Thursday, October 16, 2008

Front Loading Contracts Continued

A few comments on my last post very appropriately pointed out that the time value of money makes a dollar received today worth more than a dollar received in the future. I avoided the conversation about the time value of money because it only serves to further my argument. Paying more dollars upfront (as I said) is a real benefit to the player; not only is this an additional enticement, but may also serve to reduce the average annual value of the contract needed to sign that player. In most business situations the financially correct practice would be to back-load deals; the only problem with this is that baseball is different from most businesses. The money spent on players' salaries is going toward a diminishing asset; as players age their production declines. Each and every year a baseball team needs to receive a certain number of hits, runs, home runs, RBI, strikeouts etc... from their roster in order to win. Therefore, the most sound baseball practice would be to pay the players based on their years of biggest contributions to those needs. 

If we structure free agent contracts this way, and are fairly accurate in forecasting production, there should always be money available to sign new, more productive players to compensate for the reduced output from our aging players.

Keeping in mind that a certain amount of production is necessary each and every year, and keeping in mind that each free agent's performance is going to most likely decline during those years, the typical sound monetary business practice needs to take a back seat to sound business-specific baseball practice.

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