Why are large MLB contracts backloaded?

Question

Many MLB contracts are backloaded. For example, Alex Rodriguez will be making over $30 million USD per year at the end of his deal in 2017, much higher than the average annual value.

I understand that clubs sometimes do this to ease the burden on the luxury tax at the beginning, but as players age, they typically decline, causing all of those dollars committed at the end of the contract to be an albatross. Why do we not see clubs front-loading contracts, where they will pay the most for a player while he is in his prime?

Answer 1

There are many good reasons and many bad reason to back load a longterm deal for a baseball player. Lets start with the good:

• Revenues/luxury tax limits are likely to be higher later on.
• You have more time to plan for the expense, rather than having to pay it now.
• You might be able to trade all or part of that contract to another team, thus sharing the cost of the later years of the deal.
• You can amortize some of the premium you pay right now to a player over a longer term.
• There is always a chance the player might retire before the deal is up allowing you out of the final years.
• However, the primary reason for back loading a deal is to give you a competitive advantage during the player's prime. If you can pay them a lower rate right now you have more money (and luxury tax room) available to surround your high dollar free agent with the talent needed to compete.

Finally there are plenty of reasons not to do this

• You end up paying a premium for past performance.
• You end up chewing up a huge chunk of your payroll for a player that is well past his prime and cannot produce at the level his salary dictates
• The player becomes impossible to trade, and very difficult to release. Because contracts are guaranteed, the player is assured of seeing every dime of his contract regardless of whether he is playing or not, this means that making a case to ownership to release a player owed 18+ million at the end of his deal is very difficult (Alfonso Soriano is a great example of this).
• You can saddle a potentially competitive team with an albatross of a contract by serious limiting payroll flexibility if you manage to compete longer than your expected window.

All of this to say that backloading a contract is not always a negative, if you have a limited payroll and a limited window to compete then you might want to use a backloaded deal in order to be even more competitive than a balanced deal would allow you to be. However this comes with some serious risk if you either do not manage to win a world series or if you manage to stay competitive longer than you planned. This is a challenging business situation and I do not see this as quite a cut and dried situation as the media sometimes makes it out to be. However, it can go incredibly badly if it is done poorly or too often (see 2010-13 Chicago Cubs).

Answer 2

In finance, it's called the time value of money. That is, $1 million paid in 2020 doesn't cost quite as much as $1 million paid in 2013 because the team can earn interest on the money.

In "selling" contracts to their players, teams dangle the largest total number of dollars. Then they try to compensate by pushing back those dollars in time with players that don't understand the above paragraph.

A really smart player might settle for fewer dollars paid earlier, but few players would be willing to do this.

Answer 3

A new baseball contract can be depreciated at 100% in the first year. This would give Jeff Loria a tax deduction of 325 million in 2015 for Stanton when he is only paying 6.5 million. If Loria has another associated business which makes 325 million, he will pay no taxes on 325 million while only laying out 6.25 million. This allows him to state that he is losing money at baseball, when in fact he is not, and allows him to avoid about 100 million on taxes at the same time. He can then move the contract to someone else who needs a deduction. Nice game!