Tuesday, July 02, 2019
Contract in Perpetuity
?I polled my followers yesterday, asking this question:
Trout signed a 10 year, 360MM extension. If the Angels offered instead Trout 1MM per year while an active player and 10MM a year for 36 years when retired, would that be insanely good or just insane, for the Angels?
It was 77% to 23% thinking that it would be insanely good for the Angels to do so. Let me give you one way to look at this, without thinking of math, or the Time Value of Money.
Suppose you are the Angels, and you and Trout have agreed to give him 36MM$ a year for 10 years. What you can do is instead of paying Trout directly, you put it into an account. Let's call it the Trout Petty Cash Fund, or the Trout Escrow Fund. Whatever you can relate to. Then, Trout comes calling, and instead of asking for 36MM$ to be drawn from this account, he asks for only 1MM$.
It doesn't affect you either way, since you put it into this account, earmarked for Trout, but that you can't really control otherwise. And every year, you add another 36MM$ to this account. And every year, Trout chooses to withdraw only 1MM$ from this account.
It draws a modest interest, so, as it turns out, Trout is (basically) withdrawing the interest. He does this for 10 years, then he retires. This Escrow Fund now has 360MM$ in it. Trout now decides to withdraw 10MM$ a year for the next 36 years.
In this situation, the Angels are no better and no worse off. Because this is an Escrow account, they have no rights to it. It's basically an account owned by Trout, and very loosely managed by the Angels (through some third party). As a result, the Angels don't really care what Trout does here. Trout might want this third party to at least invest the money in some 10-year T-bills so that the money grows to at least match inflation.
Now, instead of an Escrow Fund, it's an actual Angels Petty Cash Fund. In this case, the Angels control it, they can invest with it, they can do whatever they want with it. But, they are promising Trout the same deal as what Trout would get from an Escrow Fund. So, whereas with an escrow, the Angels are ambivalent about it, with this fund, the Angels are hugely in favor. This is because of the earning potential.
What happens is that any earning potential has transferred from Trout, to the Angels. And because this is an Angels account, it is the Angels that benefit from it.
And this is why when you look at Bobby Bonilla or Bruce Sutter or anyone else still being paid well into their retirement, it is not necessarily a bad deal for the team. Nor is it necessarily a good deal. It was a deal that made sense to both parties.
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