17 Questions About Shohei Ohtani’s Extremely Large, Extremely Strange Contract
Ohtani and the Los Angeles Dodgers just agreed to one of the most unusual deals in MLB history, with an unprecedented $680 million in deferred money. Why did they structure it this way? And will it give rise to a new trend in baseball?
On Saturday, I wrote about Shohei Ohtani’s new deal with the Los Angeles Dodgers. The story ran under the headline “Shohei Ohtani’s $700 Million Dodgers Contract Is Unlike Anything in MLB History.”
Two days later, we learned additional details, and although that headline holds up, it reads differently now. In one sense, Ohtani’s 10-year pact is actually less of an outlier than it first appeared. In another sense, it’s even further from the realm of what any other player could dream of, let alone command.
Soon after news broke that Ohtani had signed, ESPN’s Jeff Passan reported that most of the money in the deal would be deferred. As it turns out, “most” was an understatement. Here’s the new kicker, after revelations on Monday: $680 million of Ohtani’s $700 million, an unprecedented 97 percent, will be deferred. The Dodgers will pay him $2 million in each of the next 10 seasons, through 2033. Then they’ll owe him $68 million in each of the 10 years after that, through 2043.
Ohtani has been wowing people with his play ever since he turned pro. And days after wowing the baseball world with his contract’s top-line figure, he did it again when the finer print was published. One thing is clear: We should never underestimate Ohtani’s capacity to surprise. But his contract’s implications are much murkier and are easily misunderstood. Is Ohtani unaffordable or deeply discounted? Has he turned heel or become a bigger babyface of baseball than before? Is this signing a model for future free agents or a move that broke the mold?
Let’s clear up some misconceptions, explain some competitive ramifications, and assess some long-term effects by asking and answering 17 questions about signing no. 17 to a drastically deferred deal. Starting with:
Wait, you can do that?
You can definitely do that. Article XVI of the MLB collective bargaining agreement says, “There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.” In other words, defer freely.
Are you sure? It seems sketchy. Shouldn’t Rob Manfred veto it and make Ohtani sign with my team?
I’m sure. He shouldn’t.
What does this mean for the Dodgers’ competitive balance tax load?
If you’re just joining us from the fandom of some other major American sport, you may be surprised to learn that MLB doesn’t have a salary cap. (In related news, MLB players do have a strong union.) However, the league employs a spending-suppressing soft cap: Every dollar spent over certain payroll thresholds is subject to tax penalties. Sign enough pricey free agents, and the owner incurs some extra cost.
The average annual value of each player’s salary counts toward their team’s total competitive balance tax assessment. When part of a player’s salary is deferred, though, their AAV for CBT purposes is adjusted for inflation and depreciation; a dollar today doesn’t buy what it would have 20 years ago, and a dollar 20 years from now won’t buy what it does today. (Though $68 million 20 years from now should still get you something good.) If Ohtani were slated to make $700 million over 10 years, his AAV and CBT salary would be $70 million, a big chunk of change considering CBT penalties start at $237 million in 2024. Thanks to the time value of money, though—and the 4.43 percent interest rate MLB and the union are using this offseason—Ohtani’s AAV for CBT purposes is only $46 million.
The Dodgers will probably add payroll between now and Opening Day—Ohtani’s surgically re-repaired elbow will prevent him from pitching next season, and the Dodgers staff still has holes—but as of now, they’re still projected to be below the lowest CBT threshold, even with their latest, greatest superstar.
So wait, the Dodgers didn’t exploit a CBT loophole here?
No, not at all, which is probably the biggest false belief about Ohtani’s singular salary structure. This isn’t an MLB equivalent of the NHL’s disallowed Ilya Kovalchuk contract, in which a team tries to tack on years to artificially lower the AAV. MLB teams have considered such a tactic: The Padres reportedly thought about offering Aaron Judge a 14-year deal last winter, and the Phillies reportedly contemplated a 20-year offer for Bryce Harper in 2019. Should a team try to circumvent the CBA by pushing the envelope on length, the commissioner would have to weigh whether to strike the deal down, as the NHL’s Gary Bettman did with Kovalchuk’s.
Nothing of the sort is happening here. The confusion comes from the disconnect between how Ohtani’s contract was initially described and what it’s worth. Passan framed that $46 million figure as “a huge discount for L.A.,” which is somewhat misleading. While 46 is obviously lower than 70, calling $46 million a “discount” presupposes a scenario in which Ohtani could have had a $70 million AAV and simply chose not to. As great as he is, Ohtani was never going to get $700 million over 10 years. He got $700 million precisely because the contract is so heavily deferred, which lowers its net present value—and, consequently, its CBT impact—considerably. Essentially, MLB considers Ohtani’s deferred 10-year, $700 million contract to be equivalent to a non-deferred 10-year, $460 million contract, which is where that $46 million figure comes from. Most public prognosticators foresaw a similar AAV. And a $460 million deal would’ve been right in line with an estimate one front-office source sent me in September, after Ohtani’s injury: “I think it probably ends up in the $400–$500 [million] range.”
Only $460 million? I thought this guy was good!
OK, I’m not sure anyone is saying “only” $460 million, but that total does seem smaller after anchoring on $700 million. Multiple pieces published before the deferral details surfaced pointed out that $700 million was close to twice what WAR-based projections would have pegged as Ohtani’s market value after his injury. Many early reactions attributed the difference to Ohtani’s star power and marquee value. There’s certainly something to that, but as I noted on Saturday, “Some of Ohtani’s capacity to sell tickets, drive ratings, and seal sponsorships is contingent on his remaining a two-way star.” The contract’s present-day value suggests that the Dodgers saw real risk of the 29-year-old Ohtani failing to maintain his two-way play for the long haul. They were willing to top what the WAR-only models spit out, but they weren’t willing to court the winner’s curse by doubling that amount.
Of course, a mere $460 million still would have been an MLB record in inflation-unadjusted dollars, surpassing the 12-year, $426.5 million extension Ohtani’s former teammate Mike Trout signed in 2019. Likewise, Ohtani’s $46 million CBT impact is higher than the sport’s previous high AAV, the $43.3 million it took to ink Max Scherzer and Justin Verlander to much shorter deals. But $460 million wouldn’t completely reset the salary scale the way it sounds like this deal does. In practical terms, this is only an incremental increase over the previous high. The “$700 million” is mostly spin.
Why not just sign for $460 million, then? Why go through this $700 million rigmarole?
Partly personal pride and bragging rights, maybe? Because Ohtani’s contract is set up this way, he and his agent, Nez Balelo, can claim to have landed the biggest contract ever awarded to an athlete. Ohtani isn’t the type to brag publicly, but maybe being both the best player in his sport and the highest-paid player in any sport brings him some measure of satisfaction, even if it’s sort of a mirage. (A really lucrative mirage, admittedly.) Lionel Messi’s $674 million contract with FC Barcelona called for him to make $674 million over only four years, with at most modest deferrals. But 700 is bigger than 674, so on Wikipedia’s list of the largest sports contracts, Ohtani’s is on top.
There are PR downsides to this, though. For one thing, opting for the flashier dollar figure makes Ohtani an easier target for fans who complain about high player salaries (instead of even higher owner net worths) out of the mistaken belief that those costs are passed down to consumers. If Ohtani’s next decade doesn’t go well, that $700 million claim could become a (very remunerative) millstone around Ohtani’s neck. For another, the way in which the parameters of the contract came out—first the $700 million, then the deferrals and the $46 million CBT hit—fostered widespread misconceptions that Ohtani and/or the Dodgers were doing something nefarious. That perception of rules being bent could linger among fans who don’t take the time to dive into the weeds (or read articles like this one).
But Ohtani also has more selfless reasons for requesting this framework. As a famous fan of Kovalchuk’s former squad once said, “I’m just trying to support the team.”
So how does this structure help the Dodgers?
Primarily because Ohtani is taking home only $2 million in annual salary for the next decade. Ohtani will wear no. 17 on the field for the Dodgers next season. He’s also no. 17 on the list of projected 2024 Dodgers salaries, just ahead of Yency Almonte. Even though his CBT figure is sizable, the Dodgers’ yearly expenditure on him will be minuscule for the time being, which will help them pay other players. The team may have even made some assurances that it would: According to a source cited by Tom Verducci, “Ohtani asked for language in his contract that assures the club will make good on its promise to use the savings he created to build a competitive team around him.”
Why was Ohtani willing to do this?
It’s not just that he was willing to; according to Balelo, this structure was Ohtani’s idea. The two-way star hasn’t explained himself publicly yet, but presumably this plan appealed to him for two reasons. One, his agent insists, is that Ohtani wants to win: As Ohtani said in 2021, “That’s the biggest thing for me.” Deferring so much money makes it easier for the Dodgers to provide the strong supporting cast that Ohtani (and Trout) lacked in Anaheim.
Two, Ohtani is uniquely well positioned to wait for a windfall because his endorsement earnings—which may be in line to increase with his move to a more successful franchise—reportedly amount to approximately $50 million a year, many times more than any other major leaguer’s. He’d be the best-paid player in baseball if the Dodgers didn’t pay him a cent, so he won’t be hurting in the short term from earning that meager $2 million. (It’s tough to imagine what he’d splurge on if he were making even more: Ohtani has long been portrayed, and also described himself, as someone who’s so dedicated to baseball that he basically lives at the ballpark and the gym when he isn’t sound asleep.)
All in all, it’s a little like Tom Brady settling for less than he could have earned during his days with the Patriots. Brady’s then wife, Gisele Bündchen, was wealthier than he was, and he alone was set for countless lifetimes: In addition to his on-field earnings, he made hundreds of millions in endorsements and business endeavors, then landed a deal with Fox worth almost $400 million more shortly after he retired. That’s not to say that even the richest athletes should feel obligated to lighten the financial load on the billionaire team owners who reap plenty of rewards from their work, but GOAT-level players whose celebrity transcends their sports have access to income streams that the on-field rank and file don’t.
It probably mattered that this was the Dodgers, though, right?
Probably, but not necessarily. Ohtani reportedly offered similar structures to all of the teams he talked to:
Granted, the Dodgers’ track record of 11 consecutive playoff appearances has made them a desirable destination: Ohtani’s contract includes a no-trade clause but no opt-outs, so he’s clearly comfortable with their competitive prospects. It may not be a coincidence that the deals Mookie Betts and Freddie Freeman signed with the Dodgers also include significant deferrals. Free agents want to be Dodgers because the Dodgers win, and also because they make players better. And because they have a knack for developing productive players on the cheap, they retain the prospect capital and payroll room to acquire and sometimes extend elite talents like Betts, Freeman, and Ohtani. As of yet, though, we have no indication that Ohtani cut the Dodgers a deal that he wasn’t willing to extend to someone else. All we know is that the Dodgers were the ones who ponied up.
Are there any other sweeteners?
Yes, for both sides. For Ohtani, the deferrals could save him a fortune in taxes. From an income tax perspective, California is the most expensive state for millionaires: Californians who earn more than $1 million a year pay a 13.3 percent tax, which will increase to 14.4 percent next year. If Ohtani no longer lives in California after his days as a Dodger are done, his $68 million money piles won’t be taxed at those rates.
The Dodgers get a sweet perk too: They don’t have to pay interest on that deferred cash.
Does this deal make Ohtani less likable?
Your mileage may vary, but not in my mind. If anything, it’s admirable that he’s putting his money where his mouth is when it comes to wanting to win. Sure, he’s hopping on the bandwagon of a perennial playoff team, but isn’t he entitled to? He’s hardly a Durant-ian serial superteam joiner. Hell, last time he had the chance to choose his team, he picked the Angels. My man just put in six seasons in Anaheim without ever making the playoffs, despite two unanimous AL MVP awards and a runner-up finish. He didn’t demand a trade or try to force his way out of a losing situation. He served his time and gained the right to sign wherever he wanted. Most fans profess to appreciate players who say they care about winning. In Ohtani’s case, we know that’s not eyewash.
Ohtani has consistently forsaken short-term payouts to place long-term bets on himself. He passed up the chance to sign with an MLB team out of high school, the better to become a two-way player. Then he left Japan in late 2017, even though MLB’s international signing rules limited him to a vastly lower salary than he could have earned had he waited to enter the league until after he turned 25. (“Shohei Ohtani Might Be the Most Underpaid Man in the World,” an Atlantic headline proclaimed soon after he signed up to make the MLB minimum in 2018.) He earned this incomparable contract by being an incomparable player and silencing skeptics on two continents. If you root against the Dodgers, you can wish this hadn’t happened, but it’s hard to hold it against Ohtani for rational reasons. Fortunately for Ohtani, sports fandom is famously rational!
What will happen when the Dodgers’ big bills come due?
Good question, inner monologue of mine. An interest-free $68 million might not be as imposing a sum in 10 or 20 years—and it won’t count against the CBT—but it will still be a pretty penny to devote to a player who’s no longer on the Dodgers’ roster. Of course, the team has time to prepare for that—and in the meantime, the Dodgers may make tens of millions of dollars a year on Ohtani-related promotions and advertising, which they can squirrel away and invest with those future payments in mind. In fact, they can’t just forget about their future debts for a decade; as the L.A. Times noted, the CBA specifies that each season’s deferral must be “fully funded by the club” within two years of the season when the deferred compensation is earned. That is, the team has to show that it’s good for it.
A more exciting scenario than the Dodgers simply saving and spending responsibly would involve Ohtani adding “owner” to “pitcher” and “hitter” by turning all those I.O.U.s into equity in the team. Active players aren’t allowed to own pieces of franchises, but ex-players are permitted to buy into ownership groups, as Derek Jeter did with the Marlins and Buster Posey did with the Giants. But don’t count on Ohtani getting his Magic Johnson on: Per the L.A. Times, “There is no option for the deferred money to be converted into an ownership stake in the future.”
Will MLB try to crack down on extreme deferrals?
MLB has reportedly tried to restrict deferrals in past CBA negotiations, but the players pushed back, preferring to preserve their flexibility. (As long as players with deferred salary still get paid down the road and players aren’t pressured into deferrals, it’s in the union’s interest to have higher contract totals and teams that feel less constrained in spending.) Whether the owners advocate for limits in the next round of bargaining depends on whether they think deferrals pose a problem for competitive balance (or their pockets), and whether they think a situation like Ohtani’s will arise again. Let’s tackle those questions one at a time.
Do extreme deferrals pose a problem for competitive balance?
In theory, not particularly. Sure, the Dodgers were already good, and adding Ohtani makes them better. But it’s not as if they can’t sign superstars without accounting tricks, and again, they supposedly weren’t the only team that Ohtani would have deferred for. Plus, it’s not as if the money Ohtani deferred is imaginary. Yes, teams that compete consistently may have an easier time persuading players to sign and stay long term, and teams that spend at the top of the market may have more opportunities to benefit from deferrals. Wealthier teams might be more willing to tolerate large lump sums on the back end, too. Then again, lower-spending teams might take advantage of a little more leeway on the front end. Ultimately, baseball’s biggest competitive balance problem in recent years has been owners who weren’t willing to spend as much as they could. Those types won’t be done in by deferrals; they tend to take themselves out of the bidding.
It’s possible that the collapse of the cable bubble will create a bigger gulf between teams that have favorable broadcast deals and those that don’t. Maybe it bodes poorly that the Yankees and Dodgers, who have two of baseball’s best broadcast arrangements, have added expensive superstars this month (one of whom was traded from a team that’s trimming payroll partly because Bally Sports went bankrupt). But that’s not unprecedented deferrals’ fault.
Will a situation like Ohtani’s arise again?
We’ve all been asking that question for some time, though usually as it pertains to Ohtani’s two-way play. This situation is closely related to Ohtani’s unicorn status, though, so it’s sort of the same question: Will there be any other Ohtanis? There isn’t that much value to teams in deferring pay for players who don’t make much money. And most players wouldn’t want to do it, no matter how much they make; Max Scherzer’s 50 percent deferral rate with the Nationals was the sport’s previous high. As Tim Dierkes of MLB Trade Rumors wrote, “One player doing it does not translate to a hot button issue or something where billions of dollars hang in the balance.” Especially when that one player is a one of one.
Put it all together, and this doesn’t seem like a very pressing problem. Except, perhaps, for the Dodgers’ division rivals.
What’s Ohtani’s dog’s name?
Sorry, we still don’t know. But he probably has a de-furred contract.
Don’t dogs of that breed have hair, not fur?
Just let me have my pun.
