Shohei the time value of money

FERVENT thanks should go to Shohei Ohtani, the Japanese baseball star who last weekend signed a 10-year contract worth US$700 million to move to the Los Angeles Dodgers. That’s the biggest contract ever for a baseball player. But now, we have the details of how it’s structured, and that turns it into one of the best financial stories in years.

Ohtani’s money is going to be back-loaded. Essentially, he and his agents negotiated “Show me the money, but not yet”. Indeed, he’s only going to receive an annual US$2 million for the next decade. Starting in 2034, once his contract is completed, the Dodgers will start paying him US$68 million per year, and do so for a decade. The last payment is due to arrive when he is 50. This is within the rules established by Major League Baseball, and both sides entered freely into the deal. Indeed, it was apparently the idea of Ohtani himself, and his agents made the same proposal on back-loading to all the other teams who approached them. So if they want to do it, there’s no reason why they shouldn’t. But why would you want to structure a deal this way?

Both the Dodgers and Ohtani know all about Bobby Bonilla, the former New York Mets player whose contract was structured so ridiculously into the future that the Mets are still paying him US$1.19 million each year and must continue until 2035. He retired in 2001. July 1, the day when the Mets write him the cheque each year, is now celebrated as Bonilla Day among baseball cognoscenti. This is all extremely embarrassing for the Mets, who have a history of spending money not wisely but too well, and also to an extent for Bonilla, as there’s a sense that he’s being paid for doing nothing.