from Amazon
Wednesday, May 26, 2010
The fallacy of “paying too much for out years”
Year $perWAR WAR Salary$ DiscRate Disc$ Flat$ DiscFlat$ Diff$
2010 $5.0 4.5 $22.5 100% $22.5 $16.6 $16.6 $6
2011 $5.5 4.0 $22.0 95% $20.9 $16.6 $15.8 $5
2012 $6.0 3.5 $21.0 90% $19.0 $16.6 $15.0 $4
2013 $6.5 3.0 $19.5 86% $16.7 $16.6 $14.2 $3
2014 $7.0 2.5 $17.5 81% $14.3 $16.6 $13.5 $1
2015 $7.5 2.0 $15.0 77% $11.6 $16.6 $12.8 $(2)
2016 $8.0 1.5 $12.0 74% $8.8 $16.6 $12.2 $(5)
2017 $8.5 1.0 $8.5 70% $5.9 $16.6 $11.6 $(8)
2018 $9.0 0.5 $4.5 66% $3.0 $16.6 $11.0 $(12)
Total $6.3 22.5 $143 86% $123 $149 $123 $(7)
Here what that means:
Year: year paid and performed
$perWAR: cost per win
WAR: number of wins
Salary$: salary if paid for performance
DiscRate: standard 5% discount rate (use whatever you want)
Disc$: Salary$ x DiscRate
Flat$: flat salary
DiscFlat$: Flat$ x DiscRate
Diff: difference between performance-based salary and flat salary
The flat salary was set so that the discounted flat salary equals the discounted performance-based salary. That chart says this:
“It’s the same thing to pay someone 16.6MM$ per year for 9 years totalling 149MM$, as it is to pay someone a total of 143MM$, starting at 22.5MM$ the first year and ending at 4.5MM$ the last year”
So, there’s no such thing as “it’s really going to cost them down the road”. They are SAVING 6MM$ the first year by paying him a lower flat salary than he deserves, and end up LOSING 12MM$ the last year by paying him too much. But overall, the difference in the (discounted) salary is zero. Therefore, you canNOT just look at the out-years in isolation. You need to look at the salaries paid in context to the whole contract.
If that wasn’t clear, perhaps someone else can write that better. I just don’t want to see any more articles about the out-years issue.