Dec
14

A-Rod’s new deal makes sense

By

We didn’t get into this much yesterday because we had some bigger fish to fry, but with the announcement that A-Rod is returning to the Yanks through 2017 came word of his salary structure. It actually makes sense. Take a look:

2008: $27 million
2009: $32 million
2010: $32 million
2011: $31 million
2012: $29 million
2013: $28 million
2014: $25 million
2015: $21 million
2016: $20 million
2017: $20 million

I love this part of the deal: It’s not at all back-loaded. For years, teams have been doling out back-loaded contracts. Take Jason Giambi‘s, for example. In his first seasons with the Yankees he made just $13 million a year. Last year, he made $21 million and stands to earn another lofty paycheck again as the second highest paid player in baseball.

The Yankees are paying A-Rod more or less what he’s worth. By the time 2017 rolls around and he’s 42, the Yanks will be paying him what seems to be a reasonable $20 million. They pay him the big bucks up front when he’s still producing and the not-quite-as-big bucks at the end of the deal.

Of course, the historic performance bonuses – $6 million each for tying Mays, Ruth, Aaron and Bonds and another $6 million for breaking the record – render this point moot in a way. A-Rod could take home $44 million in 2015 or 2016. But the Yankees know that the attention, ratings and revenue from A-Rod’s home run chance will more than make up for those $6 million bonuses.

All in all, this is some solid accounting and an economically sensible deal. Now, don’t get me started on Torii Hunter.

Categories : Analysis
  • Kevin23

    Front loaded? That’s just downright reasonable. Responsible even. George must be fuming about this.

    • http://www.riveraveblues.com Joseph P.

      Exactly. This is the polar opposite of Brian Sabean, who signs guys to irresponsible contracts, but backloads them so that he won’t have to deal with the worst of it.

  • LLOYD BANKS

    I love it. Great deal. I’m glad to see the Yankees finally made a sensible contract. I have absolutely no problem paying Arod 20 million in 2017; by that time, 20 million will be league average (or thereabouts).

    Quick question re: Mitchell Report, where the hell was Palmero, Sosa, and McGwire. How are we supposed to take this report seriously??? Your gonna tell me that Brian Roberts is now one of the prominent poster boys of the Steroid Era, and not these bums? How soon we forget that Palmero already FAILED a steroid test; ya know, that thing that NO ONE in this report failed.

    Im sorry, but i cant take this seriously at all, its an absolute Witchhunt based on hearsay and uncorroborated evidence. MLB should be ashamed, they knew what they were getting into before Micthell even presented it. I hope the Players Assoc. has an absolute field day, although, as Jayson Stark reported: the players named are already guilty in the court of public opinion. Just sad.

    • steve

      for the last time. this isn’t the final list. it’s the tip of the iceberg. mitchell just had the mets club house attendant and the yankees ex trainer and some of the balco case. that’s it.

  • Rob

    Even the peak value doesn’t eclipse what he stood to make in 2009 and 2010 under the old contract.

  • Jeff

    Does the 10mil signing bonus get reflected on this years team payroll? (It is obviously not included in his 2008 salary figure.)
    – To take the question a bit further would a signing bonus fall inside or outside of the luxury tax?

  • BJ

    It sounds nice for fans as you are paying a player what their age merits, but is it really a good thing as assuming inflation you would rather pay someone later rather than sooner. Another reason for backloading is that as baseball continues to make more money and the average salary increses, the value of the contract of the player remains about the same, or at least does not increase that highly. All backloading seems to do is make him more tradeable towards the end of his careeer, but in that situation the Yankees could have offered cash in addition, which would have been another chip on the table instead. Maybe Arod wants to be a Yankee and wants to break all the records as a Yankee and leave baseball considered one of the great Yankees, but still I don’t see how frontloading helps the Yankees.

    • Kevin23

      Cap room in his declining years is reason enough. It also recognizes the possibility of injuries later on. Insurance will be cheaper. Etc. Betting than inflation of ave salaries will be 50% over the next 10 years and no substantial decline in value over that time despite age (justifying a jump from $20 to $30 mil) is a worst bet.

  • Kevin

    Hate to burst your bubble Ben and everyone but A-Rod is getting the better of this deal here not the Yankees. Contracts are backloaded for a reason and the reason is simple: the future value of money is worth considerably less than the present value of money, as any finance major will tell you. Sure A-Rod will be getting paid what he’s probably worth at the end but front loading the contract makes the deal worth much more when time value of money is considered. Don’t believe me? Consider this example. Is $20 million today worth the same as $20 million in ten years. Unless you’re an idiot you know the answer is no. Why? Because of inflation and applicable discount rates. I’ll even take the liberty to calculate the total value for A-Rod’s contract. Considering a reasonable discount rate of 10%, the total value of A-Rod’s contract today is: $168,837,640.80. Now, if the contract were reversed, and it was more backloaded the total value of the contract today would be: $156,136,162.50, a difference of about $12.72 million. That means almost $13 million goes into the pocket of A-Rod. So PLEASE, don’t kid yourself. Alex won and won big here.

    • NYFan50

      This is exactly right. While the Yankees will be paying more for his better years and less for his poorer years, the actual financial implications for the Yankees are worse. Front loaded contracts make sense in terms of what you are paying for, but the player wins out in these deals.

    • http://www.riveraveblues.com Ben K.

      That is a good point, and I didn’t even think of it. I probably should have taken more econ classes back in college.

      But from an A-Rod perspective, he wasn’t about to take less in 2008-2010 than he would have made under his old contract.

    • ikl

      Yeah, this analysis is right, of course. But there is also the ego factor at work here – backloaded contracts yield bigger dollar figures when announced and this probably matters to a lot of players. The team cares much more about the actual economic cost – so most deals get backloaded. Here, the situation might have been reversed because it was important for the Yankees not to seem like they got played by A-Rod. So they structure the deal to make the dollar figure lower to help save face. I don’t have a problem with this – seems like smart PR to me.

    • scott

      Kevin while agree with your argument you have to consider a huge outside factor. The first 2 years of this deal are Yankee Stadiums last year and the new Yankee Stadiums first year, I dont beleive there will be an available seat for either of those years. Thus the revenue of those 2 years will proably be greater than any other years of the deal (until he gets close to bond). I’m not sure how long the novelty of a new stadium takes to wear off but I beleive the Yankees shoudl reap major benefits for the first couple of year of the stadium. If Arod average 27 hr’s over the next 9 years of his deal he will be one HR short of Bonds going into the last year of his deal.

    • eric from morrisania

      However, there’s a huge flaw in your very, very correct accounting analysis: while in the long run, it makes fiscal sense to backload a contract for inflationary, interest bearing and future value purposes, every ML contract is a tradeable commodity, and those commodities are not traded based primarily on future value but rather on present value.

      While there’s little chance that we’d be trading ARod’s deal come 2015 or 2016, the fact that he’ll have a deal that is smaller in those years benefits us much more than any accounting savings we’ll gain, because the financial flexibility is more important then when we’d be adding or subtracting pieces around him to compensate for his inevitable declining production.

      If we’d frontloaded Giambi’s contract in a similar manner, where he was making, say, 13M right now instead of 21M, you can bet your ass we’d be talking about trading him off for whatever prospect we could, rather than being stuck with a totally immovable and useless item. Furthermore, we’d be much less reluctant to trade for or call up or sign a better option than Giambi at 1B/DH if we knew we were writing off only 13M salary as a sunk cost versus writing of a 21M sunk cost. (If we’d frontloaded Giambi, Damon, Matsui, and Mussina’s contracts, the whole “we can’t afford Santana” conversation may have been moot, and I’m a big advocate of front-loading ALL pitchers contracts, considering health risks…)

      The smaller value money subject to the discount rate here means that we’d be paying more for the life of the contract, yes. But, just like putting down a 20% down payment on a house instead of a 10% down payment, if you are able to, makes more sense, this makes more sense too… if we can afford to front load a deal, we should. And as the Yankees, we can afford to front load EVERY deal, so we probably should (except for youngsters, of course).

      Front-loading contracts doesn’t make accounting sense, but if it’s feasible, it confers a substantial competitive advantage. Just like paying over-slot in the draft, or paying big signing bonuses on the international market. It’s costly, but smart costly… it will give us more flexibility to be a better team.

      Submitted by Prof. eric. Thank you, thank you, I’ll be here all week. Don’t forget to tip your waitresses. You’ve been a lovely crowd.

  • kris

    “But the Yankees know that the attention, ratings and revenue from A-Rod’s home run chance will more than make up for those $6 million bonuses.”

    Holographic ads featuring A-Rod bashing the big 800th in mid 2010s? Sounds a little scary.

  • steve (different one)

    Kevin23 is exactly right.

    but the yankees aren’t stupid, so i assume they had their own reasons for doing it this way.

    it’s such a unique contract, that they surely have more information than we do. they must have financial projections that project out their revenue sharing after the new stadium opens and they must have taken that into account.

    i mean, SOMEONE in the yankees FO surely understands the time value of money.

  • http://www.yankeesetc.blogspot.com Travis G.

    NTC, right?

    in reality, he should make the most money up front (when he’s producing his best) and it should decrease a little every year.

    but the good part about the lower salary later on is it makes it easier to trade him. assuming he’s already broken the HR record and waives his NTC (which he’s done before), it could happen.

    i still dont see how Arod ‘gave in’ to the Yanks.

    • http://www.riveraveblues.com Ben K.

      There is a full NTC in this deal.

      A-Rod didn’t exactly give in. I’m sure he would have wanted a bit of a higher AAV in the end, but $275 million is not exactly small beans.

      • http://riveraveblues.com Mike A.

        He’s a 10-5 guy after next year anyway, so throwing in a NTC was just a sign or respect, or some crap like that.

  • Kevin

    No, I’m just regular Kevin. Not Kevin 23. I’m actually new to riveraveblues so I just wanted to say that love it. So kudos to Ben and everyone, you guys do a great job.

    • steve (different one)

      you’re right, my bad. welcome!

  • Kevin23

    See my comments above…I accounted for the “time value of money” in my arguments. But remember, there are no guarantees when investing money.The “time value” could thus be negative, too.

    Economics is great, but what is worst is knowing just enough to be dangerous.

  • barry

    Not accounting, economics.

  • casey

    everyone talking about inflation is only looking at the beginning of this deal. If Arod is taking the Yanks for a ride in the early years, and being paid more than he deserves (based on the theory that future money is worth less, which is of course true), then in the later years, like 2015-17, as Arod adds to the homerun record, the big 3 is hopefully chugging along, and the Yanks continue to be competitive year in and year out, won’t Arod be helping to generate WAY more money than the Yanks are paying him?

    In that scenario, Arod will fit the definition of an exploited worker: someone who earns more money for their company than their company pays them.

  • CB

    I could be wrong on this but I think there is a different reason for the strange compensation structure in ARod’s contract that has nothing to do with frontloading vs. backloading.

    HIs salary has much more to do with the opening of the new stadium.

    Normally contracts are always back loaded because of the discount rate that is always applied to future investment dollars (ex. account for inflation, etc.)

    The yankees didn’t do that here because of the new stadium opening. Under MLB’s basic agreement teams are allowed to deduct stadium related expensed from the revenues that count against the luxury tax for a few years after a new stadium is built if the team spends its own money on the stadium.

    This means that starting in 2010 the Yankees will be effectively exempt from the luxury tax. The expense of the stadium will cancel out all of the amount that the Yankees would normally be taxed on. They won’t be paying anything into revenue sharing for a few years.

    If effect the Yankees are going to get all of the small market teams to subsidize part of the new yankee stadium. Other larger market teams have used this to plan new stadiums as well.

    I forget how long this exemption lasts – but its starts in the year that the stadium opens.

    Given how much the yankees pay out in the tax that is a huge deal for them. In 2010 and 2011 alone it could save them up to $150 million I believe.

    Those untaxed years will be huge gross revenue years for them also given the new stadium, luxury boxes, etc. Then they won’t be paying the luxury tax while all those new revenue streams come on line. Their net revenues will be enormous those few years.

    I could be wrong but I do think that’s why ARod’ max compensation is loaded towards those years. It saves the team money on the luxury tax. They’ve loaded the max compensation years of his contract to coincide with the years they will be exempt from the luxury tax.

    If his max compensation years were back loaded as contract usually are then they would wind up paying more in the way of the luxury tax later on.

    This isn’t about ARod getting one over on the yankees in getting more money up front. This ist he yankees being very shrewd.

    Here’s a reference on the whole new stadium luxury tax situation from baseball prospectus:

    http://www.baseballprospectus......cleid=3293

    • steve (different one)

      i think you are right in that the new stadium had something to do with it.

  • Rajesh

    I’m not sure which is more exciting – people with no understanding of economics discussing the merits of a contract or people with no understanding of inferential statistics promoting the absoluteness of statistically flawed sabermetrics.

    • http://www.riveraveblues.com Ben K.

      Care to clarify anything then instead of issuing a platitude? :)

    • steve (different one)

      so then why are you here? why sully yourself with the words of the unwashed proleteriat?

      • Kevin23

        I have a philosophy minor, so I found the platitude insightful. Then again, I can watch monkeys at the zoo for hours on end, and actually enjoyed statistics class. So maybe I’m not the best yardstick.

  • Rajesh

    I didn’t mean to disrespect you with my platitude. I just don’t see the need for commenters to attack you when their analysis is more flawed than the analysis they are attacking.

    • http://www.riveraveblues.com Ben K.

      Ah, no worries, Rajesh. I wasn’t sure what your point was. No one really knows what the stadium economics are, and MLB has been loathe to release it. So we’re basically speaking on second- and third-hand knowledge. I see your point now.

  • Rajesh

    I am here because this is the best source for Yankee commentary. That is all. I will step away now. Please disregard my previous comments. Thank you.

    • http://www.riveraveblues.com Ben K.

      No need to step away. We appreciate it. Steve came off a little harsh. Don’t mind him.

  • Rajesh

    When analysing this contract, we need to account for the $6 million bonuses and the multiple signing bonus payouts. Those are substantial monetary factors. The expectation on both sides is that Alex Rodriguez will receive more than the $20 million salary in the later years of the contract. It is also evident that this contract was negotiated by an owner of the team and not the general manager. The general manager would try to pay less in the early years because they know that they won’t be the general manager at the end of the contract.

  • BJ

    Between the insurance going up as Arod gets older and the stadium giving us luxury exemption I am convinced enough as these are not quantifiable enough that I can let it ride on my faith in the Yankees. However I don’t see the arguement that front loading gives competetive advantage b/c wouldn’t that be the same, or actually worse than eating that excessive back end of the contract when the time came to trade that commodity, as in this way it seems that you are giving up something extra, when in actuality you should have already paid it and instead have had the capital for more time which means more profit. Front loading silently given up the cash earlier so later trade partners just assume getting the player at current cost instead of taking into account the earlier investment you put in. Also the NTC kinda sours it. I also agree that the deal was probably negotiated between player and owner, but I do not think that in itself makes it more likely to be in the best interests of the team. I guess the real reason I posted is that someone said it was idiotic for Sabean to back load. Now Sabean is an idiot, and pretty consistently makes bad moves based on his own self interest, but I wouldn’t say backloading is one of them, and i would never put Cash in the same scentence as him. Oops i guess i did but it was a long one I’m sure he’ll understand.

    • eric from morrisania

      No, you missed my point. I was saying that while backloading or frontloading ARod’s contract doesn’t make much of a difference, because he’s not a tradeable commodity, it does give us a competitive advantage to frontload contracts in general because it is easier to trade commodities that are priced at or below market value versus ones that are above market value. Look at this winter’s pitching market, for example… Oakland has already executed a deal for Danny Haren, while Minnesota has failed to do so with Johan Santana, largely because Haren’s below market price tag increased his attractiveness and increased the number of teams willing to trade for him, and thus drove up his market price. Santana, on the other hand, is essentially being traded at above market price, since his contract will have to be addressed at new record salary levels for anyone who acquires him, thus limiting potential trading partners and driving down price due to lower demand.

      If we had a policy of paying players more during the primes of their careers and less during the tail ends of their production, it would be easier to trade or demote them once the bulk of their usefulness has waned. I acknowledge that running the business in this way will likely cost us more, but it will make us a better team.