Ervin Santana: "When will I get a contract??" Mandatory Credit: Rick Osentoski-USA TODAY Sports

Fixing Baseball's Free Agent Compensation System


It’s become a scarlet letter “Q” etched onto the uniforms of the quality free agents roaming baseball’s markets for the past two off-seasons.  The now-dreaded “Qualifying Offer” is hanging a weight around the necks of players that makes them cost significantly more than many of their supposedly lesser-productive brethren.  It is making teams skittish of improving their teams at the price of sacrificing some of their future.  So to that extent, it’s a problem impacting all of baseball – the Braves and everyone else.

 

Here’s What Was Supposed to Happen

Teams losing their best players to free agency wanted compensation to make up for their losses.  Before the newest system came into existence, players were ranked via the Elias Sports Bureau into a confusing set of bands, and assigned labels:  Types A, B, and C.  If you lost a Type A player, you got back two draft picks; Type B: you got one in return; Type C’s?  Nothing… sorry about that.

The new system is at least much simpler:  your team can be compensated if…

  • The free agent involved was on your roster for the entire previous year
  • You proffered the infamous ‘Qualifying Offer’ to that player… and were rejected
  • That player signs elsewhere prior to the next regular draft (June of the following season)

On the other side of the ledger, though:  you lose your own first round pick if you sign one of these Qualified free agents to play for your team.  Exceptions are:

  • You have a top ten Round 1 slot (a ‘protected’ pick), or
  • You have already lost that #1 pick by having signed a different free agent.

In those instances, you then lose your second round pick, or third, or fourth, etc.  Very straightforward and clean.

 

Here’s What’s Actually Happening

In this two years of the new system, there’s a pretty clear sense now of what’s going on:

  • The “premium” free agents are being signed without apology.  Teams are willing to give up the draft pick to get the best players available.
  • Players below the Qualifying Offer threshold are being snapped up quickly, too.
  • Players considered ‘marginal’ for the Q-Offer are waiting… and waiting… and their prices drop until they finally locate a team willing to sign them despite the loss of the draft pick.

Examples are adding up:

  • Ubaldo Jimenez signed recently:  4 years, $12.5m average annual salary.
  • Nelson Cruz just inked a surprisingly low 1 year, $8.5 million deal with the Orioles as well.  Note that the Orioles lose a second round pick, so Cruz’s deal cost them less than signing Jimenez.
  • Stephen Drew, Kendrys Morales, Ervin Santana… are all still sitting on the sidelines with no contract (as of this writing).
  • Last year, Adam LaRoche found no takers as a free agent, and returned to Washington on a 2 year, $12 million deal (annually).
  • Kyle Lohse had to wait until the end of Spring Training to get his offer from Milwaukee… averaging $11 million per year.
  • Michael Bourn likewise waited for a long time before signing with the Indians… $12 million per season.

That “qualifying offer” represents a one-year contract offer worth at least the annual average salary of the top 25 free agents from the previous off-season.  This year, that’s $14.1 million.  So you can see that the players above all ended up with less – some a lot less – than they expected.  Again, this is due to teams’ reticence to sacrifice that first round pick.

But it’s not just the draft pick, you see.  It’s also the money associated with the draft pick.  Since baseball instituted the “slotting” system to control the spending on players selected in the draft, that’s now a big part of this.  Losing a first round pick also means the loss of a significant hunk of slotting money – particularly if you’re a middle-of-the-round team having no protection against pick loss.

In 2013, the 11th overall pick was worth a slot value of $2.84 million.  The end of the first round (33rd pick last year) was worth $1.65 million.  By the time you get around to that 11th pick of the second round (50th overall last year), the slot value was $1.08 million.  That’s a significant dropoff which impacts not just your (missing) first round pick, but every pick thereafter since teams will often draft lesser players at certain rounds to be able to ‘afford’ to spend more in later rounds.  Roughly one-third of your team’s draft pool could be eliminated if you lose that first round draft pick!

 

How Do You Fix This?

The MLB Players Association is getting itchy about the situation and agents (Scott Boras for certain) are becoming more outspoken about it because it is serving to actually suppress salaries and restrict player movement – which is exactly opposite of both groups preferences.  Doubtless, the MLBPA did not realize how much the draft slotting system would impact the free agent compensation system when they negotiated these provisions into their Collective Bargaining Agreement.  Changing it will be difficult – and may not happen until 2016 when the agreement comes up again for negotiations.

Here are a couple of ideas that could help:

  • Teams signing free agents lose the draft pick as they do now, but retain 25% of the assigned slot value for the position they would have picked in (first round picks only).
  • Teams losing picks in Rounds 2+ retain 50% of assigned slot values for the position they would have picked in.
  • Consider changing the Qualifying Offer formula to a 2-tiered system.
    • Tier 1 – Average or median annual salary of top 15 free agents from the prior season.  Make a QO to one of these premium guys (this year, that would have been roughly $15.75 million); if he signs elsewhere, you get the same compensation pick after Round 1 existing today.
    • Tier 2 – Average annual salary of free agents of the free agents ranked 16-30 (roughly $11.65 million).  Your compensation is a single extra draft selection prior to Round 2, but after the Competitive Balance picks.
    • Teams signing a Tier 1 player lose their first round pick.
    • Teams signing a Tier 2 player lose their regular Round 2 pick.
    • Subsequent free agent pickups cause you to lose the next respective picks.

Finally, eliminate the wait-until-after-the-draft exception clause.  Teams will need the compensation – without any loopholes like that.  These suggestions are a bit more complicated, but they attempt to address the real issues.

These ideas should soften the impact of signing players – particularly those seemingly ‘on the bubble’ that are being impacted the most right now.  I believe it at least deserves a look.

 

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Tags: Atlanta Braves Free Agency Qualifying Offers

  • Lee Trocinski

    I don’t see any problem with this system. The reason why players are still on the market this late is their own action of pricing teams out. Matt Garza had no pick attached and took 4/50, and he’s no worse than Jimenez. Stephen Drew expecting a 3 or 4-year deal after barely reaching 500 PA for the first time in 3 seasons is not the system’s fault. Ervin Santana saying he wants $100M is definitely not the system’s fault. At the time, everyone thought it was crazy that Morales was offered a QO, and even more insane of him not taking it, and now he’s the worst off of the three.

    Your tiered system has been discussed. I saw another suggest of Tier A as the average of the top 50 salaries, and Tier B something like 51-150. Then you talk about whether someone like Choo should be an A or B, and if he rejects the A and sits a while, we have similar conversations. This system is good enough; we just need a couple players to accept the QO to scare teams a bit from using it on marginal players.

    • http://tomahawktake.com/ carpengui

      Sure, those players may have overvalued themselves a bit, but that’s always happening. Guys say they want $10m, a team offers $7m and maybe eventually they sign around $8m or $9m. That’s all part of the game. This is different.

      I don’t believe the case can be made that any of these guys (except maybe Santana; his demands have been a little silly given his career) would be still waiting for a contract if not for the draft compensation pick problem.

      My proposal isn’t a large change, but it does address the problem in a balanced manner. Teams get to preserve their chance to draft well at lower rounds and can improve their teams today. Players improve their chance at a free agent payday. Teams losing players maintain their compensation for the loss. Everybody wins.

      >> That said, I am a little surprised that a couple of guys didn’t accept the QO this year: Morales and Drew, specifically. Maybe even Beltran.

  • fireboss

    It’s not the pick it’s the money. The easy fix is no loss of slot money unless you sign multiple players with QOs like the Yankees did this year. Multiple QO signings you lose all the slot money but only one and you just lose the pick. The Yankees, Red Sox, Dodgers – teams with deep pockets don’t care about the slot money. The rest don’t suffer.

    • http://tomahawktake.com/ carpengui

      Right – and the funny part is that the teams actually want the right to spend more than they are allowed.

      • fireboss

        The side effect of this that owners wanted was a way to hold down salary on aging players like Michael Bourn who got what he was worth but not what he wanted. Anything that adversely affects salary from a union /agent perspective is bound to cause distress in those ranks

    • Lee Trocinski

      I promise you that the Yankees don’t give Beltran 3/45 if that meant they’d lose the slot money for their 1st and 2nd round pick. Cruz would still be without a job, as the Orioles wouldn’t have signed a second player. Maybe keeping 25-50% of the slot money would be best, but it’s just really hard to come up with a fair compensation system.

      • fireboss

        Someone else would if they don’t, particularly if the other team loses a pick but no money. The idea is to keep the rich from signing all the top picks. Remember the heart burn when the Yankees signed 3 A picks and just lost a third round pick for one of them? This system was designed in part to prevent that but it didn’t The Yankees lost their picks and their money this year on the three QOs they signed why would that change?

        • Lee Trocinski

          Yeah, when you’re willing to sign three guys, your, or any, system doesn’t matter. I was thinking the Yankees would just sign McCann and keep the slot money instead of signing Beltran, but I forgot about Ellsbury. There will always be a hole in the system, so it will keep changing.

  • Jeff Randall

    The easiest solution is one the players (and their agents) control. Some of the fringe guys need to start accepting the QOs that are given to them. Once this happens a few times, teams will become less likely to hand out QOs in the future…