Nominally, Chris Davis got the deal he and Scott Boras set out for this winter—seven years, and a higher annual average value than any free-agent position player had gotten this winter. The contract he signed with the Orioles will be consistently reported at $161 million. It’s not really worth that much, though. Over a quarter of the money Davis will get, he’ll get after the end of his deal, in 15 annual payments that begin in 2023. It’s still a fine deal for Davis. Davis’ kids will still be rich, and his grandkids will still be rich, and their kids will still be well on their way to rich before they lift a finger. When a contract essentially guarantees generational wealth, it doesn’t matter a great deal if it takes most of a generation for that wealth to arrive in full.
This is a really common thread among high-profile free-agent deals this winter. Jason Heyward will receive $20 million of his $184 million in four equal installments, starting in 2024 (although in truth, Heyward is going to opt out after year three of his deal, at which point that deferral ends). Over 30 percent of Zack Greinke’s $206.5 million payday with the Diamondbacks will be paid in the five years after his deal ends.
Nor is the can-kicking confined to deferral clauses. Ian Kennedy, Mike Leake, Jeff Samardzija, and Wei-Yin Chen belong firmly to a class of pitcher (Edwin Jackson, Ubaldo Jimenez, Ervin Santana, Ricky Nolasco, Brandon McCarthy, James Shields) who have gotten four-year deals over the last few winters. Yet, they each got five-year commitments (with options for a sixth year, in two cases). Ben Zobrist, headed into his age-35 season, got a four-year deal.
Last year, as you might remember, the Red Sox showed a willingness to pay a higher annual price in order to keep the number of years they committed to individual players low. This year, the trend arrows couldn’t be pointing more dramatically in the other direction. Consider Zobrist’s deal. It’s not hard, given his recent performance, to imagine Zobrist being worth the $56 million the Cubs promised him. It’s surprising, though, to see any 35-year-old get a four-year commitment.
Let’s do a hypothetical here. Let’s say the Cubs were perfectly willing to pay Zobrist the $56 million they paid him over just a three-year term. In that case:
1. If the team feels no obligation to Zobrist in 2019, they’re effectively deferring $12 million they would have been willing to pay for 2016-18 by tacking on the nominal fourth year.
2. It’s not hard to see the Cubs brushing up against the new luxury-tax threshold (whatever it might be) in 2017 or 2018. By spreading the money paid to Zobrist over four years instead of over three, the Cubs lower the salary with which Zobrist is credited in luxury-tax calculations from $18.7 million to $14 million.
3. If, thanks to his versatility and balanced skill set, Zobrist does happen to age particularly well, the team can capture the benefit of controlling him for 2019.
Obviously, there’s no particular reason to think the Cubs (or anyone else) did want to pay Zobrist $19 million per year. Still, the mental exercise taps into something. The buzzword with the Red Sox’s experiment in short-term commitments was flexibility, but right now, teams appear to value the flexibility they can gain by minimizing their upfront commitments, even if it means paying a player for an extra year (or 10). It’s not deception: Agents and players know how to value deferrals as well as teams do, and the rise of the opt-out is affirmation that they also value getting back to the free-agent market if they can. Rather, these things are becoming more prevalent for the same reason that pre-free agency extensions became prevalent several years ago: Teams and players are coming to understand the leverage relationship between them better. Players want to make as much money as possible, and all money has time value, and that value is invariably affected by inflation. The fact is, though, that a single family getting the kind of money we’re talking about here derives relatively little value from getting that money fast. On the other hand, though many teams are operating at a significant profit margin and don’t truly need to delay or break out payments into many installments, they still enjoy quite a bit of added value from having more money available now and more cost certainty in the long run.
All of this is compounded, of course, by the prospect of a new CBA that should (can hardly avoid it, really) accelerate the inflation of free-agent salaries and make acquiring those future talents more expensive. That helps explain both the appetite players are showing for opt-outs (which might allow them to re-address the market once they’ve made sure it favors them) and the owners’ increased willingness to pony up now (rather than risk having to pony up much more in a year or two).
A few years ago, there were a few months where many smart baseball people wondered aloud whether we needed a new paradigm for analyzing players and contracts as financial assets. It felt like teams were so flush with cash, and free agency was so bereft of especially good ways to spend that money, that it just didn’t matter if a team overpaid, as long as they landed the right player. We dismissed that idea pretty quickly, but soon, we might want to revisit it. It does matter that players deliver value, not only in absolute on-field terms, but relative to their salaries. As contracts get more complicated and both teams and players shift their expressed preferences, though, we’re going to have to find a way to properly value deals, and talk about them to wide swaths of baseball fans, without wading hip-deep into financial calculations that will matter less each year and distract us all from what really matters.
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So Davis will get payments starting in 2023 and lasting 15 years, which years does that money count in calculating the luxury tax? I assume it has to be the 7 years of his contract, so if that's the case what's the reason to deferred the payments? What did I miss?
Paying luxury tax is bad, but paying $18.7M in Years One through Three versus paying $14M in Years One through Four is worth about $3M at the most -- it's hard to see a scenario in which the Cubs were almost exactly $4M over the luxury tax threshold for three consecutive years (and just under it in year four), which probably means that even if that came into play, it would only be for one or two years, and not at the highest luxury tax percentage for each of three years. The extra value that might be attained by not paying luxury tax is probably pretty low, maybe pretty close to zero. If the Cubs are over the threshold on each of the years, they'd be paying the full tax, but they'd be paying the full tax either way.
The real value in terms of the luxury tax is the more artificial limitation: that teams see their luxury tax percentages rise based on the number of consecutive years that they've been over the threshold. There's a TON of potential value there, because if you can just get under the threshold for one year, you end up with something like this (assuming the system stays the same):
Year 1: 30% Year 1: 30%
Year 2: 40% Year 2: 40%
Year 3: 50% Year 3: 50%
Year 4: -- Year 4: 50%
Year 5: 17.5% Year 5: 50%
Year 6: 30% Year 6: 50%
Year 7: 40% Year 7: 50%
What if a quick dip below the threshold in Year Four means paying an average of 20 points less in luxury tax on $30M of overage in Years Five through Seven? That's not the most extreme possibility, but it's still about $18M in actual savings.
Just thinking that if the Cubs are solidly above or solidly below the luxury tax threshold in Years Three and Four in the Zobrist deal, there's no luxury tax effect at all, but that if they're close to the threshold, playing the limbo to get slightly under in both years is not worth as much as having Zobrist's salary come completely off the books for Year Four. I think the potential advantage of the potential of getting under the threshold in Year Four is probably worth more than flattening out their tax bracket, which only works if they are oh-so-barely below the threshold in the first place.