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Thread: Why not front-load contracts?

  1. #1
    Box of Frogs edabbs44's Avatar
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    Why not front-load contracts?

    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?

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    Re: Why not front-load contracts?

    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?
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    Re: Why not front-load contracts?

    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.

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    Titanic Struggles Caveat Emperor's Avatar
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    Re: Why not front-load contracts?

    Quote Originally Posted by PuffyPig View Post
    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.
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    Five Tool Fool jojo's Avatar
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    Re: Why not front-load contracts?

    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....

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    Re: Why not front-load contracts?

    Quote Originally Posted by PuffyPig View Post
    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.
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    Re: Why not front-load contracts?

    Quote Originally Posted by jojo View Post

    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+%.

    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.

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    Score Early, Score Often gonelong's Avatar
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    Re: Why not front-load contracts?

    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
    Last edited by gonelong; 12-26-2006 at 10:20 AM.

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    He has the Evil Eye! flyer85's Avatar
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    Re: Why not front-load contracts?

    back loading contracts is just like piling up debt on credit cards, get more now and pay for it later.
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  11. #10
    Puffy's Daddy Red Leader's Avatar
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    Re: Why not front-load contracts?

    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.
    Last edited by Red Leader; 12-26-2006 at 10:39 AM.
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    Stat Wanker Hodiernus RedsManRick's Avatar
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    Re: Why not front-load contracts?

    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.
    Games are won on run differential -- scoring more than your opponent. Runs are runs, scored or prevented they all count the same. Worry about scoring more and allowing fewer, not which positions contribute to which side of the equation or how "consistent" you are at your current level of performance.

  13. #12
    Score Early, Score Often gonelong's Avatar
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    Re: Why not front-load contracts?

    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

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    Re: Why not front-load contracts?

    Quote Originally Posted by RedsManRick View Post
    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.
    Last edited by Bobcat J; 12-26-2006 at 04:20 PM.

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    Stat Wanker Hodiernus RedsManRick's Avatar
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    Re: Why not front-load contracts?

    Quote Originally Posted by Bobcat J View Post
    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:

    Code:
    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.
    Last edited by RedsManRick; 12-26-2006 at 04:37 PM.
    Games are won on run differential -- scoring more than your opponent. Runs are runs, scored or prevented they all count the same. Worry about scoring more and allowing fewer, not which positions contribute to which side of the equation or how "consistent" you are at your current level of performance.

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    Re: Why not front-load contracts?

    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.

    Code:
    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.
    Last edited by Bobcat J; 12-26-2006 at 05:53 PM.


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