Two-way unicorn baseball player Shohei Ohtani made many headlines with news of his new contract with the Los Angeles Dodgers.
There are two main aspects to examine in regards to his contract. One legal and one financial.
Let’s TLDR the contract real quick. Basically, the media has reported that Ohtani signed a ten year, $700 million contract with hefty deferrals. For the next ten years, he’ll earn $2 million annually. Then for the next ten after that, he’ll earn $68 million annually. That would add up to twenty years of payments.
The Collective-Bargaining Agreement
Fans of other teams were all asking: “Is it possible that the contract will eventually be terminated?”
Well, this is the relevant line in the agreement agreed upon by the players and the league.
Given that both parties agreed to this term, signed the agreement, and both parties have been consistently dealing with each other for a long period of time, this term appears to stand.
People were bringing up how Ohtani’s contract violated the “spirit of the agreement” by limiting competitiveness in the league. Again, everyone was well aware what they were signing.
I’d also argue that his contract is an incredible outlier. He made approximately $40 million in endorsements last year due to his marketability in Japan, his home country.
Take a look at this chart, specifically the “Endorsements” column. I don’t think it’s unfair to say that no other player currently matches his earnings off the field. This places him in a different position than other players, who need to consider the financial terms of a deal much more closely.
The Power of Time Value of Money
This is the concept I first learned in economics class in high school. And based on the reactions I’ve seen on social media, it’s pretty clear that many people haven’t heard of it at all.
The $700 million value is misleading, because that number is the future value. The present value of the deal is around $460 million, which is much more reasonably in the realm of baseball contracts.
A dollar today is worth more than a dollar twenty years from now, simply because I can earn interest on that dollar today.
I was looking into the discount rate used in the calculation of Ohtani’s deal. It’s 4.43%, the “Federal mid-term rate” of the preceding month.
Check out my last law post about the weird definition of murder! Here it is.