Accounting

Breaking Down the Numbers: Shohei Ohtani’s Mega Contract from a CFO’s Perspective

10 years. $700 million.

Or, wait. 10 years, $20 million? No. 10 years, $460 million. 

Whatever the actual figure is, Shohei Ohtani is going to get paid. The newest Los Angeles Dodger might be the best baseball player on the planet — and his last few seasons stack up favorably to some of the best baseball players of all time — and he’s going to be compensated accordingly. But in a sport where middle relievers — good ones, at least — are paid in the ballpark (heh) of $10 million a season, perhaps the best player in the game is going to be paid…$2 million annually from 2024-2033. 

Then, he will be paid $68 million every July 1 from 2034-2043. Before taxes, of course.

We’re big baseball fans here at FloQast, but our expertise lies in the numbers. 

The move isn’t unprecedented. Legends like Ken Griffey Jr. and Bobby Bonilla also opted for deferred payments, receiving annual installments well after their careers came to a close. In the case of Bobby Bonilla, who last played for the New York Mets — the team paying him — in 1999, he receives $1,193,248.20 every July 1 (unofficially known as “Bobby Bonilla Day” among those who observe), and will do so until 2035, when he will be 75 years old. (Bonilla also took a deferred deal with the Baltimore Orioles, who pay him $500,000 a year until 2029). Dan Hajducky of ESPN did a pretty handy write-up here for more info on the history of deferred payments in the MLB.

But here’s the thing: At face value, the contract says it’s $700M, but because it’s being delayed, its true value is actually less. A lot less. It’s easier to look at the deal as not one, but two contracts (of course the MLB — and perhaps the taxman—- doesn’t see it that way, but bear with me):

Fairly straightforward, right? Not so fast.

Let’s calculate what a single year is worth. $2M today + $68M (starting once the “first” contract ends and the “second” begins) 10 years from now, discounted by a risk-free-rate of 4.43% on the $68M for 10 years means the total deal is valued at $46M today.

So…Why?

As much as it pains this Giants fan to say, the Dodgers are considered a perennial favorite in the National League. But with two losses in the team’s three World Series appearances since 1985 (that’s almost 40 years…just saying), it’s clear that the team needed something more. 

Simply signing with the Dodgers makes them better, but the structure of the deal allows the Dodgers flexibility to add more players, because, ya know, baseball is a team sport. While there’s no hard salary cap in baseball like there is in the NFL, NHL, or NBA, the MLB has what’s called a Competitive Balance Tax. Effectively, it limits how much teams can spend on players annually to ensure a somewhat even playing field. In reality, it’s a soft salary cap. Teams can choose to spend above the designated threshold. They just have to pay up later.

By structuring the deal this way, the MLB is calculating Ohtani’s contract at $460M over 10 years. That’s pretty vanilla for a player of his status. But this gives the Dodgers greater flexibility to sign other quality players to boost their chances of winning another World Series.

Now, there are a few spicy takes that I, personally and professionally, don’t feel hold much water. 

Another conspiracy floated has the deal being an elaborate wager by Ohtani, with the deal representing a bet that the fed and interest rates will come down over time. I don’t see this being the case. Really, this is entirely based on current market rates, and current rates take into account predictions on what interest rates will be over the coming decades. Further, at his net worth and income stream, he could easily hedge more or less against interest rates with other vehicles — he didn’t have to use his contract to do that. Tying his contract to his opinions on Jerome Powell seems far-fetched, and the reasons are undoubtedly baseball-related to help the Dodgers compete and avoid luxury taxes (as much as it pains me to say). It’s also worth noting that Ohtani’s various sponsorship deals will net him in the ballpark (heh) of $40-50 million dollars annually. So he’s got that going for him.

Some have floated the idea that this contract is structured the way it is for tax purposes, but it’s unclear how the tax treatment should be. 

What This Really Means

What’s the total value of money these contracts are worth today? 10 years of pay over 10 years is the most common way to compare it, but present-day dollars is the best way to compare contracts of different lengths.

Shohei’s contract is worth $365M today. That’s taking all future payments and discounting them to net present value. If he had signed a 10-year $46M/yr contract, that would also be worth $365M today. The time value converts money equally.

What would things have looked like if he had signed a more straightforward deal? If Shohei Ohtani’s deal was actually 10 years at $70M as most people believe it to be — and not being paid over 20 years — it would actually be worth $556M.

A New Era for Sports Contracts

Shohei Ohtani is baseball’s biggest name, and because of that — and the value he’s proven to bring to teams — he has the flexibility to structure his contract like this. 

There will undoubtedly be similar situations that come about in the future, but whether or not the MLB will act to close the loophole allowing Ohtani to get his money, and the Dodgers, the room to add more players is up for debate. Chelsea FC of the English Premier League started handing out similar deals to players after American businessman Todd Boehly assumed control of the club in 2022. Recently, the other EPL clubs voted to close that loophole.

Are there any indications that Major League Baseball will take action? Not as of right now. It’s not as if this were the first such deferred deal — heck, Ohtani’s new superstar teammates Mookie Betts and Freddie Freeman also have deferred payments as part of their deals. What this does represent is a fairly momentous event in baseball history: An international star firmly in his prime agreed to a contract that would pay him an astronomical amount of money — while still affording his new team the flexibility to add players around him to improve their chances of winning beyond just 2024.

I just wish it wasn’t with the frickin’ Dodgers.

Razzak Jallow

Razzak Jallow is FloQast's CFO. Prior to joining FloQast, Razzak served as VP, Head of Finance at Looker, which was acquired by Google. Throughout his career, Razzak has developed a broad experience across financial planning and analysis, accounting, tax and treasury, sales and investor operations – in both public and private companies including, Google, Apple, and Adobe. A proud graduate of Santa Clara University, as well as the University of Southern California's Marshall School of Business. Razzak splits his time between his native Bay Area and Los Angeles with his family. He is not — and will never be — a Dodgers fan.