Love Those Deferred Salary Contracts
The Orioles re-signed Chris Davis to a seven year $161 million contract yesterday, of which $42 million will be deferred and paid out between 2023 and 2037. Since there is no interest on the deferred $42 million, the actual current value of the deal is considerably less than the stated $161 million amount, at least over the seven year playing term, and there will no doubt be claims that the deferrals are in the contract mainly there so that agent Scott Boras can assert he got the maximum dollar value for the contract.
I don’t agree with that line of thinking at all. To my way of thinking, deferrals into post-career, pre-pension years are an extremely valuable way to guarantee the player the good life for the rest of his life.
Even with salaries as outrageously high as they are in today’s game and the fact that players have ready access to an army of skilled and by and large professional lawyers, accountants and investment advisers to help them invest their monies so that they and their families never suffer from lack of funds again, a surprisingly large number of professional athletes still manage to blow through all or most of their tremendous wealth before they reach what is typically the earliest retirement age of 50.
Athletes’ life-styles during their active years are expensive and a lot of people come to them with their hands out. Mega-mansions, child support obligations, fleets of cars, boats and other expensive play things, bad investments such as, for examples, unsuccessful restaurants and lawsuits, usually in combination, can be an effective way to piss through tens of millions of dollars in only a few years’ time.
Chris Davis has now insured himself that no matter how badly things go for him in the future, he will be making at least $1.5 million a year through age 50. Needless to say, the relatively few players who negotiate contracts with significant long-term deferrals are probably the players who would have been least likely to piss through the money if they got it all while their careers were still ongoing. However, by pushing and spreading the money into many more future years, there will be substantial tax savings, particularly if he continues to maintain his home in Texas, a state with no state income tax, after his career is over.
In some way it is surprising that more players don’t agree to deals with significant deferrals. In other ways, many human nature being what it is, it is not so surprising. For example, people who win the lottery usually opt for the smaller up-front lump sum payout, rather than receive the full amount spread out in small annual payments over something like 27 years. For the reasons set forth above, it seems obvious to me that it is almost always better to accept the 27 years of payouts than the lump sum, but most winners don’t do it. For many or most people, the idea of getting the much bigger sum immediately is hard to resist.