How Shohei Ohtani's unusual deferred contract actually works

Photo by John McCoy/Getty Images

As the first details of Shohei Ohtani's deal began to drip out over the weekend, the initial response in some rival front offices was fury. Though the exact numbers weren't yet known, it was clear that much of the $700 million that L.A. agreed to pay Ohtani would be deferred. Executives across baseball hypothesized that the Los Angeles Dodgers might have skirted payroll rules with the unusual structure of the contract.

A few days later, the full extent was revealed: Ohtani's salary is actually just $2 million per season. A full 97% of his salary -- $680 million of the contract -- will be deferred until later this century. But as executives have had time to process the Ohtani deal, cross-referencing the contract with the collective bargaining agreement rules, a broader truth has settled in: The Dodgers did nothing wrong.

To be sure, it's a monster deal, and it's a deal that some small-market owners will inevitably point to as they angle for changes in the next collective bargaining agreement. Even considering deferrals, Ohtani will cost the Dodgers more in 2024 than the entire Oakland roster, apparently. But it's a strange deal. And most importantly, within the language of the current CBA, the arrangement between Ohtani and the Dodgers appears to be perfectly legal: "There shall be no limitations on either the amount of the deferred compensation or the percentage of total compensation attributable to deferred compensation..."

The practice of deferring salary has been in play for a lot of teams and players for decades. Most famously, the Mets arranged a $29 million deal with slugger Bobby Bonilla before the 1992 season, and within that contract, Bonilla's agent arranged deferred payments to be made from 2011 through 2035, in excess of $1 million each. In Peter Angelos' tenure as the owner of the Orioles, he preferred contracts that deferred salary, to be paid later rather than sooner. For example: when slugger first baseman Chris Davis signed a seven-year, $161 million deal in 2016, there was so much deferred salary within the details that Angelos personally assessed the present-day value at closer to $117 million. The Dodgers previously deferred salary in their deals with two other current superstars, Mookie Betts and Freddie Freeman. When news of Freeman's agreement leaked, it was first reported at $162 million over six years, seemingly more money than the Braves had offered him before his talks with Atlanta broke down -- but in fact, $57 million of that money was deferred, and the value of the contract was actually very close to what the Braves had offered. Following that negotiation, Freeman fired his representatives.

But no player has ever deferred nearly as much money as Ohtani. That's in part due to his unusual stature in the sport: No other players makes nearly as much in endorsements, particularly internationally, so he relies far less on his salary from an MLB team. It's one of the reasons he joined the league earlier than many expected, in 2018, when he was just 23 and subject to MLB's international signing restrictions (if he'd waited until after his 25th birthday, he wouldn't have been subject to those same caps).

Other teams and agents prefer cleaner contracts. Some general managers privately said they'd rather not have salary obligations from ancient contracts hanging on their books; other agents fret about a changing world.

"I want my players to get their money as soon as possible," one agent said, "because you don't know what could happen. The economy could tank. Teams might tank, and go belly up."

Or there could be a pandemic? "Right?" the agent continued. "I'd rather have my guys using their money than teams holding their money and using it."

Agents will sometimes agree to deferred money to affect the perception of the contract -- to hit certain salary benchmarks, to establish new precedent. The optics have always mattered. Famously, Alex Rodriguez's contract with the Texas Rangers in 2001 was worth an oddly specific $252 million -- precisely double that of Kevin Garnett's deal with the Minnesota Timberwolves, the previous standard in North American sports. Because of the structure of Ohtani's deal, his agent, Nez Balelo, can claim that he is the first to negotiate an MLB deal that starts with the number 5 -- and 6, and yes, 7, for $700 million.

"The Dodgers got the player, and the agent hit his numbers," said another club executive, noting dryly that it probably wasn't a coincidence through all of the math, the size and rate of the deferrals, landed on exactly $700 million -- a number that was first announced by the agent Saturday and remained unacknowledged by the Dodgers for two days, before the nuance of the accounting invaded this alternate reality. "That's what this was about," the executive said.

On Monday, the number that actually matters was invoked -- the present-day value of Ohtani's contract, as assessed within the calculus of the CBA rules, is a little less than two-thirds of $700 million, or about $461 million. This is the number -- the CBT number, as it is commonly referred to by front office types and agents -- that is used within baseball's accounting. According to researcher Sarah Langs of MLB.com, these are the top 10 contracts, in total CBT value, in MLB history:

1, Ohtani $460,814,765
2, Mike Trout $426,500,000
3, Aaron Judge $360,000,000
4, Manny Machado $350,000,000
5, Francisco Lindor $341,000,000
6, Fernando Tatis $340,000,000
7, Bryce Harper $330,000,000
T8, Giancarlo Stanton $325,000,000
T8, Corey Seager $325,000,000
10, Gerrit Cole $324,000,000

Because of the tidal wave of erroneous reporting in the Ohtani negotiation -- from last Friday's tracking of a flight that wasn't carrying Ohtani to the reports that he was headed to the Blue Jays -- on top of the usual winter market disinformation, there is a lot of industry skepticism about some of the reports attached to his deal.

For example: The notion that Ohtani deferred salary to give the Dodgers' financial flexibility. Ohtani will be making $2 million annually in the 10 years of his contract, and as the theory goes, this will give the Dodgers more money to spend on, say, starting pitching. But the math is more daunting than that for the Dodgers, in the luxury tax accounting, because the team will be assessed the average annual value of Ohtani's contract, way more than $2 million.

Ohtani's CBT number -- based on the present value of the contract, using current national interest rates -- is still the highest for any player in the sport, and almost 20% of the room under the 2024 tax threshold of $237 million.

"It's still a CBT hit of $46.1 million," one agent said. "If he had done a deal without deferrals -- say, 10 years, $550 million, straight up -- then his CBT number would have been $55 million. The difference of what, one relief pitcher? One Joe Kelly? It's not like the deferred money gives the Dodgers a lot of flexibility to deal with the luxury tax."

All of which, again, begs the question of the point of making this all so complicated.

Back in August, when the Angels announced that Ohtani had suffered an arm injury, one agent acknowledged that the bidding for the two-way star would be affected because of the uncertainty about when he would pitch again, and offered an educated guess about where the winning contract number would fall.

"You start with the Judge contract, right?" said the agent, saying that Ohtani's offensive production would be valued in the range of Aaron Judge's $360 million deal with the Yankees. "Then on the pitching side of it... you factor in the risk for someone coming off a second major elbow injury, his potential if he's healthy."

The agent paused. "You give him another $100 million -- $460 million."

Which is precisely where the Dodgers' bid landed, after being washed through baseball's accounting -- about $460 million. Not $500 million. Not $600 million. Not close to $700 million.

Still the biggest contract in baseball history.