How much is Robinson Cano really worth? According to various reports, the Yankees and their second baseman haven’t come close to answering that question. With the team’s current offer a reported $160 million for seven years, and Cano allegedly asking for nine years and $252 million, a deal doesn’t seem imminent.
The Yankees and Cano both seem steadfast in their demands, so, absent capitulation by one side, or compromise by both, it will be very difficult to bridge the gap. However, there are steps that could make meeting in the middle a little easier. Below is an illustration of how the Yankees and Cano could compromise their position without actually altering their offers.
Total Future Value Comparison of $160mn/7 year Contract with Different Bonus Assumption
Note: Analysis assumes all payments are invested and earn a continuously compounded rate of 5%. Bonuses are factored as an initial balance, and salary is amortized monthly.
Source: calculations via www.calculator.net/
One of the Yankees’ chief concerns has been the luxury tax threshold, which will rise to $189 million in 2014. In order to limit their penalty, or eliminate it altogether, the Yankees need to keep the average annual value (AAV) of Cano’s contract to a minimum, which, based on their current offer, would be approximately $23 million. Unfortunately for the Bronx Bombers, that figure doesn’t seem sufficient to meet Cano’s demands. But, what if the Yankees structure his contract with a sizeable bonus? Might that help move the needle?
Because the luxury cap is based on AAV, teams can not circumvent the tax by front loading or back loading a contract, at least not in terms of real dollars. However, payroll calculations do not take into account present/future value (except for deferred payments), which creates a loophole. How does this relate to the Yankees and Cano? If the team is willing to pay Cano more money up front, it can increase the value of the contract without actually giving him more dollars. The result would be a more lucrative offer for Cano, but the same $23 million AAV for the Yankees.
Front loading comes at an expense, namely the opportunity cost of handing out a lump sum. That’s why, under normal circumstances, it would never make sense to structure a contract with such a large bonus. However, in this instance, the Yankees’ 50% luxury tax rate becomes a mitigating factor. As illustrated by the chart above, the bigger the bonus the Yankees pay Cano, the greater the total future value of their current offer. With an $83 million bonus, for example, the current offer would be equivalent to a $175 million/7-year deal, effectively giving Cano an annual salary of $25 million without increasing the AAV applied to the Yankees payroll. Based on the 50% luxury tax rate, that amounts to an annual savings of over $1 million.
In theory, the front loading of a contract makes sense for a team like the Yankees, but would they be willing to cut such a large check in year one? Well, if the team’s reported interest in Masahiro Tanaka is accurate, the answer seems to be yes. After all, the posting fee paid to the Tohoku Rakuten Golden Eagles, the Japanese team that currently holds Tanaka’s rights, could approach the hypothetical $83 million bonus mentioned above. In a sense, Cano’s bonus would be like the posting fee, albeit one that gets factored into the AAV. Granted, this is an important distinction, but as illustrated above, the Yankees would benefits from the bonus, so the real question is whether they have the stomach to part with so much cash up front (the team’s internal expected return on investment would have a lot to say about that).
Another question to consider is whether Bud Selig would allow the Yankees and Cano to come to such an arrangement. The CBA gives the commissioner authority to veto any contract that violates the spirit of the luxury tax system, but in this case, the Yankees would still be paying the same AAV as their current offer. Unlike tacking on years to lower the average cost, paying out a bonus impacts the future value, not the annual amount applied to the team’s payroll. Still, there’s a chance Selig might rule against the scheme, and the size of the bonus permissible could be based on the commissioner’s discretion.
Are the scenarios outlined above enough to close the divide between Cano and the Yankees? Probably not. In order to make a deal, each side will probably have to compromise quite a bit, but using front loading could be what allows them to clear the final hurdle.
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