Inside Shohei Ohtani’s Unusual Contract

On Sept. 19, Los Angeles Dodgers outfielder Shohei Ohtani became the first player in Major League Baseball history to reach 50 home runs and 50 stolen bases in a single season. He is now the sole member of the 50-50 club

But he was already part of another tiny group: American professional athletes who’ve chosen to defer nearly all of their earnings. Before the 2024 season, Ohtani signed a 10-year, $700 million contract, with $680 million in salary deferred for a decade. He’ll make $2 million per year until 2034 and then $68 million annually for the next 10 years.

While deferring some income is not uncommon for professional athletes, past players’ contracts have had much smaller deferrals and included provisions for interest payments on deferred compensation. Ohtani’s contract includes an extremely large deferral along with no interest payment provisions on the $680 million deferral. He’s effectively making a very large “interest-free loan” to the team. 

By our calculations, Ohtani may be foregoing between $49 and 91 million by deferring payment. So, why would he choose this unique structure? 

Deferred Compensation: How it Works

Before we get to that question, here’s some background on deferred compensation. Companies typically compensate their employees via cash, bonus, and equity compensation. However, companies can also arrange deferred compensation contracts where they will pay employees cash at some point in the future. That frees up current cash flows for the business to use in the meantime to help grow the business and pay for other obligations. 

For workers, deferring compensation means delaying taxation. From a U.S. federal and state standpoint, compensation is not taxed at the employee level until it is paid out in cash. If an employee has a contract to receive a sum of money over a time period or at a future date, the compensation will not be taxed until that money is actually received. At that point, the income is taxed at ordinary income rates, currently ranging from 10 percent to 37 percent. And those taxes are paid with funds withheld from the employee’s paycheck.

Deferred compensation comes with significant costs and risks for employees. For example, if the company goes out of business, the employee may never realize the future compensation. If the employee becomes disabled or is otherwise unable to work, or if they move to another company, they may also never realize their future compensation. They may also strongly prefer current compensation to invest outside of the company or to pay for living expenses. 

The Real Value of $700M: Three Scenarios

Given the risks and cost in terms of the present value of deferred compensation, why did he agree to this huge deferral? News outlets speculated that Ohtani may have done it so he can avoid state-level tax in California on the bulk of his money, if he leaves the state after the ten-year contract. 

We question whether the potential state tax savings offset the cost of deferring the income and of any nontax considerations of this compensation structure. Analyzing the present value of his current compensation structure and comparing it to alternative structures can answer that question. While in total, Ohtani will be paid $700 million over a 20-year period, we have to consider the time value of money to estimate the current value of the total payout. If Ohtani took a lump sum of $700 million or ten payments of $70 million, he could invest that money, and it would grow over time. 

Stretching his payments out over a long time period reduces the present value of those payments. For comparison, if he had taken $70 million per year over the 10-year contract, we estimate that the after-tax present value of this payment structure would be around $263 million. 

Comparing this figure to the estimated  after-tax present value of the actual contract, we can see that Ohtani sacrificed around $91 million ($263M – $172M) due to deferring the payments. 

A key consideration in Ohtani’s contract could be related to state income taxes. California imposes an income tax rate of 14.4% for its highest-earning individuals, by far the highest tax state in the U.S.

Consequently, as a result of the deferral, Ohtani has the potential to save significantly on state income taxes. We estimate that the after-tax present value of his contract, assuming he faces no state tax in the second ten-year period, would be around $221 million.

In comparing this value to the estimated after-tax present value of his current contract, we can see that Ohtani could potentially save around $49 million ($221M – $172M) if he moves out of California to a zero-tax state after the initial ten-year contract. We note, though, that there is some risk in doing this because California would have a huge amount of tax revenue lost to this structure. The tax laws are not exactly clear on whether California would have jurisdiction to tax this additional income since it would have been earned in the state. 

Insights Into Why He Deferred so Much Compensation

If we examine the after-tax present value of his contract, even if he moves out of California in the second ten years and can avoid state tax on the bulk of the income of $680 million, the present value of the total contract comes in around $221 million. This figure is still substantially lower than the present value of taking the contract evenly over ten years ($262 million). Even assuming he avoids state taxation when the big payments come, he still sacrifices around $42 million. 

It’s possible that Ohtani wouldn’t have been able to negotiate such a large contract if he hadn’t agreed to defer most of it. His deal’s average annual value—$70 million—is 66 percent higher than the average value of the 2nd-through-5th-largest contracts ($42 million per year).

We estimate that the post-tax present value of those peer deals ($42 million per year evenly over 10 years) is about $157. million, only about 9 percent lower than the present value of Ohtani’s deal ($172 million). Thus, assuming that the real value of Ohtani’s contract was somewhere closer to that of his peers, he may have been able to negotiate the contract value upward to compensate for the risks and costs of the huge deferral. 

One other factor that may have affected Ohtani’s decision: While professional sports teams are not “cash constrained” in the way that a startup company might be, MLB teams may limit their capacity to pay other good players if they tie up a large amount of compensation in one player. 

It appears that Ohtani may have structured the contract to be a “team player” while also increasing his total payouts and allowing him some opportunities for savvy jurisdictional tax planning to save state-level taxes in future years.  

Disclaimers and simplifying assumptions of our calculations

Our calculations include a number of simplifying assumptions. While the tax rates at the federal and state levels are progressive rather than flat, we simplified our calculations by using the top marginal tax rate at the federal level (37 percent) and in California (14.4 percent) as of 2024 to estimate tax liabilities. In addition to his Dodgers salary, Ohtani has significant other income such as endorsements. Given that, we believe it’s reasonable to assume his contract income would be taxed at the top marginal rate. To discount future payments to the current day, we must estimate the market rate he could earn by investing the money. We use a discount rate of 5 percent, which is in the range of the federal mid-term rate at the beginning of 2024. We also ignore the “jock tax,” where sports players usually owe tax to other states where they play games. We also calculate the tax figures using flat percentages, which ignore the progressive income tax rates. We make this simplifying assumption because the thresholds used to calculate the progressive tax rates will surely change over the next twenty years. We also ignore potential changes in tax rates at the federal or state levels, which could happen over a long time span. Our analysis also does not factor in other income that Ohtani earns, which is substantial (upwards of $40 million per year). We also do not try to estimate other fees like agents that may or may not be deductible. Finally, we do not estimate the effects of multinational considerations, such as if Ohtani has current or future income that might be taxable outside the U.S. We also ignore the tax benefits of itemized deductions since we cannot observe his personal tax situation and the potential effects of alternative minimum tax. These factors, in addition to a host of other situations, are beyond the scope of the article but could impact our calculations. However, since we ignore this income from all calculations, we do not believe that these simplifying assumptions would significantly impact the inferences we draw from the comparisons. We present our after-tax present value calculations below.  

Calculation tables

Years	Annual pretax income	Estimated federal tax	Annual estimated after-tax income	Total pretax income	Total after-tax income	Present value of total after-tax income
1-10	2,000,000	740,000	972,000	20,000,000	9,720,000	7,505,526
11-20	68,000,000	25,160,000	33,048,000	680,000,000	330,480,000	164,496,393
				700,000,000	340,200,000	172,001,919

Years	Annual pretax income	Estimated federal tax	Estimated state tax	Annual estimated after-tax income	Total pre-tax income	Total after-tax income	Present value of total after-tax income
1-10	70,000,000	25,900,000	10,080,000	34,02,000	700,000,000	340,200,000	262,693,422

Years	Annual pretax income	Estimated federal tax	Estimated state tax	Annual estimated after-tax income	Total pretax income	Total after-tax income	Present value of total after-tax income
1-10	2,000,000	740,000	288,000	972,000	20,000,000	9,720,000	7,505,526
11-20	68,000,000	25,160,000	0	42,840,000	680,000,000	428,400,000	213,236,065
					700,000,000	438,120,000	220,741,591

Nathan Goldman and Christina Lewellen are associate professors of accounting at the Poole College of Management.