photo by Flickr user d-deee
Giancarlo Stanton, the Miami Marlins’ star right fielder, made headlines recently when his team announced his new $325 million contract.
A contract that size would have made news no matter where it came from. Stanton’s $325 million over 13 years is the biggest contract in Major League Baseball history - the biggest contract in North American sports history, period, according to NPR. But it was all the more attention-grabbing because the Marlins have had a reputation for penny-pinching and unloading young players who threaten to get too expensive.
The shift is big, but it is also worth noting that Stanton’s contract is heavily backloaded. The first six years of the contract will bring him $107 million, or an average of $17.83 million per year, which is something of a bargain for the Marlins. After six years, Stanton will have the option to opt out of his contract and become a free agent, but unless he has reason to think he will be able to earn more than the $218 million he’s due in the final seven years of the contract, it seems unlikely that he’d take that chance.
For the team, this structure makes sense because it gives Stanton incentive to stay put and makes it possible to sign other talent before having to devote a larger piece of the payroll pie to his salary. But does the contract make as much sense for Stanton?
That may seem an odd question for the player who has just become the highest paid in all of baseball. But as financial advisers know well, a dollar today is worth more than a dollar tomorrow (or 13 years from now). No baseball player could say no to a guaranteed contract for $325 million with full no-trade protection. But it is interesting to compare Stanton’s contract with others. After crunching some numbers, it looks like Stanton may be spending a little too much time at batting practice and not enough time fiddling with his financial calculator.
The best measure for comparing contracts is Net Present Value (NPV). NPV takes the time value of money into account and illustrates the value of future payments in today’s dollars. Assuming a 4 percent discount rate, which is fairly conservative, using NPV as a measure for comparison shows that there are other sluggers who are paid more than Stanton. And if we assume a higher discount rate, Stanton’s contract becomes even less startling.
Miguel Cabrera, who was the most recent record-breaking contract holder prior to Stanton at $292 million, has a contract with a higher NPV. And while the net present value of Stanton’s contract is higher than Alex Rodriguez’s 2008 deal ($275 million, frontloaded), if you adjust for the difference between 2008 dollars and 2014 dollars, A-Rod’s contract is bigger than both Stanton and Cabrera’s. As a Yankees fan, discovering this did not make my day.
I don’t claim to be an expert on sports contracts, where various clauses and options can lead to all kinds of potential outcomes. And I can’t possibly make the argument that a $325 million contract is not attractive, backloaded or not. But I wonder whether Stanton and his financial team fully understood how much money they left on the table. At a 4 percent discount rate, the present value of Stanton’s contract is approximately $90 million less than its total. A-Rod and Cabrera, whose contracts are not backloaded, lose approximately $50 million and $60 million respectively due to the time value of money. If you assume an 8 percent discount rate, Stanton loses almost $150 million, compared to $85 million for A-Rod and $100 million for Cabrera.
The Marlins’ owner, Jeffrey Loria, has attracted a lot of anger from fans. Much of this comes from the Marlins’ cycle of signing free agents and then breaking their promises to them, trading players away because of claimed financial hardship. While it appears the Marlins want to turn around their reputation, it is also easy to imagine an owner as despised as Loria looking for a way out of the contract if Stanton doesn’t attract enough fans to the stadium. Tim Brown, writing at Yahoo! Sports, said that an audience member at the Marlins’ news conference asked Stanton if he was embarrassed by the amount of money he would earn. “Nah, not exactly,” Stanton replied. Brown suggested Stanton’s real future embarrassment, though, may spring from the trust he put in Loria and the Marlins.
Stanton’s trust may or may not be rewarded. You only live once, and Stanton may be happy to receive less money so that his team is more competitive. Injuries could also strike at any time; by signing his contract, Stanton ensured that he and his loved ones will never have to worry about money again.
But as Yankee great Yogi Berra put it, “It ain’t over ‘til it’s over.” Hopefully after Stanton’s contract expires, he won’t have any regrets.