Blue Jays contract extension talk: Jose Bautista

As the Blue Jays and Jose Bautista enter the All Star’s contract year, it’s possible that the organization could get creative in how they structure an offer

Jose Bautista is signed through 2016, which is the good news. After, that however, he has the ability to land a new contract anticipated to be significantly more than the previous. Of course this draws a lot of attention to the business side of baseball, as this is a business after all.

If the Blue Jays do wish to retain both Bautista and fellow free agent Edwin Encarnacion, then their new contracts may have to be structured creatively to deal with payroll restrictions.

“…the more we’ve learned about them, that has only increased our interest in keeping them here,” – Ross Atkins (ESPN)

Luckily for us, Jose has shown an interest in staying a Blue Jay. This makes him an instant candidate for a salary deferral. Deferring salary might seem like you are just creating a long term debt obligation, but saying “I owe you” and paying over multiple years actually benefits the team tremendously.

Time value of money is a concept where as money is a depreciating asset. If you handed me twenty dollars and I gave it back to you a year later, you lost money. This is part of the reason why interest is typically paid over the lifetime of a loan. A corporation (such as Rogers) must weigh opportunity cost when thinking about an investment. If you were to make an investment in Jose Bautista, you need view the numbers.

Rogers’ return on equity was 24.70% as of December 31st, 2015. This is the opportunity cost. If Rogers were not to pay Bautista right away, they would invest it in their own company. Fair? For every dollar they can defer, they will manage to make 24.7% per year, until at the end of the contract when the dollar value owed becomes 0 (as do the savings as they are paid out). Here is a chart showing the numbers, based on Dave Cameron (Fangraphs), projection of 4 years 75M:

As you can see, the Blue Jays would actually save approximately $37,050,000 through spreading out the salary over 8 years versus 4, as Fangraphs projects he will be under contract for. That makes a couple assumptions of course, including that the contract is deferred interest free (as was Max Scherzer‘s contract) as well as Rogers continues to make similar return on equity.

This isn’t the only way we can keep Jose, but as Rogers is a corporation, it is likely they will act like one, trying to save money wherever possible. Salary deferral becomes a real possibility should Edwin and Bautista both get extensions, and this is just a brief explanation of how it works.

**Disclaimer: This is an illustration only, not exact numbers or perfect methodology. The purpose of this exercise is to help explain deferral benefits.