Playing Now, Paying Later: The Future of Deferred Compensation in Major League Baseball
The Ohtani Contract
Arguably the best player in baseball, Shohei Ohtani, signed a $700 million contract with the Los Angeles Dodgers in 2023. However, he will not receive most of the contract’s value for another decade. Of the contract’s $700 million total value, $680 million is deferred until 2034 through 2043.
Deferred compensation is not a new concept in Major League Baseball. Players such as Bobby Bonilla, Manny Ramirez, and Mookie Betts have previously agreed to contracts featuring significant deferred payments, but the scale of Ohtani’s agreement is unprecedented. While Bonilla’s infamous contract with the New York Mets includes approximately $29.8 million in deferred payments, Ramirez’s contract with the Boston Red Sox included $32 million in deferred compensation, and Betts’ contract with the Los Angeles Dodgers included $120 million in deferrals, Ohtani’s $680 million in deferred payments dwarfs each of these agreements. The size of Ohtani’s deferral raises questions about whether deferred compensation is simply an increasingly valuable contractual tool or whether its growing use could have broader implications for the MLB’s competitive and economic landscape.
To understand why Ohtani’s contract has attracted so much attention, it is necessary to first examine how deferred compensation operates and why both players and clubs may choose to structure contracts in this manner.
Understanding Deferred Compensation
Deferred compensation is a contractual agreement in which a player agrees to receive some portion of their compensation at a later date rather than when it is earned. In Major League Baseball, this practice allows players and clubs to structure contracts in ways that can provide financial benefits to both parties.
Under Article XVI of the MLB Collective Bargaining Agreement (CBA), there is no limit on the amount or percentage of a player’s compensation that can be deferred. This gives players and clubs significant flexibility when negotiating contracts. However, the CBA does require clubs to prepare for these future payments. Clubs must fund the present value of their deferred compensation obligations. The CBA also requires clubs to maintain the necessary funding and report their deferred compensation arrangements to the Commissioner’s Office. These additional requirements provide players with some protection that the club will be able to meet its obligations when the deferred payments become due.
The Player’s Perspective
For players, deferred compensation can provide several financial benefits, making it an attractive option when negotiating a long-term contract. One reason players may opt for deferred compensation is the potential to reduce their income tax burden if they move to a state with a lower income tax rate after their career. Deferred payments can also provide players with guaranteed, long-term retirement income. Additionally, deferring compensation can give players greater flexibility in managing their finances by spreading their income over a long period of time
Despite these benefits, deferred compensation also presents several risks for players. First, money that is deferred cannot be invested or otherwise used by the player until the payments are received. Although some deferred contracts accrue interest, the return may be lower than what a player could potentially earn by investing the money themselves. Players also face the risk that a club or its ownership group could experience financial difficulties that affect its ability to meet its long-term deferred compensation obligations. Under the CBA, the assets used to fund deferred compensation remain subject to the claims of the club’s general creditors, meaning players may have to compete with other creditors to recover money they are owed if a club becomes insolvent. Finally, players face uncertainty surrounding future income tax rates. A player who agrees to receive a significant portion of their compensation years into the future cannot know what tax rates will be when those payments are ultimately received.
The Club’s Perspective
For clubs, deferred compensation can provide significant financial and roster building advantages, making it an attractive tool when negotiating long-term contracts with players. One of the most obvious advantages is that deferring large portions of a contract can free up cash flow, allowing clubs to use their available funds to sign other players and build a more talented roster. With these available funds, clubs can also invest or otherwise utilize the money, potentially generating returns before the deferred payments become due to the player. Deferred compensation can also reduce a club’s annual Competitive Balance Tax (CBT) charge because the MLB calculates deferred payments based on their present value rather than their full future value. This can give clubs additional spending room under the CBT threshold while allowing them to maintain long-term contractual commitments to players.
While deferred compensation can provide clubs with greater financial flexibility in the short term, it also creates significant financial obligations that can affect the club well into the future. First, the MLB CBA requires teams to fund the present value of their deferred compensation obligations, which reduces some of the expected cash-flow relief. Teams must also set aside millions of dollars for these future obligations that could otherwise be used for other purposes, such as stadium upgrades and training facilities. Additionally, teams can remain responsible for these payments long after a player retires or joins another team. Finally, it is difficult to predict how much revenue a team will generate in future years, creating a potential risk of financial strain if revenue decreases significantly.
Deferred Compensation and Competitive Balance
The benefits of deferred compensation for individual clubs also raise questions about competitive balance throughout Major League Baseball. By providing clubs with additional cash-flow and CBT flexibility, deferred contracts can allow teams to retain high-level players while preserving resources to invest in other areas of their roster. Since the MLB calculates deferred compensation at its present value for CBT purposes, these contracts can be particularly valuable to large-market clubs that regularly approach the CBT threshold. By lowering the amount of a contract that counts toward the CBT, these clubs can create additional spending room to pursue and retain elite-level talent. Large-market teams, such as the Dodgers, Yankees, and Mets, have the financial resources to combine these advantages with significant spending on star players, allowing them to build rosters with multiple elite-level players. Smaller-market clubs, such as the Brewers, Royals, Reds, and Athletics, generally do not have the same revenue-generating capabilities through television deals, ticket sales, sponsorships, and other sources, making it more difficult to take advantage of deferred compensation on the same level.
The Los Angeles Dodgers provide a clear example of how financially powerful clubs can utilize deferred compensation on a massive scale. According to the Associated Press, the Dodgers currently have approximately $1.06 billion in deferred obligations spread among nine different players. The Dodgers have used this financial flexibility while building an elite roster, winning three of the last six World Series and making the postseason in each of those six seasons. The use of deferred compensation has given the Dodgers additional flexibility under the CBT to retain and acquire elite-level talent. However, some may argue that deferred compensation does not necessarily create a competitive imbalance throughout the MLB. Smaller-market teams have increasingly demonstrated that they can remain competitive by developing homegrown talent through their farm systems. As of August 2026, the Brewers currently hold the best record in the MLB, while the Rays hold the best record in the American League. These examples suggest that while deferred compensation may provide financially stronger clubs with an additional competitive tool, it is not the only factor that determines a team’s ability to build a successful roster.
Deferred Compensation and the Next CBA
Major League Baseball has proposed eliminating deferred compensation for all new contracts in the upcoming CBA. Under the proposal, players would no longer be able to defer any portions of their salary into future years, although existing contracts containing deferred compensation would remain unaffected. The MLB is also proposing a salary cap and floor, along with limits on the length of certain free-agent contracts. Under the proposal, free agents signing with a new club would be limited to five-year contracts, while clubs would be able to offer their own free agents up to six years under the proposed “Cornerstone Player” system. There are several reasons why the MLB is seeking these changes. First, the league wants to address the significant payroll disparity between large and small-market clubs and create a more competitive balance throughout the league. The MLB has also argued that eliminating deferred compensation would prevent clubs from using deferrals to reduce the amount of a contract that counts toward the proposed salary cap. By requiring compensation to be paid in the years in which it is earned, the league would limit clubs’ ability to use deferred payments to create additional spending flexibility. Additionally, the MLB’s proposal is intended to prevent other forms of salary-cap circumvention and create a more predictable relationship between a club’s payroll and the players on its roster.
Players and the MLBPA also have reasons to oppose these proposals made by the MLB. Eliminating deferred compensation would reduce players’ flexibility when negotiating and structuring their contracts, while the proposed salary cap could further limit their earning potential. Players and the MLBPA have argued that a salary cap would suppress overall player salaries by limiting how much clubs can spend on their rosters. They also argue that these proposals can shift more of the financial benefits of the sport toward ownership at the expense of players’ earning potential. However, the impact of these proposals would not be the same for all players. The league’s highest-paid stars are more likely to benefit from large deferred contracts because they have greater bargaining power and can negotiate substantial portions of their compensation into the future. Players with less negotiating power and smaller contracts are less likely to receive the same benefits from significant deferrals. This creates a potential divide among players, as those who benefit most from deferred compensation may also be the players most affected by restrictions on it. The distinction between existing and future contracts also creates another issue, as players who have already negotiated deferred compensation may have different interests from those who will negotiate contracts under the next CBA.
The next CBA should not completely eliminate deferred compensation, but reasonable limitations may be necessary to address concerns surrounding competitive balance. While deferred compensation can provide financially powerful clubs with additional flexibility, the success of smaller-market teams demonstrates that it is not the only factor determining competitive balance throughout the MLB. A compromise could allow players and clubs to continue using deferred compensation while placing reasonable limits on the amount that can be deferred or how far into the future payments can extend. Additionally, the proposed limits on contract length should be reconsidered, as restricting players to shorter contracts could further limit their ability to maximize the value of their careers. The MLB’s proposed salary cap and floor could help address some of the league’s concerns about competitive balance by limiting the spending differences between large and small-market clubs. However, the MLB has never operated under a traditional salary cap and floor, and the MLBPA has historically opposed a salary-cap system. If these measures are implemented, they should be structured in a way that promotes competitive balance while still allowing players to earn the value of their talent.
Ultimately, both the MLB and the MLBPA must be willing to compromise to reach an agreement that protects players’ financial interests while addressing the league’s concerns about competitive balance. Failure to reach a compromise could increase the risk of another lockout and further disrupt the sport.
Conclusion
Deferred compensation provides legitimate financial benefits to both players and clubs, but its growing use also raises concerns about competitive balance and long-term financial obligations. While the MLB has legitimate reasons to seek limits on deferred compensation, an outright ban would unnecessarily remove a valuable contractual tool for players. The next CBA should instead seek a middle ground by preserving deferred compensation while placing reasonable limits on its use. Ultimately, the MLB and the MLBPA must reach an agreement that protects players’ earning potential while promoting competitive balance throughout the league.
Kyle Rosenberg is a 2L at Touro University Jacob D. Fuchsberg Law Center. He can be found on LinkedIn.
