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Tuesday, October 11, 2011
Remaining value of contracts
Poz looks at the contracts that need to be foreclosed on. These are contracts where the mortage owed is far higher than the equity remaining.
He correctly notes the following:
In the end, it evens out I suppose. The system works so that players get paid later in their career for what they did earlier in the career
Let’s say you have a guy in his early 30s, on the down side of his career. He’s still a star, but he’s going down. Let’s say he has this trajectory left:
Wins
4.0
3.5
2.9
2.2
1.4
0.5
That’s 14.5 wins left over the next 6 years, and a team would pay 78MM$ for that. The standard payment structure is just like your mortgage: 13MM$ per year. As we know, your mortgage payment is mostly interest payments in the beginning, and only near the end are you paying down mostly equity.
If you were to pay for performance, this player’s contract would look like this:
Wins $/win EarnSalary ActSalary
4.0 $5.00 $20 $13
3.5 $5.25 $18 $13
2.9 $5.51 $16 $13
2.2 $5.79 $13 $13
1.4 $6.08 $9 $13
0.5 $6.38 $3 $13
His first year, he earns the most, and his last year, he earns the least. If it’s 4 years later, and he’s got 2 years left, he’d have 26MM$ owed to him, but only 12MM$ of value. It would look like it’s a horrible contract. But the reality is that the player gave his team a discount the first 3 years, only to get the deferred payments in the last two years.
So, I get what Poz is saying, and I agree with it under the specific lens of how untradable these players are. But for the teams that own them in the middle of the contract, you have to evaluate the contract in its entirety.
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