Fixing Baseball’s Free Agent Compensation System

Ervin Santana: “When will I get a contract??”

Mandatory Credit: Rick Osentoski-USA TODAY Sports

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.