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View Full Version : Why Do Teams Backload Contracts?



metswon69
10-12-2012, 03:01 PM
I couldn't find another part of the forum for this and maybe it's not thread worthy but i wanted to pose the question anyway (we were talking about Johan Santana in the Mets forum and it came up)

Why do teams backload longer term deals in regards to star players?

I understand they want more payroll flexibility up front but it makes zero sense to backload a deal for a guy who at the end of a long term contract, in most cases, is going to make a lot more money for significantly less production.

If anything and i was one of these owners, i would frontload these contracts (during their peak production years) so that there is a chance at some point down the line if i need to deal said player, i wouldn't be stuck with him because he is making way too much money for anyone to want.

Driven
10-12-2012, 03:06 PM
If anything and i was one of these owners, i would frontload these contracts (during their peak production years) so that there is a chance at some point down the line if i need to deal said player, i wouldn't be stuck with him because he is making way too much money for anyone to want.

Good luck signing these players and/or keeping them.

metswon69
10-12-2012, 03:08 PM
Good luck signing these players and/or keeping them.

Why does it matter when they get their money?

If they are getting it all the same, does it matter how its paid out?

sf-fanatic
10-12-2012, 03:10 PM
I think it only matters most in sports with salary caps. In baseball, it doesn't matter as much.

metswon69
10-12-2012, 03:14 PM
I think it only matters most in sports with salary caps. In baseball, it doesn't matter as much.

Well i was more making in reference to the point that a player becomes impossible to deal (ex. Joey Votto making 25 million dollars from 35-39 years old)

That's what i don't get.

He won't be the player he is now by quite a drastic difference and yet they will be paying more money in 2021, then they will be next year when he is 29 years old and still in his prime.

Who's gonna want a 37 year old declining Votto making 25 million dollars a season?

metswon69
10-12-2012, 03:19 PM
I understand they can't prognosticate payroll long term so maybe that's not as a big a hit to the team down the road but still i don't get the idea of paying more money for declining return.

Driven
10-12-2012, 03:26 PM
Why does it matter when they get their money?

If they are getting it all the same, does it matter how its paid out?
Because why would they even sign for those extra two (or however many) year? They would just want those last years not in the contract, so they can sign a brand new one.

And the more money they make later in the contract means the more playing time they will get, which equals more cash for them indirectly in the long run anyways.

Also, how would you front load all of these contracts when you don't have the cash to do so?

jej
10-12-2012, 03:28 PM
I get what you are saying.

But, if they leave some flexibility when he is good, then they can build around it. That's when they will be good, and when they need to spend.

That's what I can think of anyway.

metswon69
10-12-2012, 03:29 PM
Because why would they even sign for those extra two (or however many) year? They would just want those last years not in the contract, so they can sign a brand new one.

And the more money they make later in the contract means the more playing time they will get, which equals more cash for them indirectly in the long run anyways.

Also, how would you front load all of these contracts when you don't have the cash to do so?

Again, why does it matter when the player is getting the money?

If a team still plans on signing a player for 8 years 160 million dollars, why do they have to pay him 12 or 14 million the first 2 seasons and then incrementally pay him more money after that?

These teams have the money to pay these players more money up front, like they have money to pay them all that money down the road.

Why wouldn't you want to pay a guy peak money for peak production and not the other way around?

agureghian
10-12-2012, 03:31 PM
so that they can afford to sign players in the near future.
they would have less commited money in the current.

metswon69
10-12-2012, 03:31 PM
.
And the more money they make later in the contract means the more playing time they will get, which equals more cash for them indirectly in the long run anyways.

That's not true, it's all guaranteed money regardless.

FortDetroit
10-12-2012, 03:32 PM
Again, why does it matter when the player is getting the money?

If a team still plans on signing a player for 8 years 160 million dollars, why do they have to pay him 12 or 14 million the first 2 seasons and then incrementally pay him more money after that?

These teams have the money to pay these players more money up front, like they have money to pay them all that money down the road.

Why wouldn't you want to pay a guy peak money for peak production and not the other way around?

time value of money. 20 million in 10 years is worth less than 20 million today. costs less for the organization overall.

/thread

metswon69
10-12-2012, 03:32 PM
so that they can afford to sign players in the near future.
they would have less commited money in the current.

Well i brought that up in my original post about current payroll flexibility for the team signing said player.

I am looking for other reasons besides that if anyone has them.

metswon69
10-12-2012, 03:32 PM
time value of money. 20 million in 10 years is worth less than 20 million today.

Very true but is it that drastic a difference?

Cheezombie
10-12-2012, 03:34 PM
There is some inflation to take into account

Cub_StuckinSTL
10-12-2012, 03:35 PM
time value of money. 20 million in 10 years is worth less than 20 million today. costs less for the organization overall.

/thread

Add in the fact that towards the end of the deal other players have gotten bigger deals.

metswon69
10-12-2012, 03:37 PM
Add in the fact that towards the end of the deal other players have gotten bigger deals.

True but that's the case with all long term contracts in relation to years signed.

The market changes very drastically within a 2 to 3 year period at least when it comes to FA compensation.

Driven
10-12-2012, 03:38 PM
That's not true, it's all guaranteed money regardless.
The more playing time they get, the better contract they will sign afterwards, the more endorsements they will have, etc.

metswon69
10-12-2012, 03:39 PM
I am not disagreeing, i also understand the point that inflation and financial security down the line mean a lot to these players.

I just don't understand why owners would ok a deal where there is no way they can deal said player if he is making 30 million dollars a season and isn't half the player he used to be.

I know 10/5 rules are also in effect for players (so they have a lot of control in their ultimate destination anyway) but it still all seems very impractical to me.

metswon69
10-12-2012, 03:41 PM
The more playing time they get, the better contract they will sign afterwards, the more endorsements they will have, etc.

That's not true either, some of these long term deals encompass a whole player's career like Prince Fielder or Albert Pujols and with their inevitable declining production there is no guarantee they see the field.

IE Jason Bay

FortDetroit
10-12-2012, 03:43 PM
Very true but is it that drastic a difference?

Well say for example there is an 10 year contract. Assuming the team can get 5% a year on their money, paying out 20 million dollars in 10 years is equivalent to paying out 12.3 million in today's dollars. So if you are an organization, why would you pay out 20 million this year if you could essentially pay out 12 million in year 10 of the contract instead? When you are talking millions of dollars at a time, yes it is that drastic of a difference.

http://en.wikipedia.org/wiki/Time_value_of_money

chitownbears89
10-12-2012, 03:43 PM
time value of money. 20 million in 10 years is worth less than 20 million today. costs less for the organization overall.

/thread

To an extent that is true. But is drastically limited because teams only invest in players. There is more to TVM than just a dolllar today is worth more than a dollar tomorrow. Unless they can take that money and invest it in other financial instruments, I can't see how this makes much of an impact. But I guess enough an impact.

chitownbears89
10-12-2012, 03:45 PM
Well say for example there is an 10 year contract. Assuming the team can get 5% a year on their money, paying out 20 million dollars in 10 years is equivalent to paying out 12.3 million in today's dollars. So if you are an organization, why would you pay out 20 million this year if you could essentially pay out 12 million in 10 years?

http://en.wikipedia.org/wiki/Time_value_of_money

The question is can they spend their money on anything, isn't limited only to basketball purposes. I am not entirely sure how basketball finances work, but I doubt they can go out and put that money in the market. So how do they make that 5%.

FortDetroit
10-12-2012, 03:45 PM
To an extent that is true. But is drastically limited because teams only invest in players. There is more to TVM than just a dolllar today is worth more than a dollar tomorrow. Unless they can take that money and invest it in other financial instruments, I can't see how this makes much of an impact. But I guess enough an impact.

what do you think they do with their money when it's not being paid out? it's not stuffed in a suitcase under the owners bed earning 0 interest.

fingerbang
10-12-2012, 03:46 PM
Because GM's get fired if they don't immediately improve the team.

metswon69
10-12-2012, 03:47 PM
what do you think they do with their money when it's not being paid out? it's not stuffed in a suitcase under the owners bed earning 0 interest.

Well we know the players who make 10S to 100S million of dollars make significant interest on their money, there is no doubt about that (unless invested foolishly)

If they manage their money correctly they and their family are certainly set for many generations past their own.

chitownbears89
10-12-2012, 03:48 PM
what do you think they do with their money when it's not being paid out? it's not stuffed in a suitcase under the owners bed earning 0 interest.

I have no clue, lol. I wasn't implying that they do that. Just a simple question. What happens to their cap space? Is it effected?

I guess what's stumping me is the cap space. For some reason, I feel like that money is locked into the NBA.

metswon69
10-12-2012, 03:50 PM
Well say for example there is an 10 year contract. Assuming the team can get 5% a year on their money, paying out 20 million dollars in 10 years is equivalent to paying out 12.3 million in today's dollars. So if you are an organization, why would you pay out 20 million this year if you could essentially pay out 12 million in year 10 of the contract instead? When you are talking millions of dollars at a time, yes it is that drastic of a difference.

http://en.wikipedia.org/wiki/Time_value_of_money

Well now that you calculated it out for me, it gives me a much better understanding from the owner's side.

Thank You.

But the one thing i still dont get is the fact is that wouldn't that work the same for the deferred portion of the contract that is significantly less year to year salary?

I mean paying a guy in 5 years 10 million dollars instead of 27 million certainly has to have an impact on inflationary value and translate into more money paid to the player on a larger amount of annual salary.

RaiderKid318
10-12-2012, 04:02 PM
Simple. Hopes of retirement, to be able to sign better players(going for the big win or nothing), and most importantly a decline in age and talent.

The last one sounds funny but just because Joe Shmoe is making 5-80 million at 1- 5, 2-5, 3- 15, 4- 25, 5-30 it doesn't mean he will actually get that 30 and 25 million in the last two years. It is normally a longer contract, but there are normally requirements that need to be met to get all of that money. You will never see a back loaded contract with gaurenteed money in the final years. Like chipper he was set to make 15+ million this year but he had to play a certain number of games and have a certain amount of other requirements to get that money. Then he had bonuses thrown in too if he surpassed it. A lot goes into it, but most times they get more or less than what's said and not on the dot that much.

dodgersuck
10-12-2012, 04:13 PM
I think they are banking on inflation

Nomar
10-12-2012, 04:17 PM
Inflation.

It also gives the ability to sell a player at his peak and make the other team take on the bulkiest part of the contract.

2009mvp
10-12-2012, 04:33 PM
Because GM's don't really care what kind of mess they leave behind if it all goes south. Can't really blame em either.

LongWayFromHome
10-12-2012, 05:56 PM
Also, a team can (not that they do, I couldn't say I would know) invest the saved money on a front end of a contract.

For example:
Pay a guy 10 mil, 12 mil then 14 mil. You COULD invest that 4 million you are saving as opposed to if you paid him 14 mil, 12 mil, 10 mil. In this sense it is more financially responsible to pay him less up front.

utl768
10-13-2012, 12:59 AM
the marlins do it so when they decide to firesell the most amount of money is left for the other team to absorb

backfires though sometimes

utahjazzno12fan
10-13-2012, 01:14 AM
Backload it, you don't pay it now.

Several reasons.

1) Inflation. 252 million Arod made, would not be the same amount now. 252 million is worth less. Teams theoretically increase prices and will be bringing in more down the road.

2) Retirement. Chipper Jones had his option he left on the table. He retired. He doesn't get paid. Backloading means the possibility of never having to pay it.

3) Trade. I get a superstar for a good price now because I backloaded the contract. He won't be as good then, but someone may be willing to take a good chunk of that off my hands for me in a trade.

4) Luxury tax -Teams don't pay as big of a luxury tax now, if at all so there is a probable savings since the tax threshold rises over the years as average salary rises.

5) More time - You can develop your needs in your minor leagues so that you deal with less payroll flexibility later as opposed to now.

6) Competitiveness during prime - Lets say you have a superstar now. You need the extra cash you can defer later to win now, leaving the payday later on.
Why do they accept?
1) Financial security - You backload a contract, as long as you play or remain part of the team, you have financial security. Sure the money is worth less, but you are getting paid more than you are worth at that point, too.

2) Willingness to help the team - Allowing your contract to be back loaded usually nets you an extra year or so beyond your prime. You come off with a steal of a deal and the team is happy you worked it out with them.

Jeffy25
10-13-2012, 01:38 AM
Whatever answers anyone above me gave, they are incorrect unless they gave you this answer

http://en.wikipedia.org/wiki/Time_value_of_money


Simple economics.


EDIT

UTAHjazz fan above my post simplified it well.

******2017
10-13-2012, 01:42 AM
I like the idea for the franchise to keep long term financial security in case a player falls off the map like A-Rod has but as a player I'd want my money to go up each year because of a little thing called inflation.

FortDetroit
10-13-2012, 03:14 AM
Whatever answers anyone above me gave, they are incorrect unless they gave you this answer

http://en.wikipedia.org/wiki/Time_value_of_money


Simple economics.


EDIT

UTAHjazz fan above my post simplified it well.

see post 12 ;)

metswon69
10-13-2012, 06:04 AM
Also, a team can (not that they do, I couldn't say I would know) invest the saved money on a front end of a contract.

For example:
Pay a guy 10 mil, 12 mil then 14 mil. You COULD invest that 4 million you are saving as opposed to if you paid him 14 mil, 12 mil, 10 mil. In this sense it is more financially responsible to pay him less up front.

Well i did mention payroll flexibility in my OP and i understand inflation certainly plays a part in it.

But time over money certainly puts things in better prospective to me from an owner's and player's perspective.

Either way my question was answered.

metswon69
10-13-2012, 06:08 AM
There's also the aspect of projecting payroll down the line, 30 million dollars to a guy like Joey Votto won't mean as much 5 years down the road because inflation also affects where payrolls and individual salaries will be at that time.

Not to mention teams restructure, and although Votto's contract will still be a very large portion of a team's payroll, that team might not be spending as much money on team construction down the road (based on where that organization is competitively)

Texas Holders
10-13-2012, 08:44 AM
Part of it is inflation, $1,000,000 today is worth less than $1,000,000 10 years from now.

Front loading a contract would cost a team more than back loading one.

metswon69
10-13-2012, 08:49 AM
http://www.baseball-reference.com/players/r/rodrial01.shtml#contracts

Ironically the Yankees frontloaded Arod's contract, but i guess that's a moot point considering money is not an issue with the Yankees (although it could be if they go over the luxury tax in the near future)

metswon69
10-13-2012, 08:53 AM
Front loading a contract would cost a team more than back loading one.

True i see that.

My only argument is the fact that the probability a team can deal that hypothetical player is much higher considering they only have to pay him 10 million dollars in 5-6 years instead of paying him 30 million dollars.

Taking more money now and less money in the future, gives that hypothetical team chance to deal that declining player in his waning years instead of being stuck with him for the duration.

So i think ultimately owners are stuck either way because you can't win with inflation and you aren't going to be able to deal a guy who is making that type of money at 36 or 37 years old.

R. Johnson#3
10-13-2012, 09:08 AM
I couldn't find another part of the forum for this and maybe it's not thread worthy but i wanted to pose the question anyway (we were talking about Johan Santana in the Mets forum and it came up)

Why do teams backload longer term deals in regards to star players?

I understand they want more payroll flexibility up front but it makes zero sense to backload a deal for a guy who at the end of a long term contract, in most cases, is going to make a lot more money for significantly less production.

If anything and i was one of these owners, i would frontload these contracts (during their peak production years) so that there is a chance at some point down the line if i need to deal said player, i wouldn't be stuck with him because he is making way too much money for anyone to want.

So you looked at the situation from the GM's point of view. Now look at it from the player's point of view and you will have your answer.

metswon69
10-13-2012, 09:12 AM
So you looked at the situation from the GM's point of view. Now look at it from the player's point of view and you will have your answer.

I understand the point from the player's side especially if you factor in the security on the back end, inflation, etc etc.

My point was is that they become impossible to deal.

For example, imagine what dealing Vernon Wells would have been like now with another 42 million dollars still owed to him over the next 2 seasons?

Texas Holders
10-13-2012, 09:20 AM
So you looked at the situation from the GM's point of view. Now look at it from the player's point of view and you will have your answer.

If I were a player, I would want it frontloaded, hell, give it all to me now and I will play for free for the rest of the contract.

R. Johnson#3
10-13-2012, 09:22 AM
I understand the point from the player's side especially if you factor in the security on the back end, inflation, etc etc.

My point was is that they become impossible to deal.

For example, imagine what dealing Vernon Wells would have been like now with another 47 million dollars still owed to him over the next 2 seasons?

I guarantee the Jays didn't want to backload his deal. He was 30 years old and about to sign a 7 year contract. That was probably all of Wells' side negotiating.

metswon69
10-13-2012, 12:44 PM
All i know is a lot of these teams are going to have incredibly hard time dealing some of these players going forward.

Locking up superstars for long term deals have some serious ramifications in a market where baseball players are making more and more money each year.

They pay to win now but 10 years for a guy who let's say who is 28 or 29 for example in the post steroid era is a hefty risk.

AsKingsSharks
10-13-2012, 03:25 PM
http://lmgtfy.com/?q=Why+do+MLB+teams+backload+contracts%3F#seen

scottythegreat1
10-13-2012, 06:02 PM
A lot of it has to do with Budget Constraints, such as Albert Pujols.

The LA Angels had $150 million payroll budget, so they made it so that he would make a little less in the first year, so when Torii Hunter and Bobby Abreu come off the books at the end of THIS year, then they can start paying Albert more.

Teams are thinking, ok, I have control of my team's budget after 5 years, and with pretty much everyone off the books except for this player, I can control everyone else's salary with this guy being the ONLY guy guaranteed at this point.

Other, rare times, its so that you can get a year or two out of him, and then trade him (see Carlos Delgado playing for the Marlins) for prospects.