Well, I'm glad he's not making $36,000,000 this year.Originally Posted by AtomicDumpling
Yes I agree.
The idea is that his total production over the life of the contract would be worth $238 million dollars (which is the value of his contract according to baseball-reference.com). The Reds felt Votto would outperform his salary in the early years and probably underperform his salary in the later years. The people who are assigning salaries to specific years are missing the point.
They could have structured the contract to pay him more per season in the early years, then less per season in the later years. That would make more sense if they really wanted to pay him on his expected production for each season. Perhaps his salaries would have been arranged like this:
Votto's Real Contract:
2014 - $12 million
2015 - $14 million
2016 - $20 million
2017 - $22 million
2018 - $25 million
2019 - $25 million
2020 - $25 million
2021 - $25 million
2022 - $25 million
2023 - $25 million
2024 - $20 million
Total - $238 million
This contract (the real one) makes Votto a bargain in the early years and overpays him in the later years.
Votto's Alternative Contract:
2014 - $36 million
2015 - $33 million
2016 - $30 million
2017 - $27 million
2018 - $24 million
2019 - $21 million
2020 - $18 million
2021 - $15 million
2022 - $13 million
2023 - $11 million
2024 - $10 million
Total - $238 million
The Alternative Contract pays him according to the amount of value the team predicts Votto will produce on the field that season.
Either way it is the same amount of money. The Alternative Contract would make more sense in terms of paying him directly for his expected levels of production each season. He would be expected to play his best baseball at the beginning of the contract and gradually decline as he ages. This would alleviate the concern that a lot of people have, namely that he won't be worth $25 million per season in his late 30's and his exorbitant salary will become an albatross on the team's payroll.
Alleviating that concern sounds like a good thing, but actually it is not. The reason is because it would actually cost the Reds a lot more to structure the deal in this fashion. The value of a dollar today is higher than it will be 10 years from now, and most importantly you retain the ability to use and invest that cash for several extra years.
You can set aside a lesser amount of money today and put it in bond funds or other conservative, interest-bearing investments and when the higher salaries are due your reserved money will have grown enough to pay them. For example, invest $10 million of the money you saved by paying Votto a lower salary in 2014 and in 10 years that $10 million will grow into perhaps $18 million. In this way you can pay the $238 million total dollars by setting aside perhaps $185 million today. If you paid him more in the early years of the contract it would cost you more like $225 million total. If you can defer money towards the back end of the contract it actually reduces the real-world cost of the contract. So by deferring the payments it can save the Reds tens of millions of dollars over the life of the contract. That is why contracts are structured with the highest payments at the end when the player's production has declined significantly. The Reds obviously realize that he will not be worth $25 million per year in 2023, but that is totally irrelevant.
Think of it like this, if your friend asked to borrow $1000 from you and promised to pay it back in 10 years would you do it? Your friend could take that $1000 and put it in a savings account earning 5% interest and leave it there for 10 years. With compounded interest that $1000 savings account 10 years later would have about $1700 in it. He would pay you back the $1000 and have $700 left over. Essentially that is what the Reds have done with Joey Votto's money. They structured the deal where they get to keep much of the money in their accounts for several extra years. Over those years that money will grow and leave them with more money to spend in subsequent years. That is why contracts in baseball are so frequently backloaded with the largest salaries in the later years when the player has already declined.
If people realized this maybe they wouldn't constantly complain about players not being worth their salaries in the last years of long-term contracts.
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