I'm hoping it means Zimmerman has told them he just doesn't want to sign in DC. Because, otherwise, this is just fantasy league baseball at its worst. I can't see how Zim gets more than Scherzer, so it sucks if they just jettisoned the home grown guy to get the shiny new object. But if Zim really wants to go to the Midwest, then this is the best possible thing they can do to mitigate that loss.jose melendez said:
Scherzer to Nationals: 7 years $210 million
- Thread starter RedOctober3829
- Start date
(Tried to reply earlier, but the board ate my response)
I don't think it's as simple as casting aside Zimmermann for Scherzer. After this year, both Zimmermann and Fister are free agents. After 2016, both Gonzalez and Strasburg are free agents. They weren't going to be able to keep all four no matter what, so signing Scherzer gives them some insurance against a scenario in which all four bolt and gives them the flexibility to listen on trade offers in case someone wants to give up a stud middle infielder or center fielder (since Desmond and Span will also be free agents after 2015).
Plympton91 said:
I don't think it's as simple as casting aside Zimmermann for Scherzer. After this year, both Zimmermann and Fister are free agents. After 2016, both Gonzalez and Strasburg are free agents. They weren't going to be able to keep all four no matter what, so signing Scherzer gives them some insurance against a scenario in which all four bolt and gives them the flexibility to listen on trade offers in case someone wants to give up a stud middle infielder or center fielder (since Desmond and Span will also be free agents after 2015).
LondonSox said:
Taxation of deferred compensation is complicated. For purposes of this discussion, it's close enough to say that compensation can be deferred if there's a binding, irrevocable agreement to defer before performance begins, and the employer's tax deduction is deferred until the employee recognizes income.
For people asking why deferred compensation arrangements aren't more common in player contracts, I think the deferral of the club's tax deduction is your answer.
JimD said:
That seems to me likely. They came up with a way for Boras to claim he got a player $30 million a year without it actually costing the team $30 million a year.
But there may be a win-win scenario here. An accountant may be able to answer this better, but I think there may be a bit of an inefficiency working here that makes a deferral like this allow the team to provide more cash to the player, while the player doesn't give up a corresponding amount. It's one thing to talk about the time value of money in the abstract, but it's different when you're talking about an individual and a organization, I think. Instead of paying $30 million each year, the team can simply bank the extra $15 million each year in some sort of investment vehicle that likely gives them between 2 and 3 percent. So, over the 14 years, that gives them an extra amount of money to bargain with to give Max -- maybe makes them able to call it $210 instead of $200 million.
It's tempting to say, "yeah, but Scherzer gives up a corresponding amount of earning potential on the money". Maybe that's correct. But a player who takes in $30 million in a year pays a ton of taxes -- let's say conservatively $12 million -- and his agent gets a chunk, and he has living expenses and stuff, so in the end, it's not exactly like he would have been able to invest that whole $30 million anyway. Let's say he gets to invest $15 million or so of it. If instead he gets $15 million, he pays about $6 million in taxes, and about $750,000 to has agent, and has the same million or so in living expenses, and now he gets to invest about $7.5 million.
Put more simply, the organization can pay him the interest on the entire $15 million it saves per year to get over the hump, whereas because of taxes and agent fees, Max can only invest about half as much. So, he's sort of freeriding on the organization's ability to invest more of his money for him over time by delaying his taxation and agent fees on it.
I'm sure this is all incorrect, but thrown out there for flyspecking by the experts.
Passan says that there are enormous state tax benefits for the way the contract is structured. Apparently some $50M was structured as a signing bonus too. I can't really speak to the details; I'll leave that to the experts.
http://sports.yahoo.com/news/sources--max-scherzer-s-7-year---210-million-deal-with-nats-contains-historic-deferrals-164857543.html
http://sports.yahoo.com/news/sources--max-scherzer-s-7-year---210-million-deal-with-nats-contains-historic-deferrals-164857543.html
God this has to go in the pet peeves thread. He lives in AZ, which has an income tax. So he isn't saving 8.25% by being a non-resident of DC. And this idea that deferring income means it isn't subject to tax is a new one to me.
DennyDoyle'sBoil said:
Another thing...Max is costing something like $15M/year (excluding bonus). That's John Danks money. By the time the contract start's equalizing, $15M/year will be Chris Capuano money. The real baseball payroll hit to the Nats has really been reduced because Max's payment in 2025 will be a flea on a dick.
As noted in several of the articles linked above, he's establishing residency in FL, which doesn't have an income tax.glennhoffmania said:
I don't think anyone questioned his ability to perform...IF healthy. If he were my son, I would have advised him to take the $144 since (a) an injury could have cost him the big contract and (b) he'd still be stinky rich. He rolled the dice and won.LeoCarrillo said:
twibnotes said:
In all fairness to such an evaluation, it's worth noting at that point Max had already earned roughly $15 million in his career, and was slated to double that playing out 2014 alone. If i was feeling healthy/confident, i'd probably bet on myself and against the highly unlikely event i would suffer a career ending injury too. Not like it's all or nothing in regards to my earning potential if i do have that bad year (especially these days, where showing the ability to throw a fairly league average 200IP alone is going to get you paid handsomely), and very very worst case scenario i still walk away a multi-millionaire.
Same goes for Zimmerman if/when he gets traded and elects to play the year out. Won't be a big shocker imo
Interesting deal. I wonder what we'll think of it 15 years from now.
Thread derailment questions/thoughts.
Does Boras (or any agent for that matter) get paid upfront, over the next 7 years, over the next 14 years?
I can't imagine upfront, but probably set up in their contract together and each one is different, from player to player and agent to agent.
Thread derailment questions/thoughts.
Does Boras (or any agent for that matter) get paid upfront, over the next 7 years, over the next 14 years?
I can't imagine upfront, but probably set up in their contract together and each one is different, from player to player and agent to agent.
DennyDoyle'sBoil said:
It is "easier" to think about it that way but the exactly correct way to do this is to individually discount each cashflow at the correct discount rate for each payment, and that's a pain in the ass and requires a bootstrapped curve.
So as I couldn't be bothered to do that, if it was an actual Red Sox contract I might, I took the first deferred payment, the payment that should be paid this year but will instead be 7 years later and discounted that by the libor curve I already have at work. This is by market rates and that's the answer. I then multiplied that by 7 to give a rough proxy for the whole strip, as year 2 is deferred to year 9 etc the same time period is used. This is obviously not correct because rates are not priced the same from 1y to 8y as 2 years to 9 years but frankly that's a massive pain in the ass to bother with. If someone really cares I can do it, but my calculation above is a real market discount rate for the first deferral period and then just for ease multiplied by 7.
Because to do it right you don't use a single interest rate, you need every point on the curve.
They defer the tax until they receive the compensation. Frequently, they get investment-type returns on the deferred cash between the time the compensation is earned and the time it is paid. The 409A rules passed a decade ago made these arrangements less popular, but they're still out there.glennhoffmania said:
I'm surprised you haven't heard of this.
I wonder how popular these plans are. My wife's employer offers this option but she was scared off by the idea that in the event of bankruptcy the plan participants are unsecured creditors.maufman said:
Well in finance most bonuses have regulatory required deferrals. Some for 5-7 years. So it's common in some areas
maufman said:
Of course I have. I deal with it all the time. The article suggested that deferred comp isn't subject to tax. I said that's bullshit, because it's totally wrong. You replied saying executives do it all the time. Yes, you can defer the tax liability on deferred comp under certain situations but deferring tax isn't the same thing as avoiding it. In Scherzer's case, he's not getting the salary for years, and he'll most likely not pay tax until he receives it. That's hardly a huge advantage for him since he won't have use of the cash in the meantime.
Plympton91 said:
Even if that's his plan, the article calculates his "savings" as if every dollar would've been taxed in DC. That's clearly wrong. He'll still pay plenty of tax in every other state in which he plays. Obviously the DC law provides some savings for every player who plays there but is a non-resident, but every time a situation like this comes up in sports the writers overstate the tax savings/cost because they're generally too lazy to get acquainted with the basic rules.
Sorry, I thought it was pretty clear that the article meant no current tax.glennhoffmania said:
The deferral is obviously a much bigger advantage if you get an investment-type return on the money during the deferral period.
That's the trade-off -- you basically get to circumvent the 401(k) contribution limits, and many employers offer a guaranteed return investment option, but if the company goes broke you lose it all. The plans are less popular than they were 10+ years ago, before Congress closed most of the loopholes.Shawn O'Leary said:
maufman said:
Wait - I don't believe Scherzer is getting the same deferred comp as executives get. For executives, their deferred comp is stuck inside an investment account and acts kind of like a retirement plan. For Scherzer and tax purposes, he's basically just signing a contract that pays him $15M every year for 14 years.
Which is not all that different (other than amount) from Stanton's 13-year, $325M deal, in which he's going to end up paying something like 43% in taxes according to one accountant even if he lives in Florida (based on the 2015 Marlins schedule).
One thing to note when you have an agent who gets commission being your financial advisor. Scherzer's deal looks much better compared to Lester if you discount at current rates. However, if one were to discount at 7% - which one could argue is a more historically normal rate - it doesn't look that much better and Scherzer's contract discounts to approximately $130M and Lester's contract discounts to approximately $120M. See: http://www.fangraphs.com/blogs/max-scherzer-and-when-210-million-isnt-210-million/
I wonder if Scherzer pays Bora$'s fee on the total amount or the NPV amount.
wade boggs chicken dinner said:
The flaw in using the FG calculation is you would assume Scherzer could invest all 105 million of the deferred money, which he could not (Nats can though), because he could only invest whats left after he pays taxes and commission. Lets call it half, so the difference with Lester jumps to 25 million over 7 years. So while the Nats are paying a discount to 120 million and deferring the money works well for them (although I believe they must start funding the deferred payments in 2017), Scherzer is recieving quite a bit more and the deferred payments don't hurt him as much as the Nats gain .
As for Boras commision, I assume half of that is deferred as well, which means his 10.5 million commission is worth a bit less so he suffers as well.
Is there a minor tax savings in the structure by calling a lot of the money a "signing bonus" rather than "salary"? All they've done is change what they're calling the money, not the payment schedule, but I imagine he is taxed for road games only on his salary, not his overall contract.