Over the past 10 seasons the average MLB player salary has risen by 4.39% per season. This number is always changing depending on the economic climate (since 1990 salary inflation averages 9.46% per season, but in the past 5 years it’s at 3.18% per year and last year’s rise alone was 4.10%). However, it’s safe to say salaries tomorrow will almost always be worth less than salaries today. We can use this logic to help justify a long-term deal for David Wright (or any other player, for that matter).
Let’s use that 4.39% number, and pretend that over the next 8 seasons the average MLB salary and payroll rises by 4.39% per year. Now for the big assumption – we have to give David Wright his extension. The $15MM is locked up for 2013, and let’s assume he gets an $18MM/yr, 7-year extension ($126MM total extension). To keep things simple, Wright gets paid 15 million next season, and 18 million each season after that through 2020.
Using the present value economics formula, we can calculate what each year’s salary would be worth today:
|$ 14.4||$ 16.5||$ 15.8||$ 15.2||$ 14.5||$ 13.9||$ 13.3||$ 12.8|
Every year once the extension starts, the value goes down because the average salary of players rises. So making $18MM in 2020 doesn’t mean as much when the new top dogs are getting $30MM/yr salaries (just an example, no math there).
BOTTOM LINE: Add all those up and divide by the 8 year total deal, and we’re looking at an average salary of $14.5MM for 8 years of David Wright. You have to admit, that sounds way better than the $17.6MM/yr he’d be getting without using the present value formula.
(Side notes: I messed around with how much he would make per season, because in reality it probably wouldn’t be 18/yr every year. So if it starts with $15MM in 2014 and goes up to $25.5MM in 2020, the present value is $14.4MM/yr for the total 8 years – not a huge difference. In another attempt, I changed the inflation to 3% per season for the skeptical folk, and the average present value salary per year became $15.1MM for the total 8 years).