MLB Contracts for Life
Rethinking the way MLB players get paid
“Ohtani strikes out Trout, and Japan’s back on top of the baseball world”, Joe Davis declared as Japan beat the United States in the 2023 World Baseball Classic Championship.
8 months later, Ohtani would go on to sign the largest contract in MLB history (now surpassed by Juan Soto) and win his first World Series during the 2023-2024 season. Ohtani also won the regular season NL MVP and invented the 50/50 club–50 home runs and steals in one season. But the accolades weren’t the biggest headline from his historic season. It was the structure of his monstrous contract that could shift the tide for future players.
In simple terms, his contract with the Dodgers is $700 million over 10 years, so $70 million per year. In more detail, he will be paid $2 million/year until 2034 then $68 million/year until 2043. Why would he defer 97% of his salary for 10 years? Two reasons: endorsements and championships. For Ohtani, his endorsements can take care of his lifestyle in the short term and deferring his salary opens cap space for the Dodgers to surround Ohtani with talent for years to come. Plus, what would someone even do with $70 million a year?
As groundbreaking as the contract seems, Ohtani is following an idea from players before him. Any Mets fan knows Bobby Bonilla Day. Bonilla left the Mets in 1999, yet he receives $1.2 million on July 1 every year, a paycheck that began in 2011 and will end in 2035. He is a well known example of deferred compensation in the MLB but he’s not the only one, or even the first. Ted Williams in the 1950s is rumored to be the first player. He negotiated a contract with the Boston Red Sox worth $150,000, of which he deferred $50,000 to a later date. Data from 75 years ago was not as readily available as it is today, so the claim may be a rumor. However, there are other examples like Ralph Dolgoff in 1962, Catfish Hunter in 1974 (complications led to arbitration hearings), Sparky Lyle in 1978… you get the point. Currently, players like Mookie Betts, Francisco Lindor, Christian Yelich, Rafael Devers, Nolan Arenado, and 6 other Dodgers all have a portion of their contracts structured as deferred money.
Ohtani is not a pioneer, but the size of his signing has put a spotlight on the notion of postponing one’s salary. So why will Ohtani’s contract send tidal waves throughout the MLB? I believe players at almost all levels of the MLB should ask about deferred compensation when structuring their own deals. I’ll provide an example later in the article.
In 2024, the average salary in the MLB was about $5 million/year. I understand Ohtani has way more flexibility to defer his salary than “the average guy” considering his endorsement money. However, there have been horror stories of athletes coming into money and running out shortly after retiring. Don’t believe me? Listen to Charles Barkley on Club Shay Shay:
The NBA and NFL are different from the MLB, but human behavior is universal. Juan Soto signed a 15 year, $765 million contract this offseason. He’s only 26… and deferred 0%. This is not a diss on Soto; I’m simply highlighting the mentality of MLB players who worked their whole lives to become a professional: Pay me what I deserve… now.
This article is meant to offer an alternate perspective on how athletes should view their contracts. The alternative mentality: allocate part of your contract to be used as current income and the rest to be treated as an income annuity that provides a stream of income for decades after your contract expires. You can’t spend what you don’t have yet.
Let’s create a hypothetical:
I’m an average-level player looking to sign a contract of 3 years, $15 million–that’s $5 million per year. The minimum annual salary per MLB’s rules is $740,000 so the most I can defer is just over $4 million/year. If I structured a deal that pays me $1 million/year over the 3 years and the remaining money earns 5% annual interest–lower than Bobby Bonilla’s contract at 8% interest–for 20 years after the contract expires, here is what I would get paid: $1 million per year until 2027 then $1.04 million per year until 2047.
The numbers are approximate–thanks ChatGPT–but the principle is important. You don’t have to sign an Ohtani-sized deal to build long-term wealth while living in the highest tax bracket. Currently, the median household income for a family of four is $125,700. Once you earn $1 million/year, there isn’t a huge impact to your lifestyle than if you took the entire $5 million/year upfront. However, there’s a larger responsibility to make that money last for the next 20 years, and beyond, because money evaporates quickly in your 20s. The principle is to reframe your mind on contracts to think with a long-term lens when you sign an average-sized contract. When you’re a superstar, money is not your biggest concern.
Counterargument: Players could take the money upfront and invest it themselves to earn a higher Return on Investment (ROI).
To that I say, Yes I totally agree. But, let’s be honest. When an athlete gets a check for $5 million at 24 years old he won’t be thinking of investments. He probably thinks he’ll never worry about money again. But, by deferring part of his contract he won’t give himself the chance to lose it all. Also, as long as interest exceeds inflation then the money he receives by the end will be worth more than if the player took 100% upfront. In the example above, the total value of the contract will be $20.8 million, or 39%, more than the original contract. Finally, he could still invest the deferred money each year over the next 20 years, or during the 3 years of the actual contract. You don’t have to choose between investing or deferring.
The “average Joe” example assumes 80% deferral. Those wanting 80% of their salary now could still benefit from deferring 20%, for example. Deciding how much to defer is ultimately the player’s decision; however, the power of compound interest means the more you defer, the higher the payout.
Here’s where the MLB may ruin the parade:
The MLB has a Collective Bargaining Agreement (CBA), expiring in 2026, that is negotiated between the 30 MLB clubs and the MLB Players Association (MLBPA), representing all current and future players. In 2022, the CBA decided there would be no limitation on deferred salary. At the time, Commissioner Robert Manfred stated that deferrals can, “at some point become problematic”. With the contracts continuing to skyrocket and the current CBA expiring soon, there is a real possibility that players will not be able to structure contracts with deferred compensation. However, I believe the CBA may keep deferred compensation because players are not the only party to benefit. Let’s do some math again using the average player’s contract:
As a reminder, the average contract is $5 million/year but I decide to defer 80%, meaning the team pays me $1 million/year for 3 years and the remaining $4 million/year must be put into an escrow account, per MLB rules. The total escrow account at the end of 3 years is used to pay roughly $1.04 million per year until 2047. If the contract promises 5% interest, then the escrow account would need to return at least 5% annually to match the interest. Since the average annual return in the S&P 500 is 8-10%, MLB teams could potentially profit from this scenario by 3-5% each year by professionally managing the escrow account. Staying invested in cash won’t beat inflation.
Returning 3-5% profit on tens of millions of dollars could, as Manfred says, “at some point become problematic”. MLB clubs could quickly turn into financial institutions and, if not properly regulated, could lead to insolvency issues and even worse, lawsuits. This would be a nightmare for the MLB and challenge the integrity of the league. However, professionally managed funds are not new. Colleges are institutions that professionally manage and invest billions of dollars from students in an endowment fund, so the idea of managed funds is not far-stretched. Proper regulation by the MLB could open doors for revenue growth, in turn leading to growth of the MLB’s power.
The ethics of MLB teams profiting from deferred compensation is a topic for a different day. Although, that day might come sooner than you think if more players start adopting my philosophy around contract structures. Stay tuned for future articles.
To conclude, I want to leave a final note to the MLB players getting ready to sign their next contract, or any athlete for that matter. My advice is to think about the future as well as the present. Every athlete dreams of going pro and achieving financial freedom for life. Sadly, signing your first contract is similar to winning the lottery. When the day comes to receive a life-altering check, you will most likely outlive the money.
So, what’s my proposition? I strongly urge players to explore deferred compensation during contract negotiations, while it’s still allowed, even if the contract is average.
Financial freedom isn’t about how much you make—it's about how long it lasts.