Fixing the Compensation System

The Pirates landed Allie in the second round last year. They'll have a hard time getting a similar player in the second round this year due to all of the compensation picks.

Yesterday I brought up the fact that the compensation system for the Major League draft is a broken system.  The system is intended to compensate a team like the Tampa Bay Rays for losing a player like Carl Crawford, who they drafted, developed, and relied on for eight seasons, only to see Crawford sign with the Boston Red Sox.

The problem is that the system doesn’t just compensate teams for these circumstances.  It also compensates teams for losing players that were barely members of the organization.  Teams that lose star players can often get lower compensation picks due to the flawed ranking system used to award the compensation picks.  For more details about how the system is flawed, check out the link above.

So how do we fix a system that is so flawed?  We’ll start with the method to rank free agents, since that can influence other factors in the process.

RANKING FREE AGENTS

The current ranking system ranks all players in the majors (not just free agents), broken down by position.  The top 20 percent at each position are classified as Type A free agents.  Type A free agents net their former team two compensation picks.  The first is the standard compensation pick between the first and second rounds.  The additional pick comes from the signing team, and is either a first or second round pick (the top 15 picks in the draft are protected, so compensation from those teams come in the second round).

The next 20 percent of players at each position make up the Type B free agents.  These players receive the standard compensation pick between the first and second rounds.  This costs the signing team nothing, and nets the former team one pick.

The biggest problem with the ranking system is that each position is ranked individually, as if all positions were equal in value.  Type A status is not only awarded to the top 20 percent for first basemen, but it’s also awarded to the top 20 percent for relief pitchers.  That means a team that signs Scott Downs would pay the same price in draft picks that they would pay to sign Albert Pujols.  In some cases, relief pitchers are valued higher than star players.  That was seen this off-season, when Scott Downs was rated higher than Cliff Lee, Carl Crawford, and Jayson Werth, who are all far more valuable.

Rather than ranking players by individual positions, and individual stats for those individual positions, the ranking method needs to change to something universal, such as Wins Above Replacement (WAR).  This way you can look at the WAR of a first baseman, and compare him to every other position to see where he ranks.  From there, regardless of the method used (Type A/Type B, etc), the rankings need to come from the overall pool of players, rather than taking players from each individual position.  This prevents a player with a low value being rated over a player with a higher value, all because the first player is the best at a weaker position.

QUALIFYING FOR THE PICKS

With the ranking method using a universal system, such as WAR, and the rankings coming from a pool of every major league player, rather than individual positions, it’s time to establish the rules.

First of all, the whole idea of a compensation system is supposed to be a consolation prize.  You lost that important player that played a key role on your team, and to compensate for that, you get draft picks.  That’s how it’s supposed to be at least.  The real system often seems more like a rewards program.  There is more focus on getting compensation picks than there is on keeping the players who teams are receiving compensation for.  The reason for this is simple: draft picks in baseball have become very valuable.  For that same reason, the compensation system shouldn’t devalue the regular picks, to the point where the second round picks start in the 50-60 range, rather than the 30-40 range.

This requires some changes to how teams are awarded compensation picks.  The current system factors in the previous two years of a player’s performance, and compares those two years to the previous two years from every other player in the majors.  One big problem with the compensation system is that teams get a compensation pick, even if they only had the player on their team for two months or less.

If a player gets the compensation tag, it means they’ve done enough in the previous two years to earn that compensation.  Therefore, shouldn’t the team getting the compensation have that player for the entire two year period?  If a player is deemed worthy of a compensation pick due to his performance over the last two years, then why should a team get that pick if they only had the player and that performance for one or two months?  Why should the Rockies get the #45 pick in the 2011 draft for losing Octavio Dotel, who they had for a month, while the Padres get the #58 pick in the draft for losing Kevin Correia, who they had for two years?

Furthermore, a team should only receive compensation if they make a serious offer.  Right now a team gets compensation if they offer arbitration, but in most cases, arbitration is a guarantee to be declined (and in some situations there’s even an agreement for the player to decline arbitration).  I pointed out the example of Joaquin Benoit yesterday.  Benoit had a huge 2010 season, but only made $750 K.  There is no way that he’s accepting arbitration, because even if he doesn’t receive the three year, $16.5 M deal from Detroit, he’s still going to get more on the open market than he would by accepting arbitration.  When the Rays offered Benoit arbitration, that was not a serious offer to retain him.  If they aren’t showing any urgency to retain him, then why should they be compensated for losing him?  If they’re not trying to retain him, that shows they don’t need him, and if they don’t need him, then why should they get draft picks to replace him?

Rather than going with the arbitration process, compensation picks should be awarded based on offers while the player is a free agent.  I would go with the following system:

1. Before a player can sign a contract with a new team, the former team has the right to out-bid the signing team.  The final decision is up to the player on where he signs.  If the former team offers a total combined salary that amounts to a 10% or greater increase over the offer the player is about to accept, the former team qualifies for a compensation pick.  The player would then decide whether to return to the old team, or sign with the new team.  If the player opts for the new team, the former team gets a compensation pick.

Example: The Rays see Joaquin Benoit walk as a free agent.  Benoit gets a three year, $16.5 M offer from the Detroit Tigers.  Before he can sign the deal with Detroit, the Rays have the right to make one final offer.  They must offer three years and $18.15 M or more (a 10% increase) in order to qualify for a compensation pick.  Benoit would then decide between a three year, $16.5 M deal with Detroit, or a three year, $18.15 M deal with Tampa Bay.  If he picks Detroit, Tampa Bay gets compensation for losing him.

2. The exception to Rule #1 would be if the average annual value of the player’s offer from the new team was at least 20% of the average year-end payroll of the former team over the last three years.  In that event, the former team automatically gets a compensation pick.

Example: The Rays have an average year-end payroll of $60 M over the last three years (note, I made this number up to make the example simple, although off the top of my head I think the actual number is pretty close).  Carl Crawford gets an offer of $20 M a year, which is clearly greater than 20% of the average Tampa Bay payroll from the previous three seasons ($60 M/year).  Tampa Bay would automatically get a compensation pick, and wouldn’t have to offer 10% more to Crawford like in example one.  This protects small market teams who could never afford to top a deal like Crawford received.

AWARDING THE PICKS

Now that we have the rankings to determine who is eligible, and the rules to determine how a team qualifies for a pick, we have to look at how the picks are awarded.  The current system takes the top 40 percent, breaks them up in to two groups, and awards compensation picks in the first round.  This can create a problem like we see this year, where the Rays pick ten times before the Pirates pick a second time.

Rather than awarding compensation picks only in the first round, I would break the qualified players up in to four groups.

The first group would be made up of the top 10 percent of players in the majors.  These players would net the following for their former team:

1. The first round pick of the signing team, or the second round pick if the signing team has a pick in the top 15 selections.

2. A compensation pick between the first and second rounds.

The next group would be the 11-20 percent group, and they would net their former team:

1. The second/third round pick from the signing team (again, the top 15 picks are protected)

2. A compensation pick between the second and third rounds.

The third group would be the 21-30 percent group, and they would net their former team:

1. The third/fourth round pick from the signing team (top 15 picks are protected)

The fourth group would be the 31-40 percent group, and they would net their former team:

1. The fourth/fifth round pick from the signing team (top 15 picks are protected)

The main restriction here is that a team can only give away a pick once.  If a team signs a player in the first group (top 10%), they can’t sign any other players from that first group, as they wouldn’t have any other first round picks to give away.  This keeps the value of players consistent, avoiding an issue where a team gets a lower pick for a player, all because the signing team signed multiple ranked free agents.  A team getting compensation for losing a player shouldn’t be punished based on who else the new team signs.

By breaking the picks up between the top four or five rounds, we re-establish the value of the normal draft picks.  This helps keep things in perspective.  Why should a player in the 31-40 percent range net his former team a compensation pick in the same round as a player in the top 20 percent?

ECONOMICS

The most important thing with a system change like the one described above isn’t making the system fair, but making the system fair while considering the economic factors for both the owners and the player’s union.  Here is how each decision potentially impacts the compensation that is awarded on the open market:

-Changing the ranking system to include all players, rather than the top players at each position.  Benefit: Players.  This system basically removes relief pitchers and lower valued players from the compensation system.  Teams don’t have a problem giving up picks for a top starter, or an everyday player, so the offers for those players shouldn’t drastically change.  The offers for relievers will increase, since teams aren’t already paying a high draft pick to sign those relievers.

-Requiring a player to be on a team for two years.  Benefit: Players.  This will reduce the number of compensation picks, which could bump the salaries up for players who no longer receive compensation.

-Requiring a team to top the player’s offer by 10% in order to get a pick.  Benefit: Players.  For obvious reasons.

-Limiting the amount of players a team can sign from a certain category.  Benefit: Teams.  While individual teams may be hurt by this (SEE: the Yankees) the teams as a whole benefit more, since this lowers the salaries of the top free agents by removing potential bidders.

There are more benefits to the players, although they’re all smaller benefits compared to the benefit to the teams.  Overall this does limit some of the salaries for the top players, by reducing the potential bidders, but it helps the smaller players in other ways that balance the scales for the players’ union as a whole.

Ultimately, this plan makes it harder to get compensation picks, and makes it so that teams only get the picks if they’re serious about keeping their players.  Shouldn’t that be what the compensation system is for?  It should be there to compensate teams who are losing a key piece of their team that they’d rather not be without.  It shouldn’t be there to compensate a team for a player that they lived without until the final two months of the season, and it shouldn’t compensate a team for losing a player that they don’t want to keep in the first place.

Tim Williams

Author: Tim Williams

Tim is the owner and editor in chief of Pirates Prospects. He started the site in January 2009, and turned it into his full time job during the 2011 season. Prior to starting Pirates Prospects, Tim worked with AccuScore.com, providing MLB, NHL, and NFL coverage to various national media outlets, including ESPN Insider, USA Today, Yahoo Sports, and the Wall Street Journal. He also writes the annual Prospect Guide, which is sold through the site. Tim lives in Bradenton, where he provides live coverage all year of Spring Training, mini camp, instructs, the Bradenton Marauders, and the GCL Pirates.

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  • Anonymous

    Like a lot what I see there. Couple issues I have (and I’m not sure how to change it) is the restrictions on signing guys per group. Tin this example the Pirates would be unable to sign 2 guys from the 4th group. Not sure if that’s productive. 2nd all this becomes moot if draft picks are tradable, basically blowing most of this aside from the rankings out of the water

  • Anonymous

    Like a lot what I see there. Couple issues I have (and I’m not sure how to change it) is the restrictions on signing guys per group. Tin this example the Pirates would be unable to sign 2 guys from the 4th group. Not sure if that’s productive. 2nd all this becomes moot if draft picks are tradable, basically blowing most of this aside from the rankings out of the water

  • Anonymous

    Expecting the home team to have to match and up any deal could not only be used as leverage by players but seems rather unreal (if they could meet those contract needs they would), I realize you offset that a bit with the payroll estimation, but that is not very good considering how that can fluctuate too. Furthermore the general secrecy around signings and avoiding bidding wars would be eliminated.
    In general, offering arbitration I think can be a serious offer if the player has been on the team for two years (already having been upped in arby before). Your example of Benoit is a bad one since you yourself noted under this system relievers would likely not qualify. In general, players who qualify make decent salaries already. Prince Fielder for example if offered arbitration will get more than 15mm. That’s the polar opposite example but other examples such as Pavano show that generally the base line salary and the increase one will get in arby are adequate enough. Also, it is more appropriate because it does not require the multiyear commitment of FA. Home teams should not have to meet the need in years as well as annual salary. Should the Phillies only get comp if they are willing to offer seven years? What if they have prospects 2 years away? No comp because they don’t want to lose the player for the next two years?
    I also have mixed feelings about the only one player from each category. Generally I like it, but do have some concern. I don’t think WAR is universally recognized or even the best way to “value” these players either.
    I agree the system is a problem, and think this is on the right track, but I see huge issues here too.