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What Auto Dealers Can Learn from the LA Dodgers/Othani Contract


Attracting and Keeping the Very Best Talent Available...

The Dodgers wanted to hire some very unique talent and found some very creative and unique ways to achieve their goals and manage the extraordinary costs.  Lessons to be learned for auto dealerships?

Shohei Ohtani's unique 10-year, $700 million contract with the Los Angeles Dodgers, structured to pay him only $2 million annually over the next decade while deferring much of his compensation, has distinct advantages for both Ohtani and the Dodgers.

Advantages for Ohtani:

1. Tax Benefits: By spreading out his income over a long period rather than receiving it upfront, Ohtani might minimize his annual tax burden. Deferred compensation could allow him to pay lower overall taxes as his income in later years might be subject to a lower tax rate, especially post-retirement.
2. Financial Security: This arrangement provides Ohtani with a steady, predictable stream of income over 20 years, ensuring long-term financial security. Regardless of career developments or potential injuries, he can count on this income.

Advantages for the Dodgers:

1. Salary Cap Management: The deferred compensation plan helps the Dodgers manage their payroll in the short term, maintaining greater flexibility within the constraints of MLB’s luxury tax and salary cap rules.
2. Cash Flow Management: With less immediate cash outflow required, the Dodgers can allocate more funds to other priorities, such as player development, scouting, or infrastructure improvements.
3. Long-term Relationship: Structuring a deal with deferred payments helps ensure a strong, long-term relationship with Ohtani. Knowing that a significant portion of his compensation depends on the team's financial health, he remains invested in the franchise's success.
4. Attracting Top Talent: Innovative contracts like this make the Dodgers attractive to other free agents. The flexibility shown in structuring deals demonstrates the team's willingness to accommodate player needs, fostering goodwill and a reputation as a desirable employer.

Overall, this arrangement aligns both parties' interests, securing financial stability and ensuring their relationship remains mutually beneficial over the long term.

If Shohei Ohtani leaves California after his 10-year stint with the Los Angeles Dodgers and moves to a state with no personal income tax, such as Texas or Florida, California could lose significant tax revenues. Here are some considerations:

1. Deferred Income Taxation: Ohtani's deferred compensation would still be taxable at the time it is paid out, but the location where he resides while receiving these payments becomes crucial. If he's living in a state with no income tax, California cannot claim tax on that deferred income.
2. Revenue Impact: This situation could lead to a loss of millions of dollars in tax revenue that California would otherwise receive if Ohtani remained a resident. Given the high tax rates for high-income earners in California, this loss is non-trivial. (CA estimates such a move would cause them to lose $98 million in related income taxes.)
3. Tax Planning Incentives: The structure of the deferred compensation incentivizes tax planning, encouraging players like Ohtani to seek states with favorable tax environments once they are no longer actively playing or living in California.

Just a short summary from an 18-Page DealersEdge Special Report on Creative Strategies (Including Deferred Compensation) for Attracting, Rewarding and Retaining Top Key Management Performers…

Deferred Compensation Plans offer an appealing alternative to equity offerings for auto dealership groups aiming to retain top talent through "golden handcuffs." These plans provide structured financial incentives that vest over time, aligning closely with the company’s long-term success and motivating key employees to remain with the organization for an extended period.

For a more detailed discussion of how Attract, Compensate and Retain high-value key managers...  See this 18-Page DealersEdge Special Report. Instant PDF Download With Purchase

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