Bobby Bonilla day is celebrated every July 1st, as the day on which the retired outfielder is paid $1,193,248.20 from the New York Mets, which the Mets will continue to do until the last payment in 2035. Its usually recognized in the media as the punchline of a joke about the Mets and their previous ownership, which took on this long term obligation rather than simply paying Bonilla the $5.9 million that, in 2000, was still owed on his contract. As the Wall Street Journal pointed out over the weekend, the brilliance of the deal for Bonilla was the 8% interest that was built into the deferral, which turned out to be a high interest rate relative to the low interest rate environment that was to come.
There are two interesting things about this deal and story, which tend to get lost in the fun people have at the expense of prior Mets ownership based on the deal. The first is that its not a fluke that Bonilla got paid and there is a reason why he had big money coming – whatever player Bonilla might have been by the time he finished up with the Mets, the Pittsburgh Pirate Bonilla of the late 1980s was a brilliant baseball player, and the outfield he formed with a young Barry Bonds and Andy Van Slyke was beyond exciting to watch. I have always thought that point about Bonilla always gets forgotten when Bonilla day, and its inevitable fun at the Mets’ expense, comes around.
Second, if you strip away the baseball overlay, Bonilla’s agreement with the Mets is a classic deferred comp agreement, of the type widely used with executives in all types of fields. Deferred compensation agreements are often granted by employers to senior management or executives, and provide contractually promised payments to those executives during their retirement (just like the Mets’ deal with Bonilla does for him). The Mets had their reasons for deferring the payout into his retirement years, and so too employers defer executive compensation into retirement for reasons of value to the company, such as encouraging executives to stay with the company until retirement rather than to leave for competitors.
To a litigator like me, though, Bonilla’s deferred comp deal and its history highlight a dark side of deferred compensation programs. Despite changes in ownership and management at the Mets, the deferred comp agreement continues to live on and, at least to an outsider, it does not appear that new management has ever tried to get out from under the deal, even though the interest rate environment shifted in ways that made the original deal a poor one for ownership. In the business world, though, it is not unheard of for management to try to revise the terms of deferred compensation agreements in their favor and at the expense of retired former executives when, as in Bonilla’s case, the interest rate assumptions on which the agreement was based become outdated in a way favorable to the former executive but unfavorable to the company. Sometimes these types of attempted revisions can be minor, and other times more dramatic, but if you look closely, you often find the same thing: a payout calculation that is based on an interest rate that made sense at the time the agreement was executed but that over time has become excessively favorable to the retired employees.
I have litigated this issue more than once (here’s an example) and that is probably why the most interesting thing to me about Bonilla day is that his long term payout is hiked up by an out of date interest rate – but without the payor trying to do anything about it. And that’s the second aspect of Bonilla day that is interesting to me. At the end of the day, despite the fun people take from it at the Mets’ expense, its really just a classic deferred comp agreement that was based on a prediction as to future interest rates, and that was entered into by a company that, to its credit, has abided by the terms of that deal, even though it miscalculated.