Insights into Shohei Ohtani’s record-breaking $700 million deal with the Dodgers and MLB’s deferred contracts.

Insights into Shohei Ohtani’s record-breaking $700 million deal with the Dodgers and MLB’s deferred contracts.

Ohtani and the Dodgers aren’t pioneering a novel path; instead, they are reshaping the landscape of deferred contracts in baseball on an unprecedented scale.

Shohei Ohtani’s extraordinary performances on the baseball field have reached a level of excellence beyond earthly comparison. Now, the unconventional way in which he will be remunerated is breaking yet another convention.

Ohtani is opting to defer a staggering $680 million of his $700 million salary with the Los Angeles Dodgers. He will receive a relatively modest sum of $2 million annually for the next 10 seasons, with the remaining compensation scheduled to be paid out between 2034 and 2043, aligning with Ohtani’s 50th birthday, rather than pursuing his first World Series title.

This financial strategy has elicited a mix of astonishment, criticism, admiration, and apprehension. Both the player and the club have gone to great lengths to structure the most substantial guaranteed contract in the history of sports. Simultaneously, it allows the Dodgers greater flexibility within Major League Baseball’s competitive balance tax framework.

However, Ohtani and the Dodgers are not breaking entirely new ground; instead, they are dismantling the established norms surrounding deferred compensation that fans and the industry have come to expect.

Examining the historical context of Ohtani’s contract and its potential implications for the future:

Perhaps, the ease with which the Ohtani deal materialized can be attributed to the fact that deferring salary for superstars is now a familiar practice for the Dodgers.

In Los Angeles, Ohtani will be joining forces with Mookie Betts and Freddie Freeman, forming one of the most formidable trios in recent baseball history. Both Betts and Freeman became Dodgers by agreeing to defer substantial portions of their salaries—a combined total of $172 million.

The Dodgers’ substantial investment in Ohtani has raised concerns about big-market teams attempting to purchase championships. However, the Dodgers’ spending is not constant; they fell short of the tax threshold for three consecutive seasons from 2018 to 2020.

While building a powerhouse lineup with Betts and Freeman, the Dodgers capitalized on opportunities created when other big-market teams hesitated to secure these players. When Betts and the Boston Red Sox couldn’t agree on a long-term extension, the Dodgers acquired him in February 2020 in a trade that involved three players who are no longer with the organization.

Betts initially seemed determined to play out his last year before free agency, but he and the Dodgers reached a 12-year, $365 million extension in July 2020—the third-largest guarantee in baseball history. However, Betts agreed to defer $115 million in salary, with payouts scheduled between 2033 and 2044, as per Cots Baseball Contracts. The MLB Players’ Association calculated that deferrals reduced the present-day value of the contract to $306 million.

In another opportune moment two years later, Freeman, after leading the Atlanta Braves to the 2021 World Series title, remained unsigned following the MLB lockout’s resolution in March 2022. Before Freeman and the Braves could resume serious negotiations, Atlanta acquired All-Star first baseman Matt Olson. Freeman found himself without a team, and the Dodgers seized the opportunity to acquire another Hall of Fame-caliber player.

The Dodgers guaranteed Freeman a sixth year on his contract for $162 million, with $57 million deferred. Freeman will receive annual payouts between 2028 and 2040, ranging from $4 million to $5 million.

The advantage of these deferrals, for both the Dodgers and the competitive aspirations of Ohtani, Betts, and Freeman, is that their salaries will now count $95.7 million toward the Competitive Balance Tax (CBT), instead of $118.5 million. This nearly $24 million difference is roughly equivalent to the annual cost of a solid No. 2 starter.

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