Why not front-load contracts?

[edabbs44]

I've been thinking about this for a while...why don't teams front-load some of their contracts? I think it would be beneficial for the teams involved, especially when the contract involves an older player. I realize it makes the player more affordable now, but I think this method is a bit short-sighted.

For example, take the much maligned Soriano contract (signing bonus not included).

SORIANO SPECIFICS
2007 — 9M
2008 — 13M
2009 — 16M
2010 — 18M
2011 — 18M
2012 — 18M
2013 — 18M
2014 — 18M

Why not pay him $18 million now and $9 million in 2014? Wouldn't the $18 million apply more to his 2007 production? And, when his skills decline, wouldn't he be a little more appealing in a trade making less cash?

This isn't the best example since he hits his peak salary in 2010, but you catch my drift. Any ideas?

[Dracodave]

I would imagine front-loading contracts would be more wise (I suppose?) then backloading. Expecially if a player is going to be on the decline soon, Mathews JR and Soriano both come to mind on this. I also think either way this contract is done, it's still going to be hard to trade them. Even if they are making less they are still overpaid.


Seems to be lose-lose for GM's who overspend lately?

[PuffyPig]

I dollar paid later is less than a dollar paid now.

It's costs less ion the long term (in real money terms) to pay less now and more later. And as salaries go up over time (that's a fact), the larger contracts later on don't look so bad. A team can always throw money into the pot to move a contract.

And, if you front load a contract, you have less to spend now to be competitive.

[Caveat Emperor]

I dollar paid later is less than a dollar paid now.

It's costs less ion the long term (in real money terms) to pay less now and more later. And as salaries go up over time (that's a fact), the larger contracts later on don't look so bad. A team can always throw money into the pot to move a contract.

And, if you front load a contract, you have less to spend now to be competitive.

Plus, it's probably a safe bet that within the next 5 years, there'll be something else (ala XM radio) that'll add to the total pool of revenue that teams have to draw from.

There'll be more money available to spend in the future, be it by new revenue generators or by inflation that devalues the dollars being spent.

[jojo]

Well there is always the chance of trading a player before the backloaded years kick in...

Also, having three years to worry about it makes it a little easier to budget for it as opposed to giving a guy like Soriano $18M right now.... in essence, the Cubs get Soriano and a pitcher for the $18M this season...

GMs have their jobs today.......

think of it this way, why do some people use their credit cards at McDonalds? Despite having to pay 15-30% interest on it later, they want the Big Mac NOW....

[Z-Fly]

I dollar paid later is less than a dollar paid now.

It's costs less ion the long term (in real money terms) to pay less now and more later. And as salaries go up over time (that's a fact), the larger contracts later on don't look so bad. A team can always throw money into the pot to move a contract.

And, if you front load a contract, you have less to spend now to be competitive.

The net money is still the same. It is just a differnt spin on it. I could elaborate more but I think if you look closely you will see what I mean.

[4256 Hits]

think of it this way, why do some people use their credit cards at McDonalds? Despite having to pay 15-30% interest on it later, they want the Big Mac NOW....

I do to get 5% cash back and then have 30 to 60 days to then pay the credit card online from my checking account which is earning 3+%. :D :D

The biggest reason for not front loading contracts is time value of money. If you don't understand time value of money I would recomend learing about it. Because if you understand it at an early age you can easly retire a weathly person.

[gonelong]

I'd seriously consider front loading contracts when you are a lower payroll team like the Reds.

In order to compete you need to have all your resources maximized. IMO the way to do that is to front load a handful of contracts if you have those kind of players (Dunn, Harang, Encarnacion) you can reasonably expect to have success over that time-frame.

By year 3 & 4 you hopefully have a couple of guys like Bruce, Bailey, Votto, etc that are productive for you. Now you have a core that isn't costing you all that much and you can afford to go out and get a couple of solid high dollar guys and maybe a 1 year contract on a semi-injured guy who is looking to prove himself for the big payday. Now you can take your shot with a full clip of ammo.

Possible downsides. I'd imagine you'd get a bit more player grief in the latter stages of their contract. What have you done for me lately?

How many guys would be financial nightmares (affecting their play?) unable to manager a declining income?

Would the players union (or other owners) strongly object?


I was a huge proponent of front loading Dunn's contract when the Reds decided to waste the money on Milton instead. Image if they had signed Dunn to a front-loaded contract at that time? At this point you'd have Dunn dropping down to $7M or even $5M for 2007 and not have Milton's contract at all.

GL

[flyer85]

back loading contracts is just like piling up debt on credit cards, get more now and pay for it later.

[Red Leader]

If you front load the contract, you also risk "Operation Shutdown," with some players. Those players will want their contract re-done after their "big money" years are over and the contract value decreases.

The only way I could see it done is if you did a contract. Let's take Adam Dunn as an example and create a purely hypotethical contact.

2007: 16M
2008: 16M
2009: 14.5M w/ incentives for games played, All-Star appearance that could
take the total to $16M.
2010: 13.0M w/ incentives for games played, All-Star appearance, AB's, and
MVP voting that could take the total to $17M.
2011: 12.0M w/incentives for games played, All-Star appearance, MVP
voting, AB's, and HR's that could take the value to $18.0M.

So, you're basically replacing "real" money with incentive money as the player ages. If his production decreases as you expect, as he ages, he gets less "base" money. If he continues to produce, his salary actually escalates during the life of the contract. The reality is that he'd probably accomplish some of those incentives in the later stages and you wouldn't save that much. That's one way I guess you could do it. Is it beneficial? I guess it has its uses, but if I were a GM, I'd rather the players salary escalate from the beginning (backloaded) so that the players contract rises with the rest of the league. As someone else said, additional revenue sources could come into play and even though the players salary has risen, that money is more "affordable" in 2-3 years than it is in today's money standards.

Also, I doubt many players would agree to a contract as it is above. Why have the last three years based on incentives when another team would give you that money guaranteed? Players (and their agents) aren't stupid. They're going to (in most cases) take the most guaranteed money available to them.

[RedsManRick]

I've been an advocate for front-loading contracts as well (or at least incentivizing the backend). However, a lot of the logic for backloading is based in inflation. Because of insane industry growth and standard dollar devaluation, that 18M that Soriano is getting in 2012 may actually be less (in 2007 dollars) than the 9M he's getting next year.

In fact, I saw an interesting article (on BP I think) that showed that the contracts today are actually just as big as contracts 50-60 years ago. Regular inflation would make salaries grow 8 times over the last 50 years. Meanwhile, the industry has expanded immensely, with gross revenue growing much faster than standard inflation.

For example, in 1992, gross revenue in the industry was $1.2 billion and the average player salary was roughly $1.0 million. In 2006, gross revenue for MLB was $5.2 billion (333% growth) whereas the average player salary was $2.8 million (180% growth). In terms of the ratio of player salary to revenue, the players are actually making LESS money now than they were 15 years ago.

If you have a reasonable expectation about the growth of the industry, those dollars don't seem so bad. The bigger question in my mind however, and the real problem with backloaded contracts, is that you don't know what quality player you're going to be paying that money to. Sure, if you know he's going to be the 40-40 guy for the next 8 years, that makes sense. But if he declines to an .775 OPS guy with 15 SB speed, or worse (see Darren Dreifort -- and Todd Helton's 15 HR say hi) you're likely overpaying regardless of the value of a 2012 dollar in MLB.

[gonelong]

I think a frontloading contract would only work on a 3 year deal.

IMO the longer the deal the less attractive it is to everyone. I'd also think that this would be most attractive to players that have not yet hit their first big payday. Get a ton of money up front and in the bank.

GL

[Bobcat J]

If you have a reasonable expectation about the growth of the industry, those dollars don't seem so bad. The bigger question in my mind however, and the real problem with backloaded contracts, is that you don't know what quality player you're going to be paying that money to. Sure, if you know he's going to be the 40-40 guy for the next 8 years, that makes sense. But if he declines to an .775 OPS guy with 15 SB speed, or worse (see Darren Dreifort -- and Todd Helton's 15 HR say hi) you're likely overpaying regardless of the value of a 2012 dollar in MLB.

Front loading does not make financial sense.

Let's say a player signs for 40 million over 5 years and has a 1.100 OPS is year one and a .775 OPS in year five. In the end you are still paying 40 million actual dollars whether he makes 20 million in year one and 2 million in year five or the opposite. You still got the same production for the same amount of actual dollars.

But, the value in backloading contracts comes from the fact that 20 million is worth less in five years than it is now. So, a team is actually saving money by deferring larger payments for later in the contract.

The credit card analogies don't match up to this situation. Its not like the money that gets paid later is being paid with interest. If the team has the money to spend now, but doesn't have to spend it until five years down the road, it could invest that money and actually collect interest for years.

In the end, it makes sense for teams to put off paying for as long as they can.

[RedsManRick]

Front loading does not make financial sense.

Let's say a player signs for 40 million over 5 years and has a 1.100 OPS is year one and a .775 OPS in year five. In the end you are still paying 40 million actual dollars whether he makes 20 million in year one and 2 million in year five or the opposite. You still got the same production for the same amount of actual dollars.

But, the value in backloading contracts comes from the fact that 20 million is worth less in five years than it is now. So, a team is actually saving money by deferring larger payments for later in the contract.

The credit card analogies don't match up to this situation. Its not like the money that gets paid later is being paid with interest.

In the end, it makes sense for teams to put off paying for as long as they can.

You are correct. The U.S. currency inflation rate has been at about 3% for the last 15 years of so. Major league baseball salaries have been inflating at about 8% the last 15 years (though much more steeply in recent years).

Now, let's see the current value of soriano's deal given those numbers. If we use the U.S. rate (3%) and the MLB rate (8%), it looks like this:



Year Salary Inflation Divisor (3%) Adjusted Salary (3%) Inflation Divisor (8%) Adjusted Salary (8%)
2007 $9,000,000 1.00 $9,000,000 1.00 $9,000,000
2008 $13,000,000 1.03 $12,621,359 1.08 $11,686,444
2009 $16,000,000 1.06 $15,081,535 1.17 $12,929,985
2010 $18,000,000 1.09 $16,472,550 1.26 $13,076,441
2011 $18,000,000 1.13 $15,992,767 1.36 $11,755,161
2012 $18,000,000 1.16 $15,526,958 1.47 $10,567,387
2013 $18,000,000 1.19 $15,074,717 1.59 $9,499,629
2014 $18,000,000 1.23 $14,635,647 1.71 $8,539,760
$128,000,000 $114,405,532 $87,054,806
AVG $16,000,000 $14,300,692 $10,881,851


As you can see, using just the US inflation rate, his salary peaks in '10, but comes out to an average of just over 14.3M per in today's dollars. The MLB rate, the one to look at in terms of dollars on the MLB market, suggests he'll actually be "cheaper" in 2014 than he will be in 2007, and that the average yearly values is just under 11M in todays dollars.

That's all well and good if the true "value" of the player is static. If the performance of the player is static. However, in most long term contracts, the player declines in terms of production over the life of the contract. What ends up happening, is that you get more peroformance for you buck at the beginning of the contract, and then less and less over time. As you can see, if Soriano sustains his level of performance, and that performance merits say 12MM in today's market, then the Cubs got a steal.

However, what if his 2012 performance declines to a level that would be worth only 8MM in todays market. Suddenly, even after generous inflation, he's still overpaid. Unless the true inflation in the market is upwards of 10%, Soriano is going to need to maintain his current level of performance for the next 8 years to justify his salary. Any slip, and the Cubs aren't getting value. If he happens to slip significantly... ouch.

That said, given the growth of the sport in the last 5 years, I think an extremely healthy growth rate projection isn't wholly unreasonable. I'm curious what the teams use in their internal calculations.

[Bobcat J]

If Soriano agrees to play 8 seasons for $128 million, it doesn't matter what the Cubs pay for the return each season. Its what they get on the whole. Think of the 8 seasons as one single product that is being purchased. The best value for the Cubs is to pay the least amount of money for that product.

The value of the contract adjusted for MLB inflation is $87,054,806. But if you invert the salary per year, putting the cheapest at the end, the value of the contract adjusted for MLB inflation is $99,206,494. That is an extra $12,151,688 dollars that the Cubs are paying for the same product. Imagine how big the difference would be if the contract was even more front loaded.



Year Salary Inflation Divisor (3%) Adjusted Salary (3%) Inflation Divisor (8%) Adjusted Salary (8%)
2007 $18,000,000 1.00 $18,000,000 1.00 $18,000,000
2008 $18,000,000 1.03 $17,475,728 1.08 $16,666,667
2009 $18,000,000 1.06 $16,981,132 1.17 $15,384,615
2010 $18,000,000 1.09 $16,472,550 1.26 $13,076,441
2011 $18,000,000 1.13 $15,992,767 1.36 $11,755,161
2012 $16,000,000 1.16 $13,793,103 1.47 $10,884,353
2013 $13,000,000 1.19 $10,924,369 1.59 $8,176,100
2014 $9,000,000 1.23 $7,317,073 1.71 $5,263,157
$128,000,000 $116,956,722 $99,206,494
AVG $16,000,000 $14,619,590 $12,400,811


Now, all of this assumes that Soriano's production is equal in each year in each model. But, in today's age, I agree with Red Leader that back loading opens up a can of worms in dealing with players shutting it down in the later stages of contracts. Its an additional reason to not front load.

[RedsManRick]

Interesting take Bobcat. However, the assumption there is that the Cubs value Soriano 128MM in todays dollars. What happens in these backloaded deals, is that the player is underpaid based on the current value, and then overpaid at the back of the deal, even when inflation is taken in to account because they fail to properly account for the risk of performance decline.

A "fair" contract in my mind, wouldn't be frontloaded per se'. A player would be fairly paid, or slightly generously paid right away, and then each consecutive year would be at a fair salary, but with an increasing portion incentivized. As a way to give the player leverage, he would be given player out options after say the 5th year. This way, everybody is protected from getting the shaft.

Right now, the only way the player gets screwed is if he outperforms his contract. I doubt that many 30 year olds signing 8 year deals outperform their contract. This way, the player is guaranteed to get paid what he deserves according to the market, and a chance to escape the deal and retry FA once the deal becomes incentive laden.

Working from a model with the same "real" dollar value of 114.4, I'd structure it like this:


2007 $18,000,000.00 1.00 $18,000,000.00 1.00 $18,000,000.00
2008 $18,000,000.00 1.03 $17,475,728.16 1.08 $16,666,666.67
2009 $18,000,000.00 1.06 $16,966,726.36 1.17 $15,432,098.77
2010 $15,500,000.00 1.09 $14,184,695.72 1.26 $12,304,399.74
2011 $15,500,000.00 1.13 $13,771,549.24 1.36 $11,392,962.72
2012 $15,000,000.00 1.16 $12,939,131.77 1.47 $10,208,747.96
2013 $13,000,000.00 1.19 $10,887,295.34 1.59 $8,192,205.15
2014 $13,000,000.00 1.23 $10,570,189.65 1.71 $7,585,375.14
$126,000,000.00 $114,795,316.23 $99,782,456.13


This way, it's easier to build a winning squad because you are paying fair value for your players and aren't stuck with ridiculous contracts. The effect this would have is a smoothing out of the up and down payroll and W/L cycle. You wouldn't have as much of this "window" language that you have now. Now, on the down side, it does mean there will be less of those years where you get a lot of underpriced guys and make a run. If you have to do that to win, well, maybe this model wouldn't work. But when you can afford to pay guys a lot of money, like the Cubs can, there's no reason to put yourself in a hole.

The real reason I think we see so many majorly backloaded contracts is that inflation in MLB is much higher than the 3% currency inflation. Given that, you can see how it flattens the salary curve for a contract like Soriano's. It makes a lot more sense. Of course, it still doesn't address the issue of performance attrition, but at least it doesn't make the contracts seem so "backloaded" because those 2014 dollars in MLB adjusted dollars are much much more reasonable.

[Unassisted]

Not to be too grisly, but one of the downsides to front-loading contracts would be if a player dies early in the contract. Cory Lidle and Darryl Kile come to mind.

[RedsManRick]

Not to be too grisly, but one of the downsides to front-loading contracts would be if a player dies early in the contract. Cory Lidle and Darryl Kile come to mind.

Taken a bit let grossly, you're simply stating the worse case of performance attrition. The likelihood is that the player will decline throughout his contract -- and as you point out, there's a LOT more room for decline than there is for improvement.

To this end, it would be interesting to see some contract analysis for contracts of say, longer than 4 years for players in their 30's. How did the salary progress relative to the player's performance?

[PuffyPig]

Not to be too grisly, but one of the downsides to front-loading contracts would be if a player dies early in the contract. Cory Lidle and Darryl Kile come to mind.

I believe all contracts are life insured.

[PuffyPig]

The net money is still the same. It is just a differnt spin on it. I could elaborate more but I think if you look closely you will see what I mean.


A dollar paid tomorrow costs less than a dollar paid today. On a net basis.

[gonelong]

To me the reason to front-load a contract is simply one of timing. Do I think we are going to be in a better situation to spend that money more wisely now or later? If I think next years free agent pool is a better one and I am a year or two away anyways, then front-loading seems all the more interesting ... again, I think the risk/reward of front-loading is probably capped at 3 yr deals IMO.

Time value of money makes it much less interesting over 4 or 5+ years.

GL

[Z-Fly]

A dollar paid tomorrow costs less than a dollar paid today. On a net basis.

Not always, but the majority of the time you are correct.

That wasn't what I was saying though.

Here is a Extreamly simplified example.

Front loaded contract...

2007 2008 2009 Total

Player Sal. 10M 8M 6M 24M

Team gross 100M 120M 140M 360M

Diff. 90M 112M 134M 336M

Back loaded contract...

2007 2008 2009 Total

Player Sal. 6M 8M 10M 24M

Team gross 100M 120M 140M 360M

Diff. 94M 112M 130M 336M


This neglects the fact, if a team were to invest the money and gain intrest on the money saved up front.

[bradmu]

Even though a player would love to have a front loaded contract for all the reasons mentioned above, The paycut would likely be a demotivator in some way. For example...if you're boss gave you a huge pay raise and then over the next few years started giving you pay cuts...Would you feel motivated to keep working as hard? Just a thought

Also, if you are worried about the tradeability of players with backloaded contracts...You can always throw in some cash in the trade to get teh deal made...just like we did with Larue. We could have paid Larue that money 2-3 years ago...but instead we "paid" that this year.

[RedsManRick]

Even though a player would love to have a front loaded contract for all the reasons mentioned above, The paycut would likely be a demotivator in some way. For example...if you're boss gave you a huge pay raise and then over the next few years started giving you pay cuts...Would you feel motivated to keep working as hard? Just a thought

Also, if you are worried about the tradeability of players with backloaded contracts...You can always throw in some cash in the trade to get teh deal made...just like we did with Larue. We could have paid Larue that money 2-3 years ago...but instead we "paid" that this year.

To counter that thought, if I knew I was going to be getting a big raise regardless of my performance, what would my motivation be? To me, it seems like another reason to start them at fair value an increasingly incentivize the latter years of the deal.

[edabbs44]

This is my thought process:

Milton: $4 million in 2005, $8.5 mil in 2006 and $9 mil in 2007.

Reverse that and he is a lot more marketable in '07 than he is currently.

I know that is an easy example, but players typically play better when they are younger (except for certain artifically enhanced players:)) so it would make sense to front load their contracts to actually pay for their performance. There's a good chance that Soriano's value will be declining over the life of his contract, so why not give him less during those years?

[gonelong]

Frontloading would allow a team to maximize their roster at some point in the future, at the expense of today. Its why I like to see the Reds explore a front-loaded contract for Harang this season, its not like they are going anywhere in 2007. Build for 2008/2009. Additionally, the player becomes much more tradebable as the contract ages. More teams will be interested in a $4M player than a $12M player, no matter what his production is. At $4M you don't exclude the lower payroll clubs looking to boost the roster for a stretch run and stand to get them to spend prospects as opposed to simply money.

A club that is already there and wants to maximize its current roster should backload.

If the Reds want to succeed, they can't do things the same as everyone else, most other teams have larger resources. You have to do things differently.

GL

[mth123]

This is really about overall cost. A backloaded deal allows a team to fund an investment now that is used to pay the higher salary later. The earnings from pre-funding reduces out of pocket for the team.

If the money is spent on other things instead of funding then the backloading gets to be a burden.

Another point for backloading is it gradually raises salary as the contract expires which allows:

1. Other bad contracts to expire from the books to fund the increase.
2. Creates a bigger slot to extend or acquire a replacement.

A good example is Adam Dunn. This year he is at $10.5 Million. Next year he jumps to $13 Million. The Larue buy out comes off the books and pays for the increase. After 2008, it will be easier for the team to swallow a jump to say $15 Million if the starting point is $13 Million. If it went the other way and he was at $7 or $8 Million the jump to his 2009 salary would be huge.

[Red Leader]

This is my thought process:

Milton: $4 million in 2005, $8.5 mil in 2006 and $9 mil in 2007.

Reverse that and he is a lot more marketable in '07 than he is currently.

I know that is an easy example, but players typically play better when they are younger (except for certain artifically enhanced players:)) so it would make sense to front load their contracts to actually pay for their performance. There's a good chance that Soriano's value will be declining over the life of his contract, so why not give him less during those years?

Well, if the contact is backloaded, as has been talked about in posts previous to this one, you ARE techically giving him less during those years, in terms of cash value at the time the contact was signed.

$9M in 2007 is worth less than $9M in 2005 when the contact was signed because of inflation.

I understand what you are saying, but you're not taking into consideration how much those dollars are worth on a year to year basis.

Re-read Z-Fly's post for a better understanding of what I'm saying.

[Bobcat J]

This is my thought process:

Milton: $4 million in 2005, $8.5 mil in 2006 and $9 mil in 2007.

Reverse that and he is a lot more marketable in '07 than he is currently.


Or you could offer Milton and $5 million in a 2007 trade. You've spent the same amount in actual dollars, but you've had 2 years to invest the $5 million. Plus, $5 million is worth less in 2007 than 2005.

[RedsManRick]

The question though RL is which declines faster, the value of the dollar or the value of the player. I would argue that in many cases, if not most, the player devalues much faster than his salary.

Even if Soriano got paid 16MM every year (meaning his 2014 16 mil is actually worth only 10 mil in today's dollars), is he going to be a 10 mil dollar player in 2014? I doubt it.

So when you back load a contract, even though that 18 mil in 2014 is less than 18 mil -- Soriano (arguably) isn't going to be worth that much. In this way, a static salary makes sense if the player devalues at the same rate as the money does.

I would LOVE to see the numbers on the rate of devaluation (based on WARP3 or VORP or some other statisitic) based on age for players of a given skill set. Assuming Soriano is really worth, say 16 mil based on his current skill level and he declines at some standard rate, what should be paid in the last year of his deal in 2014 dollars?

As others have pointed out though, you don't necessary want to always be paying fair market value every year. If you're shooting for the WS, you want to get as much talent as possible, which might mean shifting cost to latter years. But if you're rebuilding, you should try to build the contract around a window which allows you to do that.

If you're the Reds and a 70 million dollar payroll will never buy you enough talent to win, you can still win occasionally by cycling your payroll up and down and pushing big time during the up years. That's exactly what Florida and Arizona did. Arizona sucked the last few years because it was forced to trim payroll after binging in 2001. Of course, the other positive of this method is that you can maintain organizational talent levels by trading your high priced talent for youth which peaks such that when you're ready to binge again, you have even more talent than you did during your last binge.