Buy Me some Peanuts and Contract Deferrals? Shohei Ohtani’s Contract with the Los Angeles Dodgers Reignites the Debate over Deferred Compensation Plans.
by Julian O’Donnell
Published onApr 08, 2024
Buy Me some Peanuts and Contract Deferrals? Shohei Ohtani’s Contract with the Los Angeles Dodgers Reignites the Debate over Deferred Compensation Plans.
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In December of 2023, baseball superstar Shohei Ohtani signed the largest professional sports contract in world history, agreeing with the Los Angeles Dodgers on a 10 year deal worth a whopping $700 million. Soon after, news broke that Ohtani and the Dodgers had also agreed upon a deferred payment plan, with Ohtani deferring $68 million per year to be paid at a later date.
Deferred payment plans are a mechanism used by Major League Baseball (MLB) teams to free up payroll space and avoid paying a luxury tax. Normally, baseball teams have to pay a luxury tax (i.e. a penalty) when their payroll exceeds certain thresholds established in the Collective Bargaining Agreement (CBA). Calculating any team’s payroll requires determining the current annual valuation of an individual player’s contract. For example, Ohtani’s contract with the Dodgers will be tagged for $46 million on the Dodgers’ payroll because the value of $68 million in 2034—the year that Ohtani’s deferred payments begin—would be around $46 million today. According to the CBA, there are “no limitations on either the amount of deferred compensation or the percentage of total compensation” for a player’s contract.
These payment plans are not a new phenomenon in professional baseball. In fact, one of the more noteworthy days on the baseball calendar is “Bobby Bonilla Day,” when early 1990s baseball star Bobby Bonilla receives just over $1 million because of a deferred contract. Other notable players who received a deferred contract include Max Scherzer and Manny Ramirez. Despite the utility of deferred contracts, Ohtani’s, in particular, has brought to the forefront a lingering skepticism that such deferred payment plans unfairly favor rich teams.
The main critique of the current system is that teams like the Dodgers can effectively skirt the luxury tax and continue to sign expensive players. This produces not just a payroll disparity but a talent disparity as well, with more signature players signing with teams that have the means to pay for them. Soon after Ohtani signed with the Dodgers, another sought-after free agent, Yoshinobu Yamamoto, signed with the Dodgers for a 12-year deal worth $325 million. With the MLB already facing a historic payroll disparity, contract deferrals have the tendency to exacerbate the existing differences between teams, especially the average amount of wins per team.
Yet, amidst the potential harm done to poorer teams, contract deferrals were agreed upon by the Major League Baseball Players Association and all 30 teams in the most recent CBA. Teams that voice displeasure with the current arrangement only have themselves to blame.
When the current CBA expires at the end of 2026, amending the deferred compensation section should be one of the main priorities. In doing so, deferred compensations on the payroll should be valued at a number closer to what was originally agreed upon instead of valuing a contract based on what its future amount would be valued at today’s rate. For example, instead of the Dodgers only being responsible for $46 million of Ohtani’s contract for their 2024 payroll, they should have to be on the hook for closer to $60 million. This middle-lane approach can appease those looking to overhaul the current deferred payment system and those who want teams to have payroll flexibility.
Amending the current deferred payments scheme should not intrude upon the contractual agreement between the team and the player. There can be a lot of benefits for setting up a deferred contract, including the potential to legally avoid certain state taxes. However, when involved with other organizations whose interests are directly affected by actions like deferred compensation plans, more emphasis should be placed on the original agreed upon price for payroll purposes.
Julian O’ Donnell is a second-year law student at Wake Forest University School of Law and is on the editorial staff for the Journal of Business & Intellectual Property Law. He holds a Bachelor of Arts from Ohio State University.
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