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View Full Version : Why are so many contracts backloaded


PatK
05-22-2009, 11:08 AM
With all of the talk of the failed Peavy trade, it got me wondering as to why so many players have backloaded contracts.

Offhand, I'd think it was because in general, salaries keep getting higher. By putting more money in the back end, you tend to keep the player happy.

You always see guys getting pissed because 2-3 years into a contract, another player of similar/lesser ability ends up signing somewhere for more money. So the extra money put into a contract is a way of adjusting their salary to what it would be on the open market in the future.

I'm sure I did a bad job of trying to explain myself, but am I somewhat right? If not, what are the reasons?

voodoochile
05-22-2009, 11:36 AM
That's a good part of it - the salary keeps up with other contracts being signed as the years pass.

There is also a sound financial/economic reason: A dollar today is worth more than a dollar tomorrow. If given the choice between paying someone less money today and more money next year, you always take that option as the payer.

$1M next year only costs about $950K today due to inflation, interest, etc. So when you see a contract that was signed before the 2008 season and is structured like this:

2008: $10M
2009: $11M
2010: $12M
2011: $13M

It's total costis $46M but in 2008 money it's only worth about $40M or less because of the aforementioned factors.

thedudeabides
05-22-2009, 11:40 AM
Teams prefer it because of the time value of money or future value of money. It's basic finance that a dollar today is more valuable to the team than the dollar five years down the road. Ultimately, ownership would prefer the money be deferred long term, as happened with Frank Thomas and several other athletes who eventually realized this wasn't in their best interest.

The players like their salaries to escalate, as it keeps them in line with what other top comparisons at their position are earning. I guess it's a bit of an ego thing.