And as the value of sports franchises grow and revenues from television broadcasting rights increase, pushing out fixed obligations into the future could be a smart move. For players, whose careers are relatively short, deferred compensation creates a de facto retirement savings plan they can dip into once their playing days end. And agents benefit from the arrangement because it’s the nominal values that typically set market prices.
“If the interest rate is really only 0 or 1%, that would seem to be a bit surprising based on the time value of money, but presumptively the person negotiating the contract understands this and they’re negotiating that interest rate cost into the value of the contract,” Edelman said.
The strategy isn’t without risk, though. Backloading so many contracts, of course, could eventually hamstring the Nationals once they need to start replacing their current crop of All-Stars and hamper their ability to compete for the best players in free agency in the future.
For example, the Nationals will owe Scherzer and Strasburg a combined $41.7 million in each of 2027 and 2028. Neither ace is currently under contract for those years. Both pitchers were represented by superstar agent Scott Boras in their negotiations.
The 2001 World Series champion Arizona Diamondbacks are an example of how the strategy could go wrong, according to Brett Albert, a faculty lecturer at the Isenberg School of Management at University of Massachusetts, Amherst.
“The early 2000s, Diamondbacks were really aggressive about deferring salaries for players like Randy Johnson and Curt Schilling,” he said. “They won a World Series, but the revenue streams never materialized like they anticipated they would and they had to subsequently gut their roster.”
Albert says the decision to defer liabilities into the future comes down to an ownership group’s tolerance for risk. Lucrative TV deals and revenue sharing agreements mean there’s a lot of room for error, but a recession, for example, could always make tickets at the ballpark harder to sell.
For his part, Cole decided that money is more valuable in the present. He reportedly turned down an eight-year, $300 million dollar offer from the Los Angeles Dodgers. That deal had a higher average annual value, but also featured deferrals.
This article was provided by Bloomberg News.