Max Scherzer: Washington Nationals plan to win now, pay (a lot) later

When I wrote for Monday that the Nationals had mercifully killed the speculative rumormongering that free-agent ace Max Scherzer might sign with the St. Louis Cardinals, the details of Scherzer's contract with Washington had not yet been revealed. The terms of the contract make clear how off base the notion that Scherzer might give the Cardinals a hometown discount were—even those like FOX's Jon Morosi, who mused that a five-year framework worth $156 million ($31.2 million average annual value) might fit the parameters both parties were seeking. Sitting here today we know that wouldn't have close. The Nationals are reportedly going to pay Scherzer $210 million to play in D.C. for the next seven years. While Scherzer signing such a deal isn't particularly surprising, the structure of the contract is groundbreakingly singular.

Scherzer will not be the highest paid pitcher in any of his contract's seven seasons. That's because he will make half of his contract's overall value, $105 million, during the seven years he is playing for the Nats. After Scherzer's contract to play for Washington expires on the day following the 2021 season, the Nationals will pay him another $105 million over the seven years from 2022 through 2028. (There's a chance, however slim, that the Nationals might pay a 37-year-old Scherzer $15 million while he pitches for another major-league club in 2022.)

The Scherzer deal caused FOX's Ken Rosenthal to wonder, "What did Mike Rizzo know, when did he know it and what does he plan to do about it?" Rosenthal posited the question based on the assumption that Scherzer's agent, Scott Boras, negotiated the righty's new contract directly with Washington owner Ted Lerner and not the GM, which is apparently what occurred when the Nats inked Jayson Werth. Given the 14-year span of the Natonals' Scherzer payments, such an assumption is understandable.

The Cardinals have regularly used salary deferments on big-dollar contracts, just never on the scale of the Nats-Scherzer agreement. Most recently, St. Louis and Matt Holliday agreed to defer annually $2 million of the left fielder's $17 million salary. Of course, Holliday will have had $14 million in salary deferred in total over the seven guaranteed years of his contract after 2016 (its final season, if St. Louis doesn't exercise the club option for 2017). Scherzer will receive $15 million in each of the seven years between 2022 and 2028. It's the amount and time span over which the deferred salary will be paid out that makes Scherzer's contract historically singular.

This is not to say that there are not potential benefits to such a salary structure. At Fangraphs, Dave Cameron put together an interesting post on how the deferred money changes the present value of the contract compared to a typical backloaded deal (like the Jon Lester-Chicago Cubs contract), or an evenly distributed salary structure (like the Holliday-Cardinals contract). It's a good illustration of why players would likely prefer front-loaded salary structure while clubs a backloaded or deferred salary structure. You should read the whole post, but here is Cameron's explanation for the impact time will have on the overall value of Scherzer's contract:

For a lot of reasons, money today is worth more than money in the future, and the further in the future you go, the less money is worth. To translate various schedules of annuities into a scale so that they can be compared side by side, financial analysts use Net Present Value to calculate the value of deals like this. In other words, what amount of money would you need to be handed in cash today to roughly equal the value of the structured payout over time?

NPV calculations are pretty simple, with the primary variable being the discount rate you apply to those future dollars. Just for the sake of argument, let’s assume Scherzer’s discount rate is 7%, roughly the expected long-term rate of return on investing in the stock market. If you take $210 million spread out over 14 years and apply a 7% discount rate, then the contract is worth about $131 million in today’s dollars. Still a lot of money, obviously, but a lot less than the $210 million figure.

On the one hand, a $210 million contract being valued at $131 million in today's dollars seems pretty palatable. But spending $15 million for a pitcher who isn't on the team any longer over seven years is nothing to sneeze at, even with inflation factored in. Home Rule Act or no, Washington is going to be paying a Scherzer tax from 2022 through 2028. It's unlikely ownership is going to be paying that out of its share of the club's revenues. More likely than not, the Scherzer tax will be paid out of the club's operating budget, perhaps out of payroll. If Rizzo is still the GM during that time span, he'll have Lerner, who is 89 at present, to thank for the Scherzer tax.

Scherzer will undeniably help the Nationals win now. It's just as true that Washington will pay for it later.