Trevor Bauer # 27 of the Cincinnati Reds celebrates after the final of the sixth innings during the first game of the Wild Card Series between the Cincinnati Reds and the Atlanta Braves on Wednesday, September 30, 2020, at Truist Park in Atlanta, Georgia.
Adam Hagy | Major League Baseball | Getty Images
The Los Angeles Dodgers recently signed the 2020 National League Cy Young winner Trevor Bauer for one of the most unique contracts in Major League Baseball history.
Bauer agreed to a $ 102 million, three-year deal with the team on Thursday, making him one of the highest-paid players in theory in theory as the pact unfolds. There are opt-outs that trigger a peak salary, a deferral and a short-term model structure. Most importantly, it has flexibility, which a player of Bauer's talent usually avoids.
"That's what this player wanted," said Jon Fetterolf, partner at litigation firm Zuckerman Spaeder, to CNBC on Thursday. Fetterolf is one of the two MLB co-agents who negotiated Bauer's deal. The other is Rachel Luba from Luba Sports.
"We ended up on a three-year contract where he'll make a lot more in the first few years than we've seen before," he added, noting that Bauer will earn $ 85 million in the first two years of the contract could.
Again, it's unique and that's how it's built.
Inside the deal
Bauer reportedly earns $ 38 million in his first year. If he goes out of business, that total will be $ 40 million as the Dodgers would pay him an additional $ 2 million on the way out.
The Dodgers can benefit from this. If Bauer leaves, they can defer $ 20 million of the salary for future payments – much like the Mets' arrangement with Bobby Bonilla. There is also a $ 10 million signing bonus that will be paid out in the 2021 season.
This bonus helps as the money is only taxed at the player's state residence, while MLB game checks are taxed based on the city the clubs play in during the year.
The second year of the contract is $ 47 million. It's $ 32 million for the year, but if he signs out the Dodgers will pay him another $ 15 million.
These salaries make Bauer the highest paid player (per year) in the MLB for 2021 and 2022.
And if Bauer is still a dodger after two years, he'll miss the $ 15 million buyout but make up for it with a $ 32 million payment for the last year of the deal. The sum: $ 102 million over three years.
"The structure gives him the opportunity to assess the situation from year to year," said Fetterolf. "It's a different kind of contract, and it also shows that he's a different kind of person."
Short term thinking
The 30-year-old farmer made his share of PR mistakes. But a player of his caliber usually takes the long-term path – money and security over several years.
For example, New York Yankees pitcher Gerrit Cole signed a nine-year deal worth around $ 324 million in 2019. He was 28 years old at the time, but was bound by his contract until he was 37. Bauer and Cole were teammates at UCLA, and they were both selected above in the 2011 MLB draft.
Once drafted and at an MLB club, it takes players six years to become a free agent, and along the way they will earn the minimum wage under the collective agreement. Once the service time is reached, the players have the right to negotiate the salary with the team. If they do not agree, there is an arbitration tribunal to determine the compensation.
If the players in this window do not agree to long term deals, especially when they start pitchers, they will agree once they reach the free agency. Bauer emulated new teammate David Price, who had embarked on a path similar to his mega-deal.
Price continued his years of service with the Tampa Bay Rays, enduring pay arbitration along the way, and putting on a one-year contract with the Detroit Tigers for the 2015 season. At 30, he signed a seven-year $ 217 million deal with the Boston Red Sox.
Both Price and Bauer were four-year-old players in pay arbitration schemes that were traded by their clubs and signed one-year contracts before hitting mega-contracts. Price, now 35, was traded to the Dodgers last February and is set to raise $ 32 million for the 2021 season. He'll be 37 once the post-2022 deal closes.
Fetterolf and Luba were hired to represent numerous players in the salary arbitration. Fetterolf explained why Bauer chose the short-term model instead of the long-term model.
"Theoretically, he would like to give himself the opportunity to control his life if you don't leave for most of the years, most of the dollars," said Fetterolf, using the example of short-term basketball contracts.
"He could have done the maximum," said Fetterolf. "He didn't do that. Why? Because he wants to make sure he's in a situation he likes. I think that's different. We see that in basketball. I think one of the reasons we do it in basketball see, these guys are able to make so much money off the field, far more than baseball players normally make, ”he continued. "But a lot of these guys want to make sure they are in a situation where they have a chance to win."
Trevor Bauer # 27 of the Cincinnati Reds plays in the third inning against the Milwaukee Brewers at Miller Park on August 7, 2020 in Milwaukee, Wisconsin.
Dylan Buell | Getty Images
Filet Mignon at half price
However, not all teams can afford contracts with expensive annual salaries.
After winning the 2020 World Series, the first since 1988, the Dodgers use a championship window. Landing Bauer at this salary costs the team.
According to Spotrac, the Dodgers have a payroll of $ 234 million, well above the Yankees' $ 189 million (second highest), and are expected to be the only team to pay a competitive luxury tax bill. Clubs will be taxed dollar for dollar if they exceed $ 210 million in 2021.
But the Dodgers are familiar with taxes after paying a record $ 43.7 million in 2015. The bet is that Bauer's deal will help the team get their money's worth with another title, and this time with fans in the stands to make up for lost revenue in 2020 due to Covid.
"It has to be a club that sees itself in a (championship) window and takes over the salary," said Fetterolf. "And if it takes them to a World Series and he goes, so be it. And it eliminates a lot of teams in baseball."
When asked if more players should consider the short-term game, if available, Fetterolf said the circumstances were different but pointed to flexibility as bait.
"A player like Trevor looks at it and says," I'd rather see if I can maximize my annual earnings upfront while maintaining flexibility. " He said he only charges a 1.5% fee on contracts (more notable MLB agents can charge up to 5%) and an hourly rate during negotiations. The fee structure helped Bauer save brokerage fees.
"The player is different," added Fetterolf. "He got the deal he wanted and a record deal at a cheaper price than anyone else. You get filet mignon and pay half the price. It's not a bad deal."