Max Scherzer and When $210 Million Isn’t $210 Million

Scott Boras has done it again. After months of what appeared to be mild interest from the clubs one would assume would be in the bidding for the best free agent on the market, Boras found an unexpected bidder with $200 million burning a hole in their pockets. Or, more precisely, $210 million in this case, as the Nationals joined the club of teams paying $30 million per year for premium talent.

Or, at least, they did on paper. Scherzer signed a seven year contract, and in exchange for pitching for them for those seven years, the Nationals have agreed to pay him $210 million in salary. Divide $210 million by seven years and you get $30 million in AAV, which is how this deal will be reported. But because of how this deal was structured, it’s not really $30 million per year.

Instead, the Nationals will pay Scherzer $15 million per season, but do so for 14 years; essentially, they’ve deferred half of each season’s salary seven years into the future. Effectively, they signed Scherzer for $105 million over the seven years that he’ll pitch for them, and then they’ll pay him the next $105 million after the contract ends, making this the most deferred money contract in baseball history.

Teams have been deferring money in contracts forever — the most famous case is Bobby Bonilla’s deal with the Mets that has them paying him through the 2035 season — but never before have we seen this size of a deferral, and so this deal serves as a nice reminder that the payment terms of a deal can have an impact on the actual value of contract. And in this case, the significant deferral has a pretty big impact.

For a lot of reasons, money today is worth more than money in the future, and the further in the future you go, the less money is worth. To translate various schedules of annuities into a scale so that they can be compared side by side, financial analysts use Net Present Value to calculate the value of deals like this. In other words, what amount of money would you need to be handed in cash today to roughly equal the value of the structured payout over time?

NPV calculations are pretty simple, with the primary variable being the discount rate you apply to those future dollars. Just for the sake of argument, let’s assume Scherzer’s discount rate is 7%, roughly the expected long-term rate of return on investing in the stock market. If you take $210 million spread out over 14 years and apply a 7% discount rate, then the contract is worth about $131 million in today’s dollars. Still a lot of money, obviously, but a lot less than the $210 million figure.

Of course, every contract is an annuity with scheduled future payments, so we need to compare that NPV to what the NPV of this deal would have been had the Nationals not deferred half the contract into the future. So, below is a table of various NPV calculations that show the differences in contract valuation based on the payment structures. The first column is how Scherzer’s deal is going to be paid, followed by a more normal backloaded contract that we regularly see, then a completely flat payment structure with even payouts each year, and finally, the NPV equivalent if the salaries were paid on a flat basis.

Year Scherzer Backloaded Flat EqualNPV
2015 $15,000,000 $20,000,000 $30,000,000 $24,341,000
2016 $15,000,000 $25,000,000 $30,000,000 $24,341,000
2017 $15,000,000 $30,000,000 $30,000,000 $24,341,000
2018 $15,000,000 $30,000,000 $30,000,000 $24,341,000
2019 $15,000,000 $35,000,000 $30,000,000 $24,341,000
2020 $15,000,000 $35,000,000 $30,000,000 $24,341,000
2021 $15,000,000 $35,000,000 $30,000,000 $24,341,000
2022 $15,000,000 $0 $0 $0
2023 $15,000,000 $0 $0 $0
2024 $15,000,000 $0 $0 $0
2025 $15,000,000 $0 $0 $0
2026 $15,000,000 $0 $0 $0
2027 $15,000,000 $0 $0 $0
2028 $15,000,000 $0 $0 $0
Total $210,000,000 $210,000,000 $210,000,000 $170,387,000
NPV $131,182,020 $157,976,085 $161,678,682 $131,180,693

The first two columns are maybe the most important. Here, you can see that if the Nationals had simply signed Scherzer to a normal backloaded deal, the kind of contract we see all the time in MLB, the contract would have been worth almost $27 million more to Scherzer than the one he signed. If he had gotten a flat payout structure, we’re talking about $30 million in additional value. Generally, deferred money doesn’t make a huge difference, but when you’re deferring half of the second largest contract for a pitcher in baseball history, the timing of the payments can make a big difference.

And that’s where that last column of that table comes into play, as it shows what an equivalent flat payout AAV would be to this deal: $170 million. If Scherzer had signed for 7/$170 with an equal payout in each season that he actually played for the Nationals, that contract would be roughly equivalent in value to the $210 million deferred compensation contract he actually signed.

You know what the crowd projected Scherzer to sign for this winter? $168 million over seven years. I guessed $175 million. Pretty much everyone else did too. The $210 million figure is going to grab headlines, but this is essentially the contract that we all thought Scherzer would get this winter; it’s just structured differently than we anticipated.

And, as Jeff wrote last night, $170ish million is probably about what we should expect Scherzer to be worth over the next seven years. The extra $40 million in guaranteed money is just there to offset the fact that so much of it is being paid far off in the distant future.

One last comparison, and then I’ll let you get back to the baseball side of baseball. On the surface, Scherzer’s deal dwarfs what Jon Lester got from the Cubs, but that deal is actually somewhat frontloaded, and so it has a very different payment timeline than the Scherzer deal. Let’s look at the NPV of both deals side by side, based on their per-season payouts.

According to Cot’s Contracts, Lester’s $30 million signing bonus is paid out in four installments; half of it coming next April, and then the other half spread out over the last few years of the deal. I’ve added those signing bonus payments to the annual salaries paid out in each season, as well as including the $10 million buyout of the seventh year option. Here’s how the two contracts stack up by NPV.

Year Scherzer Lester
2015 $15,000,000 $30,000,000
2016 $15,000,000 $20,000,000
2017 $15,000,000 $20,000,000
2018 $15,000,000 $22,500,000
2019 $15,000,000 $25,000,000
2020 $15,000,000 $27,500,000
2021 $15,000,000 $10,000,000
2022 $15,000,000 $0
2023 $15,000,000 $0
2024 $15,000,000 $0
2025 $15,000,000 $0
2026 $15,000,000 $0
2027 $15,000,000 $0
2028 $15,000,000 $0
Total $210,000,000 $155,000,000
NPV $131,182,020 $121,373,821

In terms of guaranteed dollars, Scherzer got $55 million more than Lester did, which makes the gap between the two contracts seem enormous. When you factor in the payout structures, though, the value of the two contracts is actually only $10 million apart; the Nationals didn’t actually pay all that much more for Scherzer than the Cubs did for Lester.

Whether the Nationals needed Max Scherzer is up for debate, and I think there’s a strong case to be made that a team with the Nationals rotation could have spent this kind of money more efficiently on other things, but don’t let the initial shock of the $210 million price tag scare you. Scherzer really only needs to justify about $170 million in salary over the next seven years, because the rest of it is just there to account for the fact that the Nationals are forcing Scherzer to make them a long-term loan in order to keep their payrolls at a manageable level while he’s actually on the team.

We hoped you liked reading Max Scherzer and When 0 Million Isn’t 0 Million by Dave Cameron!

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newest oldest most voted
Andrew
Guest
Andrew

Scott Boras is so petty. All so he can say he got more than $200 million

j6takish
Guest
j6takish

Or Max decided he would rather collect checks for nearly a decade after he retires…

Andrew
Guest
Andrew

or he could collect the same present value in a normal contract…It’s a combination of taxes and ego.

jo
Guest
jo

Scherzer: youjelly?

a eskpert
Guest
a eskpert

It’s not nearly so simple. As we saw with the insurance policy thing, Max is more than somewhat risk averse. He might have a lower discount rate, and see expected returns on savings as being very different from guaranteed dollars.

Andrew
Guest
Andrew

no I’m actually a big Scherzer fan and Nationals fan

Richie
Guest
Richie

Offhand, don’t see how taxes matter really. $14 mill is still way above the top bracket, so you’re just getting another 7 years of up to wherever the top bracket kicks in. Chump change when you’ve already collected all that Max will have by then.

haishan
Guest
haishan

Maybe he’s trying to mitigate the risk of Barack Hussein Obamacare creating a new bracket for the ultra-high-income.

James Hogg
Guest
James Hogg

Apparently it has to do with the tax structure in DC where there may already be a millionaires tax … which, yeah, should be coming in the rest of the USA since basically even Mitt Romney is saying the ultra rich have too much money (see today’s news)

Wags (@wags721)
Guest
Wags (@wags721)

Really doubt his taxes go down because he’s only making $15 million.

Jason B
Guest
Jason B

“Really doubt his taxes go down because he’s only making $15 million.”

I would hope his taxes go down if he’s making $15M rather than $25M or $30M. But his tax rate probably won’t change regardless.

Mike
Guest
Mike

A big thing that everyone’s missing is that Scherzer might not retire at the end of the deal. He’ll be 37, so he might have 2-3 years left in him. At that point, he can collect two paychecks at once.

Furthermore, he probably wants to win a championship, and at $15 million a year for a front-of-the-rotation guy for the next seven years, the Nats will be able to more aggressively pursue talent than most teams that sign such high-profile contracts. Remember, we’re talking about a guy who took out an insurance policy on his arm after his Cy Young season. Scherzer is financially savvy.

Pennsy
Guest
Pennsy

Exactly. $15m is a pretty negligible amount for as long as Scherzer is able to be, more or less, a league average pitcher. Every year he’s better than league average is just a bonus on the “pension” payments the 7 years after. This contract can still go awful, as these kinds of contracts go, but this seems like about as reasonable a contract I would have expected Scherzer to get barring some how of sudden injury concern.

arc
Guest
arc

How can you be annoyed with Boras and not Scherzer here? Do you think Scott hired Max? The players go get the guy and he performs his duties at their direction.

bdhudson
Member
Member
bdhudson

Why are we annoyed with anybody?

August Fagerstrom
Member
Member

Because someone else earned $210 million and we didn’t!

arc
Guest
arc

Why did the guy I’m replying to become a we?

Catoblepas
Member
Catoblepas

Also, how can you be annoyed with any player/agent for getting as much money as they can? Get that guap! Moving money from owners to players is a just and noble cause, and Scott Boras advances it more than any other individual in baseball.

Andrew
Guest
Andrew

who said anything about the actual value of the contract??

Richie
Guest
Richie

Given that it’s almost always ownership ‘groups’ that are put together, you’re probably mostly moving money from a group of multi-multi millionaires to a single multi-multi millionaire. Even if moving money from a single billionaire to a quarter-of-a-billionaire, still think that’s one quirky definition of nobility you got there.

randplaty
Guest
randplaty

shrug, a lot of people don’t believe in capitalism.

Pennsy
Guest
Pennsy

@Richie Don’t let dollar values disallow you from seeing the difference between “worker” class and “investor” class. Athletes make millions but you have to consider that a rare few players live to make even a hundred million dollars off their athletic accomplishments while many investors live long enough to earn a billion dollars through business and capital investment efforts. Because you can only make money playing baseball for as long as you’re among the world’s best at it. You can get return from investment projects well past you reach senility so long as you have an adequate trust taking care of your wealth.

Your average player is going to come out of his MLB career earning about as much as a guy working a upper-middle-class career all his life might. Sure you’d rather live the ballplayer’s life, but don’t fool yourself into thinking either of them are in the same financial strata as those who are able to invest in MLB baseball for (at least a portion of) their livelihood.

chuckb
Member
Member
chuckb

What the hell is a guap?

Richie
Guest
Richie

Well, that’s still the thing then. Scherzer ain’t the average major league baseball player. I don’t really care what class anyone decides to divide us into, there’s very little noble about whatever sum of money going from the top .001% to someone only in the top .002%.

And, of course, Scherzer joined the ‘investor’ class a few arbitration awards ago.

CC AFC
Member
Member
CC AFC

You know it’s not Boras’ signature going on that contract, right?

Woop it up!
Guest
Woop it up!

Did this help the Nationals stay under the luxury tax threshold? If so, I don’t think Boras was petty, I think it was just a necessary part of negotiations.

Kevin
Guest
Kevin

Except that, if the luxury tax remains in place (even if it increases in threshold), this may be regrettable 8 years from now.

John
Guest
John

MLB uses the AAV of guaranteed contracts for luxury tax purposes. Their calculation has nothing to do with deferrals, payment structures (front-loaded vs back-loaded), etc. For Scherzer’s contract, it will be the full $30M for each of the 7 seasons for which he plays (unless the payroll tax penalties are abolished in the next CBA).

Steve
Guest
Steve

Yeah, because you know baseball owners would lower prices if they didn’t pay the players so much.
/sarcasm

RobM
Guest
RobM

That’s not petty. That’s business and the marketing of his business. The deal is for $210 MM.

Goat Fondler
Guest
Goat Fondler

or because the Nationals preferred this structure because it allows them more payroll flexibility during their current window of opportunity.