A while ago I discussed a topic near and dear to my heart, contracts for baseball players, more so why they should not give a hometown discount to teams they’ve played their entire careers with. The topic of this blog post is going to be along the same lines of contracts for professional athletes, but in a different spectrum.
Contracts often differ based on sport, baseball is usually back loaded with little signing bonus money, small amounts of performance bonuses, and a lot of guaranteed money. Football on the other hand is almost exactly the opposite and basketball is somewhere in the middle, with a heavy emphasis on rookie contracts. Here’s what all of them are missing, deferred guaranteed earnings after they are no longer playing. This idea is often referred to as the ‘Bobby Bonilla‘ payout. Bobby Bonilla negotiated a contract that guaranteed him a certain amount of money over a period of time ($1.19 million over 25 years) after he stopped playing instead of paying him what was owed to him in the final year of his contract ($5.9 million). This was a historically bad deal for the Mets, who instead of paying Bobby $5.9 million in 2000, would start paying him in 2011 the first of 25 payments that would equal a total near $30 million. But there are lessons to be taken from this, ones that can prove fruitful for both the team and the player.
Players should insist on deferred compensation, especially if they are nearing their final contract. It’s no secret that professional athletes are know for going broke after they stop playing, the numbers for the NFL alone are around 80% of all former players. This highlights the fact that players lack fiscal intelligence and have no clue what to do when the money dries up (side note; roughly 60% of all Americans have less than $1000 in savings, so athletes are not necessarily any less fiscally responsible than the average American, they usually just make more). What these athletes can do to safeguard, for the most part, against going broke after they finish playing, is to insist on deferred compensation. What really makes sense about this is that the team will benefit equally from this decision.
In the case of Bobby Bonilla the Mets obviously got the raw end of that deal, but it doesn’t always have to be that way. If the player insists on deferred compensation the team should give consideration based on the time value of money and build in at least the risk free rate of paying a player beyond his or her service time. Yes, a lot of contracts in professional sports are for well above $1 million, which means that anything less than that annually will be hard for the player to justify, but for the sake of the argument lets give an example. If a player is seeking $10 million per season over 5 seasons, and is expecting this to be the last contract of his career, how should he defer the money for financial security? Instead of negotiating for $10 million/5 years, he should ask for $8 million/5 years with deferred compensation of $500,000 over the twenty years immediately following his retirement from baseball. This is great for both the player and the team because the team would actually save money, despite it looking like the same amount (5X10=50 million / 5X8= 40 million + 20X.5=50 million) the time value of money tells us that the team would save on the interest of deferring the money over the long term. This also is beneficial for the player because, well, who is guaranteed to make half of a million dollars for 20 years after they quit their job?
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