The Anti-Competitive Effects of Deferred Compensation in MLB Contracts

Deferred compensation in free agent contracts is back in the news again this off-season. Six of the major free agent signings, Kyle Tucker, Framber Valdez, Alex Bregman, Edwin Diaz, Dylan Cease and Devin Williams, all have deferred money in their contracts, with three of these players going to last year’s World Series finalists.

Analysis of deferrals in recent years has tended to group around two polemics. First, there was a wave of criticism regarding the use of deferrals after Shohei Ohtani signed his landmark, 97% deferred contract with the LA Dodgers before the 2024 season. This criticism was largely focused on the perceived benefits the Dodgers were gaining in relation to the league’s Competitive Balance Tax (CBT), as deferrals, such as the deferrals in Ohtani’s contract, can reduce the value of the contract for the purposes of the CBT. This was followed by a wave of analysis justifying and defending the use of deferrals. At a general level, these pieces highlighted issues such as the fact that deferrals have been used by a wide range of teams for many years without issue, that deferrals serve to boost player compensation, particularly through retirement, and facilitate deal-making, and that the CBT discount which teams can receive through deferrals is relatively conservative.

These two streams of thought both raise valid arguments for or against the use of deferrals, but often fail to answer the most pressing questions arising from the use of deferred compensation contracts. Has the use of deferred contracts actually increased or is it in line with historical trends? Are richer teams using deferred compensation more than small-market teams? If richer teams are using deferred compensation more than other teams, are there significant anti-competitive effects arising from these teams heavily using deferred compensation, or is this just a relatively harmless corollary effect of rich teams spending more than other teams? Answering these questions requires a comprehensive analysis of the complexities underlying how deferrals are governed and a fulsome dataset, one that is larger than the recent Dodgers’ contracts.

When one conducts such an analysis, it becomes apparent that the rules for deferred compensation have facilitated the emergence of a system in which deferred compensation contracts are being used disproportionately by wealthier teams. Deferred compensation rules systematically advantage wealthy teams through a range of factors including cash outflow flexibility, funding requirements, and CBT discounts. This leads to a range of anti-competitive effects, which should be addressed through targeted measures in the next round of collective bargaining.

Background and History of Deferrals

Deferring compensation is not a new practice for MLB teams, and has in fact been integral to some of baseball’s biggest moments. In 1979, the Pittsburgh Pirates extended star outfielder Dave Parker with a 5-year, $7.75 million contract, making Parker the first player in U.S. professional sports to receive over $1 million a year. $5.625 million (72.6%) of his contract was deferred and scheduled to be paid out over the years 1988-2007 (although the payment of this deferred compensation later resulted in a legal dispute between ‘Parker and the Pirates). Other notable pre-2000’s contracts with significant deferrals were the NY Mets’ contracts with Bret Saberhagen and Bernard Gilkey. The infamous Bobby Bonilla deferral agreement also occurred around this time, although, unlike the other contracts discussed in this piece, Bonilla’s deferrals were not initially included in his contract and instead resulted from a separate agreement between the Mets and Bonilla that was reached when the Mets released Bonilla.

Use of deferrals became more common, although not approaching today’s levels, after the turn of the millennium. Contracts with significant deferred compensation from the early 2000s included Ken Griffey Jr.’s 9-year, $116.5 million contract with the Cincinnati Reds starting in 2000, which deferred $57.5 million.

Around this same time, the league also fully committed to the CBT system. The CBT system was introduced in 1997, temporarily suspended in 2000, and reinstated for good before the 2003 season. The terms governing deferred compensation and the CBT are found in the MLB’s collective bargaining agreement (CBA). There are two notable aspects of this regime that apply to deferred compensation generally.

First, there is no limit on the amount of a contract that can be deferred. This is unique among the major US sports leagues, with the NFL and NBA limiting the percentage of a contract that can be deferred and the NHL recently prohibiting it outright. Second, under Article XVI of the CBA, deferred compensation must be “fully funded” by the team. Fully funded in this section means that the team must, within 18 months of the end of a season in which deferred compensation is earned, put aside the present value of the deferred compensation with a 5% annual discount. This money is often put in an investment vehicle, allowing the team to earn interest on the deferred compensation until payment is owed.

Section E(6) of Article XXIII of the CBA governs the interaction between the CBT and deferrals. Under this section, deferred compensation paid without interest to a player is discounted at a rate equal to the Federal Mid-Term Rate from the October prior to the start of the season when the contract starts. The Federal Mid-Term Rate is a rate set for related-party loans by the Internal Revenue Service and is based on the yields of U.S. Treasury debt obligations maturing between 3 and 9 years. This rate accordingly fluctuates over time, meaning that the CBT discount will very likely be different for two contracts signed in different years. For Octobers between 2002 and 2025, this rate varied between a low of 0.91% (2022) and a high of 4.82% (2007) as shown in the chart below. In recent years this rate has been on the higher side at 3.28% in 2022, 4.43% in 2023, 3.70% in 2024, and 3.87% in 2025.

However, deferred compensation which is paid to a player with interest does not result in any CBT discount. There are several notable contracts with deferred compensation which have not created a CBT discount, including the 7-year, $245 million contract between Stephen Strasburg and the Nationals that started in 2020 and the 5-year, $115 million contract between JT Realmuto and the Phillies that started in 2021. In these scenarios, the deferral may have been driven purely by cash structuring considerations.

With this background, we can now turn to the data regarding modern usage of deferrals.

Modern Usage of Deferrals

Although deferrals continued to be used through the 2000s, there was an increase in deferred compensation starting around 2016. Given this mid-2010s increase, I compiled a dataset comprising all publicly available, verified information regarding contracts containing deferred compensation from contracts starting in 2015 until the present. This dataset only contains contracts where deferred compensation was part of the initial contract, meaning it does not include contracts where compensation was deferred as part of a subsequent restructuring or arrangement.

The dataset has 60 contracts, 41 of which were free agent contracts and 19 of which were extensions. The data reveal significant patterns regarding how deferrals are being used.

As a starting point, it is clear that contracts with deferred compensation are increasing in frequency. The chart below shows the total number of contracts containing deferred compensation in three-year increments.

20 teams have used deferred compensation in contracts over this time, as per the chart below.

This list encompasses the big-market MLB teams, but it also includes several smaller-market, low-budget teams. However, a closer look at the data reveals a notable trend over time towards a concentration of deferred compensation contracts with wealthier teams.

Only 26 of the 60 contracts in the dataset involve a team with a top 5 payroll in first season of the contract. However, 22 of the 38 contracts in the period from 2021-2026 involve a team with a top 5 payroll in the first season of the contract. This trend is even more notable when one looks only at free-agent signings (i.e. excludes extensions). The charts below show this pattern.

These figures appear to support the notion that, while deferred compensation contracts are not exclusively used by wealthier teams, there is a clear trend, which has recently increased, towards wealthier teams being the main users of these deferred compensation structures.

The specific aspects of individual contracts are also revealing. For example, there appears to have been no major contracts since Realmuto’s contract in 2021 where the team did not accrue a CBT discount as a result of the deferred compensation. For contracts with reported CBT discount information, there are 20 contracts where the difference between the total compensation owed and the total CBT-discounted treatment of the compensation is greater than $10 million, meaning the team’s CBT payroll is at least $10 million less than it would be without the discount over the life of the contract. 11 of these 20 contracts, which go back to 2015, started in 2024 or later, indicating an increasing trend towards achieving significant CBT discounts and potentially reflecting the increased Federal Mid-Term Rate since 2024.

The largest discount by a wide margin is for Ohtani’s deal, under which the Dodgers receive a discounted CBT treatment of $240 million over the term of the contract ($24 million per year). The Dodgers 12-year extension of Mookie Betts is a distant second on this list, with the Dodgers receiving a discounted CBT treatment of roughly $59 million over the contract (roughly $4.9 million per year). In total, the Dodgers have 7 of the 20 contracts with total CBT discounts greater than $10 million, with no other team appearing more than three times (both the Red Sox and Diamondbacks each have three). Of note, the Blue Jays have recently become active in using a similar structure, with the 2025 contract of Anthony Santander and the 2026 contract of Dylan Cease both having CBT discounts of greater than $10 million over the contract.

It is also useful to look at the funding requirements for these deferral obligations, as these funding obligations require real cash outlays by the team prior to when payment of the deferral becomes due. This can be a relatively complex formula depending on when money is deferred and when deferred compensation is due (see Note 1 below), but examining certain major contracts illustrates the impact of funding requirements. For example, the Ohtani contract requires, on average, funding of roughly $40.7 million per year. Excluding the contract of Kyle Tucker, for whom payment timeline information was not available at the time of writing, the Dodgers’ active contracts with deferred compensation require, on average, roughly $79.8 million of funding per year. This puts their yearly funding obligations for deferred compensation in approximately the same ballpark as the full payrolls of the teams with the lowest payrolls. The Dodgers are an anomaly in terms of the magnitude of these requirements, but the commitments for other wealthy teams are still substantial. For example, both the Mets’ and Blue Jays’ active contracts with deferred compensation require, on average, roughly $13.8 million of funding per year. This is in the same ballpark as the annual compensation for top players on many teams.

As one final point of note, there does not appear to be a correlation between the applicable Federal Mid-Term Rate that is used for the CBT discount and the number of deferred compensation contracts signed in a year. This indicates that teams are not attempting to game the CBT discount system by focusing on signing deferred compensation contracts during years with a high discount rate.

Takeaways and Recommendations

There are indisputably benefits to players and teams arising from deferred compensation. It can provide players with tax advantages, consistent income through retirement and may increase the total compensation they receive from a team. It is also clear that smaller-market teams can leverage deferred compensation arrangements to sign star players, either through extensions or free agency, that they may otherwise have not been able to sign. The Brewers and Diamondbacks are good examples of this, as they have extended or signed key players like Christian Yelich and Ryan Braun (Brewers) and Ketel Marte, Zack Greinke, and Corbin Burnes (Diamondbacks), using deferred compensation. Cleveland’s recent extension of Jose Ramirez, undoubtedly the face of their franchise, also leveraged deferred compensation and illustrates the benefits of deferred compensation for smaller-market teams.

However, the analysis shows that big-market teams with top 5 payrolls, particularly the Dodgers, are increasingly using deferred compensation. This is particularly true in comparison to the rest of the league. We must then return to the question posed earlier: Are there significant anti-competitive effects arising from the top payroll teams heavily using deferred compensation, or is this just a harmless corollary effect of them spending more than other teams?

Providing a conclusive, data-driven answer to this question would likely require data that is not publicly-available and/or longer-term data than currently exists. However, the data collected for this article reveals several potential anti-competitive externalities that may serve to amplify inequality between MLB teams and which arise from wealthier teams disproportionately using deferred compensation:

1.CBT Discounts: Given that deferred compensation deals are predominantly and increasingly concentrated with wealthier teams, one could view the CBT discounts associated with almost all recent deferred compensation contracts as having anti-competitive effects. This argument would be that the luxury tax and redistribution mechanism is undermined by wealthy teams using deferred compensation to pay less tax than they would otherwise be liable for if there were no CBT discounts.

2.Exclusionary Effect of Long-Term Cash Outflow Structuring: Deferring compensation allows teams to structure cash outflows to players from a long-term perspective. Deferred compensation can free up a team’s spending room for a given year by splitting a large cash amount, which would otherwise be due during the year, into smaller amounts due after the contract. This principle applies to and can benefit all teams. However, it may also serve to amplify disparities between wealthier and less wealthy teams. Wealthy teams, particularly teams with large recurring revenues and rich ownership, likely have more certainty in terms of long-term funding than small-market teams with less wealthy ownership. In this sense, the availability of deferrals may have an exclusionary effect, whereby wealthier teams are the only teams practically able to take on multiple significant deferred compensation obligations in the same time period. This leads to wealthier teams being able to sign contemporaneous expensive contracts to the exclusion of less wealthy teams.

3.Exclusionary Effect of Funding Requirement: Connected to the above, the requirement that deferred compensation be “fully funded” may also have an anti-competitive exclusionary effect by favouring wealthier teams which can take on significant annual cash outlays in addition to their annual salaries. As described above, the Dodgers’ deferred compensation arrangements for players currently on their roster requires annual funding at around the same level as the entire payrolls for other teams. In this way, the financial position of wealthier teams allows them to leverage deferred compensation to take on more contemporaneous expensive contracts than other teams. Put another way, the money of wealthier teams already gives them a greater ability to sign expensive players, but this dynamic is amplified by wealthier teams being the only teams able to meet the deferred compensation funding requirements.

4.Inflationary Effect: If the use of deferred compensation leads to teams signing players, and particularly expensive players, to higher total value contracts than would be possible without deferred compensation, there may be an inflationary effect on contract value. This would logically benefit wealthier teams more than other teams, as wealthy teams would be better positioned in a market where contracts are increasing in value faster than they would be otherwise.

These four theories are put forward as possible explanations for the trend towards deferred compensation contracts being concentrated with wealthier teams. However, they are not intended to suggest that any team or group of teams is acting inappropriately in relation to deferred compensation. In fact, it is the converse. Wealthier teams are acting rationally within the system that exists. The deferred compensation rules are set up in such a way as to facilitate the concentration of deferred contracts with wealthier teams. Neither the Dodgers nor any other team are breaking baseball, they are simply acting how you would expect in a broken system.

How do we fix the system? While the lightning rod of CBT discounts for deferred compensation ostensibly seems like an easy place to start correcting these issues, this would be misguided. There are several reasons for this. First, focusing on CBT discounts ignores other, potentially more impactful, aspects of the deferred compensation system, such as the exclusionary effects associated with funding requirements and long-term cash structuring. Second, CBT discounts only matter in the context of the entire CBT mechanism, and particularly in relation to the redistribution system associated with the CBT. Without an effective disciplinary mechanism for team spending at the bottom of the league, such as a salary floor, an elimination of CBT discounts may not actually have the desired wealth redistribution effects that underpin the CBT system. Third, CBT discounts may be of significant benefit to less wealthy teams hoping to use deferred compensation to sign free agents or extend key players.

A more impactful change to the deferred compensation rules would be to impose limits on the portion of total contract value that can be deferred, as other major sports leagues have done. This would diminish all of the anti-competitive externalities associated with deferred compensation, including issues associated with CBT discounts. This could be done in a tiered or segmented manner in order to allow less wealthy teams to continue to benefit from deferred compensation structures while also imposing some restrictions on the use of deferred compensation by wealthy teams. For example, there could be exclusions for extensions of pre-arbitration and arbitration-eligible players and a tiered structure for other contracts, whereby the most expensive players could only defer a relatively small portion of their compensation. This would not address all of the issues underlying disparities between MLB teams, but it would be an important step towards reducing the anti-competitive effects associated with how deferred contracts have recently been used.

NOTE 1: Average present value funding calculation: Average annual deferred compensation*(1-.05)# of years until paid. There can be further slight variance in this if a team funds the deferred compensation in a timeline other than during the year that the player earns the deferred compensation