s salary was not unique, the amount of money deferred in Ohtani’s case was unprecedented.
Applying 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. First, today’s money can be invested to earn a return during the investment period, which allows the money to grow over time. By deferring salary, Ohtani has postponed his ability to invest such money and thereby sacrificed the return on it. In addition, inflation reduces the value of money over time since its purchasing power decreases as prices increase (Fernando, 2023). As a result, a dollar paid to Ohtani in 2034 has less purchasing power than the same dollar he receives in 2024. When taking into account the time value of money and the dollar amount deferred by Ohtani, the present value of his contract is approximately $460 million (or a $46 million aav) (Feinsand, 2023), which is significantly less than his ten-year $700 million headline number suggests.
When assessing Ohtani’s contract, it is helpful to understand the reasons that his compensation was structured in this way. From the Dodgers perspective, the deferral of almost all of Ohtani’s salary significantly lowers the team’s payroll during the period that Ohtani plays for them. Although the charge to the Dodgers’ payroll is not as low as the $2 million Ohtani will be paid for the next ten years, it is remarkably lower than the initially believed $70 million aav of his contract – the charge against the Dodgers’ payroll is actually the present-day value of $700 million over ten years, which is approximately $46 million a year. While Major League Baseball (MLB) does not have a “hard cap” on a team’s aggregate salary, which means there is no real limit on the amount of money it can spend in a season, there are significant financial penalties, known as the collective bargaining tax, for teams that exceed a certain payroll threshold. For the 2024 season, that threshold is $237 million (Feinsand, 2023). The first year a team goes over the threshold, they are charged a 20% tax on any spending that exceeds the threshold, the second consecutive year they are charged a 30% tax, and the third consecutive year (and any successive years) they are charged a 50% tax. If a team’s payroll falls below the threshold in any particular year, then the penalties reset. In addition to the above taxes, there is a surcharge for teams that surpass the base threshold by $20 million or move: a 12% surcharge for an overage between $20 to $40 million, a 42.5% surcharge for an overage between $40 to $60 million (which escalates to 45% for each consecutive year thereafter), and a 60% surcharge for an overage of $60 million or more. Furthermore, teams that exceed the threshold by at least $40 million will have their highest pick (or second highest pick if the team’s selection is in the top six) in the next year’s player draft moved back ten spots (MLB, 2024). Given that these harsh penalties affect the Dodger’s ability to draft top talent, as well as sign other superstars, to surround Ohtani, it’s not surprising that they preferred Ohtani to defer almost all of his salary so that they can compete for a championship now and worry about paying the rest at a later date when the collective bargaining tax thresholds will likely have been raised.
While Ohtani’s contract structure is advantageous to the Dodgers from a baseball perspective, it also makes financial sense given the massive amounts of revenue Ohtani’s presence on the team will presently generate as he is the most famous baseball player in the world. For example, when Ohtani signed with the Dodgers, the sports apparel company Fanatics sold more of his jerseys in a 48-hour period than it had for any other athlete (Bengel, 2023). Moreover, since Ohtani is from Japan and has previously been a star in its baseball league, the Dodgers have added a whole new fanbase that contributes to its television viewership and in-person attendance, both of which increase team revenue. Even small-market baseball teams, understanding the significant financial benefits of signing Ohtani, competed for his services since the revenue he generates now will more than compensate for the salary they will only need to pay at a later date.
Although it’s clear from the above why the Dodgers would be in favor of deferring so much of Ohtani’s salary, why would Ohtani agree to it? Likely, it is his intense desire to compete for a championship that has led to such a large financial compromise on his part. When Ohtani first joined the MLB in 2017, he signed with the Los Angeles Angels. During his time there, despite his personal accomplishments, he never appeared in a playoff game. As a competitor, Ohtani grew weary of his team’s lack of success. Consequently, when he reached free agency, Ohtani sought a team that could consistently compete for a championship. This personal goal led him to select the Dodgers, who enter every season well-armed to win a title. By agreeing to defer his salary, he intended to give the Dodgers the necessary financial flexibility to sign other top players that could help him in his pursuit of a World Series ring. Also, Ohtani’s already accumulated vast wealth earned from his many endorsement deals made it easier for him to defer so much of his salary under his new contract. According to MLBMetrics, Ohtani was expected to earn about $35 million in endorsements in 2023, which was over $30 million more than the next highest MLB player. Since Ohtani earns such a significant amount of money from his activities outside of baseball, he can certainly afford to postpone his receipt of his baseball salary for the benefit of the team.
The Ohtani deal broke the record for total compensation and aav paid to a baseball player, but the value of his contract is not as large as initially thought because it defers almost all of Ohtani’s salary for ten years. The reasons that the Dodgers agreed to such an arrangement are clear from both a financial and baseball standpoint, however, Ohtani’s rationale for accepting a payment structure that significantly devalues his compensation is less certain. Likely, he compromised on this point (the financial impact of which was mitigated by his many endorsement deals) to provide the Dodgers with the necessary financial flexibility to pursue other top players, thereby improving his chances of winning a championship with them. With the 2024 season just beginning, it will be interesting to see whether Ohtani’s gamble ultimately pays off with a championship, and if it does, whether other high profile players follow his lead in deferring so much of their compensation to help their teams compete for a title.
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