At the start of the offseason, Max Scherzer was rumoured to pursue a contract with over $200 million guaranteed, and that's exactly what the Washington Nationals gave him. Seven years and $210 million, the second-largest pitching contract ever and only a hair behind Clayton Kershaw's record extension. If Scherzer, and agent Scott Boras, set out to break new ground, this contract delivers. Max Scherzer is now the proud - and wealthy - owner of the largest free agent pitcher contract in history.
Of course, this deal is unique not just due to the dollar figures involved. Half the money is stretched out past the seven-year commitment for Scherzer to serve as a Washington National. The final $105 million will be paid out over 2022-2028 when Scherzer could be retired or even pitching for another team. In return for these record deferments, the Nationals need only pay $15 million a year for the pitcher who racked up the third most wins above replacement over the last three seasons. On the face of it, it's flexibility for the next seven seasons as the Nationals go all out for championships, but it's flexibility they will literally pay for in the future.
Perhaps that is the primary motivation here, for a franchise with an 89-year old owner that has never won a World Series, and while in Washington never a postseason series. Barring further moves the Nationals now possess the highest projected WAR both in their position player depth and pitching staff thus of course overall as well. Their World Series odds have been cut to 6-to-1, making them the favourites. Predicting baseball is a fool's errand, even during the postseason, and certainly in January. However, the Nationals have put themselves in the strongest position heading into spring training.
The extra financial flexibility from reducing Scherzer's salary in 2015 might be the difference in being able to keep the rest of their rotation intact. Lowering it for the duration as opposed to a back-loaded deal might give Washington the ability to re-sign some of their impending free agents. Windows to win in MLB are hard to come by, as us Yankee fans have seen first-hand recently. The Nationals may well be seizing their chance here, and other teams in the future may build on strong cores by signing deals with deferred money instead-of or in-addition-to the already popular back-loading structure.
Washington has been rumoured to be looking to trade from its excellent starting pitching depth, both for immediate financial relief and to restock on prospects for a player they might otherwise lose to free agency. This doesn't immediately fit a go-for-it-now mold, but then despite the headline figures here the Scherzer deal is not a financially irresponsible one. Relatively speaking, of course. Dave Cameron converts the long-term dollars into present-day figures for comparison, applying a reasonable 7% discounting rate. to match the expected return from the stock market. This deal effectively translates into a flat-figure of 7 years and $170 million, a lot of money but much more in-line with his expected market. Even more striking, Cameron compares this deal to the front-loaded six-year $155 millon Jon Lester deal and finds the deals only $10 million apart in today's money even if Scherzer will receive an extra $55 million total. The Nationals have given Scherzer and Boras the headline numbers they wanted here without spending the full fare.
For luxury-tax purposes, #Nationals will be charged present-day value of salaries in each of seven years on Scherzer’s deal, per rival exec.— Ken Rosenthal (@Ken_Rosenthal) January 19, 2015
So, luxury-tax salaries for Scherzer likely will be in $26M-$27M range rather than $30M for each of his seven years in deal with #Nationals.— Ken Rosenthal (@Ken_Rosenthal) January 19, 2015
If the competitive financial package and long-term security is what a specific player seeks, this structure brings one additional benefit specific to luxury tax paying teams. While MLB doesn't discount for luxury tax purposes by the full 7% that might match the stock market, they do convert this $210 million to a standard seven-year deal between $182 and $189 million, per Rosenthal's numbers above. That means a reduction of between $21 and $28 million of the luxury tax overage, which we can certainly expect the Yankee front office to factor in for future deals. Not all contracts will come with dollar figures to match Scherzer's of course, but on any nine-figure deal structured this way there could be eight-figure savings just in luxury tax overages. Seeing as repeat offenders like the Yankees pay tax in the 50% bracket, these figures could easily tip the balance on a contract offer. Other tax paying teams may also look at the structure here with interest. Indeed Scott Boras and other agents may themselves propose this structure to other teams around the league.
Certainly not every free agent contract will have a total dollar figure of $210 million, and not every player might have the financial motivations that factored into Max Scherzer's decision making. Not every team will be as flexible as the Washington Nationals were here, in taking on such significant future cash obligations. After all, the impact could be far-reaching, as such a deal could complicate a potential sale a decade in the future. It potentially sets up a long-term drain on operational cash and might hamper future payroll flexibility. Think how much some of the current Yankee big contracts are affecting spending, and imagine the team paying $15 million for a player who hasn't been on the team in six seasons. This isn't a cure-all deal by any stretch, especially if it helps persuade teams to part with more money in present value than they might otherwise do. However, it is not a structure without appeal in specific cases.
The total sum of future money here truly is astounding, perhaps a perfect storm of ideal factors for such a deal. Scherzer may hold the record on $105 million total deferred money commitment longer than he holds the one for his $210 million free agent pitcher contract. Maybe longer than the contract itself. However, I personally would not be surprised to see more contracts based on deferred money in the future.
More generally, I would like to see the Yankees be willing to take a flexible line in contract negotiations. Deferred money should be on the table, as should be front-loaded contracts like the Cubs gave Lester to put more money in his pocket earlier. Indeed, any other structure that creates a happy medium between Hal Steinbrenner and top-tier free agents could help. Free agency might be all about the money, but perhaps it's better viewed as being all about the value. Understanding and accommodating the priorities of each specific free agent target with creative financial structures could allow the Yankees to better compete in the offseason market going forward.
If the simply outspending everyone strategy no longer applies with the modern front office, it's time to adapt. Improved scouting, development, extensions for players still under control will all help the New York Yankees field competitive rosters. However, free agency should continue to be a valued avenue for talent, and being flexible here could allow the Yankees to sign elite free agents at a lower total value financially. Not cheap, but perhaps cheaper. Relatively.
Hat tip to PSA member Vehemens for posting Rosenthal's tweet on luxury tax in yesterday's comments.