Baltimore Orioles and Adam Scialomies Deal

This case follows sport agent Whitney Regine as she reviews contract offers for her client, baseball player Adam Scialomie. Scialomie currently plays for the Baltimore Orioles and plans to resign with this team. The Orioles have a good relationship with Regine, and they want to resign Scialomie; yet, like any organization, they are looking to minimize their expenses. Their goal is to negotiate the smallest contract possible. Regines task is to get him the largest contract she can during the upcoming negotiations.

Regine receives four offers, and though they are all for five years of playing time, the payments are structured in wildly different ways. Regine must use her knowledge of Time Value of Money to determine which contract will provide her client with the largest contact in terms of PV. She will find that the contracts with the largest nominal valuesi.e., the figures that get reported in the mediaare not necessarily worth the most in terms of present value. She will also see the impact that different discount rates can have in making her decisions.

Both sides agree that Scialomie is a decent Major League Baseball (MLB) player, and his salary should reflect that standing. Where the sides disagree is when those payments should happen. The Orioles are pushing to extend payments through deferred compensation, and while Scialomie and Regine are not opposed to that idea, Regine is wary of what that means for Scialomies bottom line.

A typical contract negotiation will involve numerous factors, both financial and nonpecuniary. Regine and the Orioles have already agreed upon many of the nonpecuniary details about Scialomies contract, leaving just financial aspects to finalize. Some players egos dictate that they get the largest nominal value contract, since that is what will make headlines. Fortunately, Scialomie has been smart enough to listen to Regine and knows that the nominal value is irrelevanthe wants the highest TVM deal.

It may seem like deferred compensation is only a bad thing for players, yet it has advantages for the players as well. Playing careers are typically short, with baseball players averaging 5.6 years (Witnaurer, Rogers, & Saint Onge, 2007) and even shorter careers in sports like American football (2.66 years; Arthur, 2016). A player can ensure income beyond his or her playing career through structuring contracts with deferred compensation. The deferred compensation revenue stream may serve as or supplement a players retirement, be used by the player to fund other ventures, or provide for the players family. Many athletes face severe financial hardship within a just a few years of finishing their playing careers (Carlson, Kim, Lusardi, & Camerer, 2015; Torre, 2009), and a well-structured deferred compensation plan can help avert a future of being destitute.

Scialomie is a better than average player overall, and hits well for a catcher, but the risk of reinjuring a surgically repaired throwing arm reduces his market value. The average annual salary for a catcher is around $2.24m, though Regine argues that Scialomies strong hitting should allow him to make closer to the league average [across all positions] of $4.5m (Sportrac, 2017). With that range in mind, the Orioles prepared four contract offers that would work with their strategic plans and other salary commitments (see Table 2). All offers are for five years of playing with the team.

Table 2: Contract Offers From the Orioles (All Dollar Figures Are in Millions)
Offer	Signing bonus (paid at t0)	Playing salary per year (t1-t5)	Deferred compensation	Total nominal value	Average salary reported in media
#1	$2.75	$2.75	None	$16.5	$3.3
#2	None	$1.5	$3 annually, for 5 years, starting in year 8 (t8-t12)	$22.5	$4.5
#3	None	$1.5	A 10-year growing annuity that starts with $1 in year 9 (t9-t18) and grows at 10% per year	$23.4	$4.7
#4	None	$1.1	A lump sum (single payment) or $25 at t20	$30.5	$6.1

Regine studies the four offers and consults her TVM Decision Tree. For the purposes of keeping things simple and focusing just on the differences among the deals, she assumes Scialomie receives all payments at the end of each year (e.g., the salary for year 1 is received at the end of year one) and she does not consider any tax implications. She draws a timeline of payments for each of the contract offers, which is an absolutely necessary step for visualizing the payment timings and making TVM problems easier. After realizing how helpful the timeline is in solving even simple TVM problems, she uses her dry erase marker to add Draw a timeline! to her bathroom mirror reminders.

Regine completes her initial TVM calculations using a discount rate of 5.5%, which is the most likely rate based on macroeconomic factors and alternate investments available to Scialomie. Her skills as an agent do not include perfect clairvoyance, however, and thus she wants to examine other scenarios in case the rate is higher or lower than she expects. She repeats the calculations using rates of 3.0% and 8.0%. She closes her laptop once the calculations are complete and puts it in her bag for the morningshe is ready to head to the Oriole front office and settle on Scialomies extension.

Questions to be addressed: 3) Offer #4 has a lump sum payment of $25m happening at t20. The Orioles may want to prepare for that payment by investing a little money in advance rather than needing to find all the money to handle this large expense in year 20. In fact, the CBA mandates that deferred money is fully funded within two years of the associated playing year. Regine was surprised to see that baseball is the only league with such a rule. If the baseball CBA were like those of other leaguesi.e., the Orioles had freedom to fund their future obligations in however they wantedhow much would the Orioles have to invest in each of the following four scenarios to fully fund the account? That is, how much do they need to put away in present value dollars to have $25m when the deferred compensation obligation comes due? Assume a 5.5% discount rate for each of the different funding approaches. a. The Orioles make a single deposit today (t0). b. The Orioles invest a small amount into an account each year, making constant payments annually starting at t1 and ending at t20 c. The Orioles make nine constant payments starting at year 5 (t5t13). d. The Orioles make 15 payments starting in year 6 (t6t20) and growing the payment amount at 8% each year. For this scenario, Regine only needs to determine the payment amount in year 6. 4) Regine believes the Orioles might have some hesitation about locking in Scialomie for five years, so she thinks about proposing a four-year contract instead of the five-year deal. In such an offer, she knows that there needs to be enough deferred compensation so that Scialomies salary over the four years of playing does not overly burden team payroll. Design two contract counteroffers for Regine to present to the Orioles. They must be structured differently from each otherto give the Orioles some optionsand both must meet the following characteristics: a. The contract has a total PV of between $15.5m and $16.0m, assuming a 5.5% discount rate b. Scialomie must earn at least $0.6m (nominal value) in each of the playing years c. There is deferred compensation build into the contract.