First Pitch: The Draft Compensation System is Still Broken

Last year the Collective Bargaining Agreement introduced some changes to the free agent compensation system. The system was overhauled, drastically reducing the amount of compensation picks that would be awarded. Here were the key changes:

**Previously there were Type A and Type B free agents. A player was eligible for compensation if a team tendered them an offer of arbitration, giving them a raise on their previous year’s salary. Now teams have to tender an offer of $12-13 M to get compensation for a player.

**Previously teams would get two compensation picks for a Type A pick. Those picks would come from the signing team and from MLB in the compensation round. Now teams only get one pick, which comes in the compensation round from MLB. The signing team still loses a pick.

**The top 15 picks in the draft were protected under the old system. The new system only protects the top 10 picks.

**Under the old system you got a draft pick if you tendered an offer to an eligible player, no matter how long he was on your team. Under the new system the player has to be on your team for a full year to get compensation.

There were two problems with the old system. One problem was that teams were abusing the compensation rules. Teams would acquire ranked free agents in the off-season for the sole purpose of letting them walk as a free agent, tendering them an offer that they would beat in free agency, and collecting a draft pick. Some teams were even getting two first round picks for relief pitchers. The end result was that there were so many compensation picks that the second round of the draft was starting around picks 50-60. This problem was largely wiped out by the new system.

The amount of compensation picks under the new system has been drastically reduced. Currently there are only three compensation picks, with the potential for four more. Those picks haven’t changed the second round order, since two of the signing teams forfeited first round picks, thus moving the compensation picks and every other pick up one spot.

The other problem with the old system remains a problem. Players were seeing their values dropping because any team signing them not only had to pay big money, but had to lose a draft pick. For a team like the Pirates, losing a draft pick is a pretty big deal. There are fewer players eligible for compensation this year, but that compensation is lowering the values of those players.

Kyle Lohse is quickly becoming the poster child for this issue. There has been talk the last few days about Lohse still being on the market. Today it was reported that he has received zero offers. This is a pitcher who had a 2.86 ERA in 211 innings last year, and finished seventh in the NL Cy Young award voting. There are some downsides with Lohse — mostly that he’s 34 years old, but also that his xFIP has been around 4.00 the last two years. Even with those downsides there’s no reason he should be without an offer at this point in the off-season.

Lohse brought up some good points recently about the new system. He noted that Zack Greinke and Anibal Sanchez both landed great deals this off-season without netting their old team a draft pick, all because they were traded mid-season. Had Lohse been traded, he wouldn’t have been eligible for a pick, and would probably be signed right now.

It’s the same situation with Michael Bourn. The outfielder looks like a premium free agent. He’s got plus defense in center field, and his OBP the last four years has been around .350. He’s got a ton of speed and profiles as a great leadoff hitter. He provides two things that a lot of teams need: strong defense in center, and leadoff hitting. Yet the rumors around Bourn have been non-existant. He’s 30 years old, so there is some concern that he could eventually go on the decline. That probably wouldn’t prevent him from landing a good deal without the draft pick compensation.

If you look at things from the Pirates’ perspective, you can see how this system is still broken. Lohse has zero offers, so the immediate reaction is “maybe the Pirates should try for him”. If Lohse was getting the offers he should be getting, the Pirates would have no chance at landing him. Suddenly he looks like a value signing, all because his price has been lowered by the lack of bids due to the compensation system. The problem with this is that you can’t just sign Lohse for one or two seasons. If you’re giving up a draft pick — and the Pirates would be giving up the 14th pick in the draft — you don’t want to give that pick up for a short-term solution. So you’d want to sign Lohse for a longer deal, with three years being the minimum. But would Lohse sign a long-term deal at a reduced rate with Scott Boras as his agent? If Edwin Jackson is any indication, the answer is no.

If Lohse did sign a three year deal, that would bring up the age problem. You’d be signing him for his age 34-36 seasons. The Pirates have taken that risk recently with guys like A.J. Burnett and Russell Martin. Those guys came only at the cost of money and very little else. In the case with Lohse you’re talking about losing a high draft pick, spending money, and dealing with the age-related questions. It’s already a lot of risk to spend money for multiple years on an aging player. Adding the loss of a draft pick only makes the risk worse.

Dave Cameron at FanGraphs had a good look at this subject. He brought up a good point that the value of middle-to-late round picks is significantly lower than early round picks. He cited a study at Baseball Analysts that noted the average WAR from each draft pick. The expected return for the number 14 pick would be less than a 5 WAR. Kyle Lohse has combined for a 6.1 WAR the last two seasons. On paper, a two year deal would produce more WAR than the average result from a 14th overall pick.

It’s not as simple as Lohse vs the draft pick. You have to look at several factors, starting with the alternatives. The Pirates pretty much have their rotation set. They’ve got A.J. Burnett, Wandy Rodriguez, James McDonald, Francisco Liriano, and one of Kyle McPherson or Jeff Locke. Adding Lohse would remove McPherson or Locke. The Pirates need to give one of those guys a shot to see if they could match the potential of Lohse. There are a lot of benefits to going with McPherson or Locke. One is that you save your draft pick. You also spend less money and go with a younger player. There’s risk involved with Locke/McPherson, and that risk mostly surrounds the fact that they’re unproven. That’s the risk that small market teams have to take. Lohse might have a good chance at a 6 WAR combined over the next two years, but what if the Pirates can get a 4 WAR from one of Locke or McPherson? The opportunity cost of adding Lohse goes down. Now you’re giving up a draft pick for an increase in one win a season for two years, plus you’re paying millions more in the process and preventing the development of young pitchers.

Michael Bourn might be a better fit for the Pirates in that scenario. You’re still blocking Travis Snider or Jerry Sands. Bourn has averaged a WAR around 5.0 the last four years. Assuming his production doesn’t immediately fall off a cliff, one year would be the same production you’d expect from the 14th overall pick. A multi-year deal would make such a move worthwhile. But once again you have to consider the opportunity cost. It’s not just Bourn vs the draft pick. It’s Bourn vs the pick and the potential production from Snider or Sands. If one of those players becomes a 3 WAR player, then you’d need three years of Bourn at 5 WAR/year to have a net result that is higher than the 14th pick. But during those three years you’re also going to be paying a lot more for Bourn than you are for Snider or Sands, which also has to be considered. All of this would be a whole different discussion if the signing team for these players didn’t have to give up a pick. Then you’d just have to focus on the potential increase in WAR that a guy like Bourn would bring, and how much that increase would cost.

The problem with the draft compensation system is that the signing team still loses a pick. That pick no longer goes to the former team, but is forfeited. This makes no sense. The old team is already being compensated for losing a player. The new team shouldn’t be punished for adding a player. The idea behind the signing team losing a pick is to discourage teams like the Yankees from signing all of the top free agents. This seems like putting a band aid on a broken leg. MLB’s free agency system is extremely unfair to small market teams. Big market teams can sign anyone, and can sign multiple top free agents. Small market teams have a whole group of players who are totally unavailable to them, and max out their big signings with middle tier players.

Rather than actually fixing the problem, MLB tries an indirect approach by punishing teams if they take advantage of the imbalanced system. This punishment is ineffective because it hurts small market teams more than big market teams. Losing a draft pick won’t hurt the Yankees. Losing a draft pick would be horrible for the Pirates. That doesn’t mean teams like the Yankees or Red Sox will just give up draft picks without a second thought. There’s a reason Lohse is without an offer right now. But if those teams did lose a draft pick, they wouldn’t feel the impact nearly as much as the Pirates.

Here’s the irony. If you remove the stipulation that the new team forfeits a draft pick, we still wouldn’t be talking about Kyle Lohse or Michael Bourn with the Pirates. Without the draft compensation, their markets would open up and a big market team would sign them. It’s only because of the draft compensation that these guys are still available, but that same draft compensation makes them incredibly expensive to the Pirates.

The draft pick compensation system is still broken. The punishment for signing a top player hurts two people: the player and any small market team that chooses to sign that player. It makes sense to compensate teams when they lose top players. Right now that compensation only comes from MLB. What doesn’t make sense is a system that punishes a player for being good enough to receive compensation eligibility. It also doesn’t make sense to punish teams for signing top free agents, since the reality is that the loss of the draft pick is meant to discourage big market teams from taking advantage of the bigger problem in baseball: MLB’s imbalanced market.

Links and Notes

**The 2013 Prospect Guide is now available. Order your copy today!

**Pirates Announce 2013 Minor League Managers and Coaches.

**Winter Leagues Recap: Comeback in Adelaide Falls Short.

**Minor Moves: Pirates Bring Back Miles Durham.

**Chad Beck Claimed off Waivers by Toronto.

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, 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.

Share This Post On