Analysis | Shohei Ohtani’s $700 million deal is more complicated than it seems (2024)

Then, on Monday, when the Athletic reported that Ohtani’s deal included $680 million in deferred money — or, put another way, that he would be paid only $2 million annually for the 10 years of the deal — jaws dropped again. More literally, perhaps, fingers dropped onto iPhone keypads as executives from rival teams compared notes on the absurdity. That $700 million figure was not quite what it seemed.

Sure, other Dodgers such as Mookie Betts and Freddie Freeman have deferred money in their deals. The Nationals became notorious for deferring money in deals during their best years. They owe Max Scherzer $15 million next year because of it. But this seemed like something else.

Ohtani’s camp is making the case that his deal is one of the more unselfish ones in MLB history. What player would agree to be paid a mere $2 million annually so his new team has more cash available to spend on other players? Then again, Ohtani reportedly makes millions in endorsem*nt deals each year. He will have plenty of spending money before the bulk of his deal kicks in.

The Dodgers can also say they gave Ohtani the biggest deal in professional sports history — bigger than the one Lionel Messi got from Barcelona — without paying out record money in real time. According to the latest version of the collective bargaining agreement between the owners and the MLB players union, all deferred salaries “must be fully funded by the Club, in an amount equal to the present value of the total deferred compensation obligation, on or before the second July 1 following the championship season in which the deferred compensation is earned.”

In other words, the Dodgers will have to set aside the money they will eventually pay Ohtani each year by July 1 to ensure they can pay it to him later. But they need only set aside the present value of the money, not the $68 million he will eventually get, which is somewhere around $45 million, thanks to interest rates. And therein lies the reason that Ohtani’s deal — while still massive and unprecedented — is slightly less astronomical than it feels.

The Dodgers will still take a major hit to their payroll for the purposes of competitive balance tax (CBT) calculation. No, they are not taking an annual hit of $70 million, which the total value of the deal suggests they would. Article 16 of the CBA explains that the present value of deferred compensation is used to calculate the average annual value for competitive balance tax purposes.

The present value of the deferred money — the amount that, if paid in full now, would grow to $700 million in 10 years with current interest rates — plus the actual value of the $20 million the Dodgers will pay Ohtani in real time for 10 years is roughly $460 million. That number divided by the 10-year duration of the deal yields an average annual value of around $46 million — which is still more than any other player has been paid annually. But it is not nearly as much as it seemed: Scherzer and Justin Verlander signed deals with average annual values of $43.3 million each. Aaron Judge’s deal averages $40 million annually. By that measure, Ohtani is not quite so out of reach.

Speaking of Scherzer, those familiar with Nationals payrolls of the mid-2010s might be wondering: Why did they receive ridicule for their inclusion of deferrals for Scherzer and Stephen Strasburg and in potential deals for Bryce Harper and others if the Dodgers are being considered innovators now?

The main difference is scale. When the Nationals signed Scherzer to his seven-year deal, they, too, received a competitive balance tax break. But because interest rates were lower, the break was smaller — his $210 million contract had an estimated value of around $185 million then. It did offer the Nationals more payroll flexibility, both literally and when it came to CBT calculations, because his deal counted for slightly less than the $30 million annually its total value would suggest it would be worth. And the Dodgers, who are among the sport’s biggest spenders year in and year out, have a different relationship to their payroll than the Nationals did.

Even though there was precedent for the use of large-scale deferrals to offset present-day costs, Ohtani’s deal nevertheless seized industry conversations Monday evening. But the players union has not taken issue with deferred compensation because of the flexibility it affords players and teams as they try to construct big deals. Ohtani would never have been able to say he got a deal worth $700 million without deferrals. It is in the union’s interest to allow players to structure deals in any way that maximizes value. And while the owners did try to bargain for limits on deferred compensation in the negotiations for the current CBA, they did not get it. The agreement, as currently written, is clear: “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.”

But to the extent that any rival teams feel frustration with the way the Dodgers structured the deal, multiple executives and league officials speaking on the condition of anonymity suggested that the Ohtani contract is hard to use as a harbinger of things to come for one obvious reason: Very few players, even very good ones, would be willing or able to take $2 million in annual salary on a deal that big. Because Ohtani makes so much money in off-field endorsem*nts, and because he is so desperate to win after six seasons without a postseason appearance with the Los Angeles Angels, he amounts to something of a perfect deferred compensation storm. Perhaps other players will use him as a model. But in his contract, as everywhere else, Ohtani is one of a kind.