Apr
21

Stark: A-Rod’s homerun milestones do not count toward luxury tax

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(J. Meric/Getty Images)

Alex Rodriguez‘s contract is the albatross that keeps on giving, with five years and $114M still to go after this season. To make matters worse, the deal also includes five homerun-based historical bonuses that could begin to rear their ugly heads as soon as this season. With the Yankees looking to tighten up the payroll in the coming years, we’ve been assuming those bonuses would create a headache at some point. That may not be the case, however. Courtesy of Jayson Stark

Officials of both MLB and the union confirmed to Rumblings that baseball has now banned future personal-service deals and all milestone bonuses. Rob Manfred, MLB’s executive vice president for economics and league affairs, said both issues had become a growing concern. So once the offseason signing dust had cleared, owners and players agreed that it was time to step in and spread word that contracts containing those perks would no longer be approved.

So what’s the big deal, you ask? The closer you hone in on this, the more obvious it becomes why these arrangements raised eyebrows.

The “milestones” payouts, for instance, appear to violate baseball’s longtime ban on bonuses for virtually all statistical achievements. A-Rod‘s 2007 contract with the New York Yankees disguised his bonuses as “marketing” money. But “the more they looked at it,” said a source who was briefed on MLB’s thinking, “the more they realized what it was. … He was getting paid to achieve those milestones.”

[snip]

Finally, there’s one objection the commissioner’s office would seem to have to both of those creative wrinkles: Because those payouts are not regarded as guaranteed money, teams potentially could use them to avoid luxury-tax bills. And why do we suspect Bud Selig just totally hates it when that happens?

Unless I’m misinterpreting Stark’s article, A-Rod’s homerun milestone bonuses will not count towards the luxury tax. Signing bonuses, awards bonuses, and playing time bonuses do count towards the tax, but apparently not milestone bonuses. Alex will get $6M each for his 660th, 714th, 755th, 762nd, and 763rd career homers. He’s at 631 career dingers right now.

Obviously, this is pretty significant news as far as the 2014 payroll plan is concerned. The Yankees are aiming to get under the $189M luxury tax threshold that season, and now they don’t have to worry about A-Rod reaching one (or more) of those milestones and eating up payroll space in a given year. That $189M was really $183M or even $177M because they had to leave some payroll space in case Alex earned some of his bonuses, but now it doesn’t matter. Again, it’s pretty significant and good news. Six million bucks may only be ~3% of the payroll, but it sure does buy on a big league roster.

Categories : News
  • Paul VuvuZuvella

    Wow, this is huge !!

  • leo

    i believe these changes do not affect existing bonuses (such as arod and pujols)

    here’s the link http://www.mlbtraderumors.com/.....nuses.html

    • Cris Pengiucci

      Still not clear to me that these will be included for salary/luxury tax purposes. This is not the same as a personal services addition to the contract after the end of his playing career. I certainly hope they don’t count. He’ll be eating enough of the payroll at the end of it if he’s not productive offensively. He’s only a fan draw while he’s producing. Soon after he stops, he will no longer be a fan attraction. (plus the whole ($189 Mil payroll thing).

      • Cris Pengiucci

        Don’t know how that personal services comment got a link associated with it.

    • whozat

      The changes make bonuses such as ARod’s against the rules, but do not retro-actively nullify them, that’s true.

      However, my reading is that the _reason_ for this ruling is that such bonuses are not subject to luxury tax. So, from the Yankees’ point of view…this is just fine.

  • raisin

    I’m thinking that those bonus’s don’t count as averaged taxable value, but nonetheless will still end up subject to the luxury tax when earned?

    • http://www.adimeback.com T-Dubs

      This is my impression too.

      • whozat

        That’s what we thought before.

        But why make this ruling if the money was already subject to the luxury tax? There’d be no need to “outlaw” them if they were already going to get taxed.

        • Ted Nelson

          The tax is one issue, but the other is that they’re statistical bonuses. So, if Stark is wrong they are outlawing them because they are statistical bonuses that were already outlawed. (Not sure why, compensation should be incentivized rather than guaranteed IMO.) I have no idea if Stark is right or wrong, but this was pretty off-hand and round-about.

        • Needed Pitching

          it does change when the money would be taxed, instead of being included in AAV, it would count in the year earned (if it is included at all), allowing teams to defer luxury tax payments on the money

  • Jesse

    This is great news. I was getting worried that this would be a potential roadblock.

  • Ray Fuego

    I hope he reaches all the milestones, but do we honestly think his health hold up for him to hit about 27 homeruns a season for the next 5 years?

    • Cris Pengiucci

      I think he can stay healthy enough to hit 30+ for the next couple of years, not so sure after that.

    • Havok9120

      If he hits 20-30 for the rest of the contract, he can reach it pretty easily. Its just all going to depend on what he’s capable of, and we simply don’t know yet after the injuries the last few seasons.

    • RetroRob

      His contract runs through 2017, or six seasons including 2012. He’d have to average 22 HRs a season to achieve all the milestones. I wouldn’t be overly comfortable taking either side of the bet.

  • Kosmo

    Arod has to average from this year on approx 22.5 HR to break the career HR record.

  • Tyrone Sharpton

    I think I’m one of the very few that think A-Rod will achieve all of those milestones. Then Justin Upton will break his record.

    • Don W

      Not just one of the few. You’re probably the only one that believes both.

  • bwolfsohn

    i would be shocked if mlb allowed these to bypass the luxury tax calculations.

    IAC, i think the yankees will convert these into some guaranteed money, and some extension which will lower the aav of the contract (i thought you wrote about this a couple of months ago)

    • Havok9120

      Uhhh.

      Wouldn’t that also just be a blatant work-around of the luxury tax?

  • Ed

    Horribly phrased article, but I think I get the logic. Non-guaranteed isn’t the reason it wouldn’t count. No bonus or option ever would if that was the case, but we know they count once they become guaranteed.

    The bonuses were always called marketing bonuses, and he does have to participate in the marketing to get it. He’s required to give the team autographed memorabilia, participate in events, etc. My guess is it originally counted as a non-playing job and was treated as if he was an office employee. That would fit with the same logic as the personal services ban.

  • Rey22

    Is this definitive though? I interpreted it the same way, but for all we know Selig will just laugh it off and screw the Yankees anyway.

    • Havok9120

      Of course it isn’t, but it does call into question what we all were assuming about how the milestones would work.

      I mean, there’s no need to close a loophole if there IS no loophole. AND MLB and the union didn’t announce any retroactive changes, soooooo….

      It’ll be interesting to see what kind of arm-twisting, if any, will go on behind the scenes.

      • Ted Nelson

        Stark mentions the potential loophole offhand to close the article with no source. So I’d still say it’s pretty up in the air. The first reason he gives is that statistical bonuses are not allowed, and then he offhand throws in that maybe there’s a loophole in the luxury tax. Not that they’re closing a loophole, but that this was always against the rules as a statistical bonus.

        • Havok9120

          Not “always against the rules” but against the rule “according to the new CBA.” That’s at least how I read Stark’s piece and the MLBTR writeup of this pronouncement by the League/Union. They wanted it made clear that these things are outlawed now because they got around the luxury tax as non-guaranteed money. If the league is saying that these things don’t count against the tax because they’re non-guaranteed, that’s a little more definitive, no? I mean, why would they even bring up that these deals avoid the tax if they don’t?

          It would also explain why no one in our front office mentioned the ARod milestones as things to keep in mind as the franchise worked toward 189, which was something I’ve been wondering about.

  • viridiana

    I’m not so sure A-Rod is going to earn a bonus in 2014 anyway. Doesn’t he need around 83 HRs to reach 714 in 2014? I doubt he’ll do it.

    • Havok9120

      We’ll see. But he’s almost sure to get one of the milestones in 2014/15. And since we need to be under for both years to get the benefits on the revenue sharing side….

  • hip hip Jorge

    Not to get all reportorial, but wouldn’t the easiest way to out the answer be someone from the RAB braintrust calling up the Yankee FO and asking for clarification, thusly, “Do A-Rod’s performance bonuses count towards the luxury tax threshold in 2014 and beyond? If so, why, according to the CBA? If not, why not?” Someone there must know the answer to the question, even if we don’t.

    • Havok9120

      I don’t think the brain trust here has the personnel and connections to make that call.

      Why none of the beat writers have asked about this, however, I do not know. Or maybe its just general knowledge and no one asks. Or they DID ask and we just missed it. Who knows?

      • Ted Nelson

        The more I think about tithe more I doubt there’s a loophole where a player can get paid and not counted. Every team would just structure their salaries this way

  • Jerkface

    The bonuses do not count as guaranteed money, but that does not mean they do not affect the luxury tax. Page 91 of the CBA:

    (4) Performance, Award and Other Bonuses
    (a) Any amounts that are actually earned by a Player as Performance
    Bonuses, Award Bonuses or any other bonuses properly
    included in a Uniform Player’s Contract shall be included as part of
    the Player’s Salary in the Contract Year in which the service or performance
    giving rise to the Bonus was provided. Potential bonuses
    shall not be included in the Average Annual Value calculation made
    pursuant to Section E(2) above.

    (b) A Special Covenant in a Uniform Player’s Contract that provides
    that Player performance or achievement in one year of the
    Contract will increase the Base Salary in other year(s) of the Contract shall not be considered in the determination of Salary until the
    triggering event occurs (other than, if applicable, as a “potential
    bonus”), unless it is determined by the Arbitration Panel that the
    Special Covenant was designed to defeat or circumvent the intention
    of the Parties as reflected in this Article XXIII. As long as such
    a finding is not made, the additional Base Salary triggered by the
    Special Covenant shall count as part of the Player’s Salary in the
    Contract Year(s) to which it is attributed by the Contract once the
    triggering event has occurred. Multi-Year Contracts shall not be
    recalculated on an Average Annual Value basis once the triggering
    event has occurred; the additional Base Salary shall be added to the
    Salary as originally calculated for the Contract Year in question.

    They will count in the year they are earned. This just stops teams from rigging up the luxury tax to be different in certain years (which can help them backload or frontload contracts).

    • Jerkface

      There are different things to consider when talking about the luxury tax. The ‘loop hole’ being closed is regards to these items not being counted as guaranteed, which I guess kind of defeats the luxury tax, but not in the way that is helpful for the Yankees going forward.

      You have your AAV (which is used for the luxury tax) of all contracts based on the AAV including certain options. Other things are only taken into account in the year they are earned or in following years. This loophole closing addresses hiding money from the AAV calculations.

  • Dummies Playing With Balls (formerly Rainbow Connection)

    The Yankees are victims! Waaaa!

    Wait. Wut?

  • RetroRob

    I’ve read the article and every note here. One thing is clear: No one knows the answer, myself included.

  • Plank

    I see this as bad news assuming it’s correct. If the HR bonuses count against the cap, the team may determine the slashing of the payroll in 2014 is unrealistic. If the bonuses don’t count, there is a higher likelihood they go for it.

    • Ted Nelson

      I’m pretty sure their cap experts already know the answer.

      • Plank

        Such rage within this one.