First Pitch: The Draft Compensation System Remains Broken

During the last Collective Bargaining Agreement, Major League Baseball made some big changes to the draft pick compensation system. Under the old rules, teams qualified for draft pick compensation if they offered arbitration to any pending free agent. They could make this offer even if the player was acquired after the season, in the days before he became eligible for free agency.

The result was that people abused the system. Contenders could trade for players, knowing that they would just be getting a compensation pick at the end of the year when that player walked as a free agent. Then you had teams who were trading for players in September, and then after the season, for the sole purpose of offering them arbitration to get extra draft picks.

Thus, MLB changed the rules. Under the new system, a player has to be under team control the entire final season of his contract to be eligible for compensation. Gone were the simple offers of arbitration, replaced by a “qualifying offer”, which was a one year deal for a set amount each season. This year that amount is $14.1 M.

Here are the players who received qualifying offers this season.

Stephen Drew, Red Sox
Jacoby Ellsbury, Red Sox
Mike Napoli, Red Sox
Robinson Cano, Yankees
Curtis Granderson, Yankees
Hiroki Kuroda, Yankees
Nelson Cruz, Rangers
Kendrys Morales, Mariners
Brian McCann, Braves
Carlos Beltran, Cardinals
Shin-Soo Choo, Reds
Ubaldo Jimenez, Indians
Ervin Santana, Royals

To break that down, here are the potential comp picks by team, their opening day payroll, and the payroll rank.

Yankees (3) – $228.8 M (1st)

Red Sox (3) – $150.6 M (4th)

Cardinals (1) – $115.2 M (11th)

Rangers (1) – $114.1 M (12th)

Reds (1) – $107.5 M (13th)

Braves (1) – $89.8 M (16th)

Royals (1) – $81.5 M (19th)

Indians (1) – $77.8 M (21st)

Mariners (1) – $72 M (24th)

There are 13 potential compensation picks, and nine of those picks go to teams who began the season in the top half of the league in payroll. Six of those potential picks will go to the Yankees and Red Sox.

Think about the irony of this. The Rays can’t spend money, and haven’t won a World Series, yet they were one of the teams benefitting from the old system. They would trade for players in the off-season, risk an arbitration offer, and get extra draft picks. The end result was that the system was changed. Now we have a system where the Red Sox are coming off a World Series title — their third in ten years — and might have four first round picks, and a lot of money to spend in a new draft system where more money equals the best chance at top talent.

There was a problem with the old system, but the new system is worse. The new system prevented people from taking advantage of the old system, but in turn it really handicapped small market teams, and benefitted big spenders.

Let’s think about the qualifying offer for a second. Who is more likely to be able to offer that kind of money? A team spending $80-100 M per year, or a team spending $150-200 M per year? The Red Sox can potentially tie up $42 M in qualifying offers, and it doesn’t even amount to a third of their payroll next year. If the Pirates did that, it would amount to almost half of their payroll if they were spending $90-100 M. That’s not to say the Pirates can’t afford to make a qualifying offer. They definitely can, but it’s easier for big spenders.

Then there’s the concept of a qualifying offer. The players who are going to be worth $14.1 M are usually some of the best free agents on the market. Most of those players are going to be playing for contenders. You don’t find a ton of teams who lose a top free agent at the end of a horrible season. Usually those players are traded at the deadline for a better and more immediate return. The system now just benefits winning teams, and allows them to stay winners. That’s not a bad thing, but it makes it even harder to become a winner in the first place. A lot of teams can’t build by signing big free agents or trading prospects for big name players. They have to build through the draft and international markets. MLB has made it harder to build through these avenues, and it only gets harder when you’ve got the Red Sox and Yankees getting six extra draft picks.

It’s not just about the teams. The compensation system makes no sense for the players either. Ubaldo Jimenez and Ervin Santana both received qualifying offers. Matt Garza couldn’t receive a qualifying offer, because he was traded mid-season. But Jon Heyman has Garza projected to earn more than the other two pitchers this off-season, and the qualifying offers make a difference. If you look at the numbers, Jimenez and Santana both had better seasons than Garza. There are question marks about all three prior to the 2013 season (performance for Jimenez and Santana, injuries for Garza). However, there’s no reason why Garza should be getting more than those two, just because he was traded and the other two weren’t fortunate enough to be dealt. Basically Garza is projected to get an extra $10-20 M this off-season because he was playing for a bad team last year, and was traded to a good team mid-season. Meanwhile, Jimenez and Santana see their values depressed because they were helping their teams to a better record than the record the Cubs had when they traded Garza.

The difference in values is due to the fact that teams will have to give up their first round pick, plus a large amount of draft pool money, if they sign Jimenez or Santana. Under the old system, the signing team would give their first round pick to the former team, and the former team would also get an additional compensation pick after the first round. Now the former team only gets that pick after the first round, but for some reason the signing team still loses a pick. If the old team is getting compensated for losing a player, then why should another team be punished separately for signing that player? Again, this is something that hurts small market teams more than big market teams. The Yankees can afford to lose a first round pick, especially in a system where they might get three additional picks. The Pirates couldn’t afford to lose a first round pick, even if they were getting additional picks.

The new system doesn’t make sense for teams. It doesn’t make sense for players. It’s a total mess that only benefits teams like the Red Sox and Yankees. Not only do they get extra draft picks, but they also get free agents at cheaper prices due to the draft pick compensation involved with signing a player who received a qualifying offer.

This isn’t the first time I’ve written about this system being broken. I originally went with the title of “The Draft Compensation System is Still Broken”. Then I noticed that I had previously used that exact same title back in January, also in a First Pitch article. So I decided to take a different approach this time and present a simple solution that would actually be fair to all teams, along with being fair to all of the players.

Fixing the Compensation System

1. Come up with a ranking system where the top X amount of free agents get compensation. This shouldn’t be hard, since that is what happened under the old system. The only change I’d make from the previous version is that middle relievers should never receive compensation. That was a large problem with the old system, and the main avenue where teams would abuse the system to get extra picks. I also would say that this shouldn’t be a high amount. Maybe the top 20-25 free agents. Some of those players would be returning to their old teams, so you’re getting about 15-20 extra draft picks.

Marlon Byrd Pittsburgh Pirates

Under my proposal, the Pirates would get compensation if Marlon Byrd signs elsewhere. (Photo Credit: David Hague)

2. A player must be on a team by the playoff trade deadline to qualify for compensation. Teams are paying a premium to get those guys for the playoffs, so they should be compensated when those players walk at the end of the year. The Pirates, for example, gave up Dilson Herrera and Vic Black for Marlon Byrd. They only had Byrd for one month and the playoffs, but they paid a lot to get him for that time.

3. No qualifying offer is necessary. If a player is eligible for compensation, and he signs with a new team, the old team gets compensation. I don’t understand why the old team has to make some huge offer just to get compensated for a talented player leaving.

4. There is no penalty to sign a ranked free agent. The old team is getting compensated. Why punish the signing team just for being the team who signed that player? This also helps the players by avoiding situations where one player sees his value hurt and another doesn’t, all because the first player was unfortunate enough to be eligible for compensation. This will lead to the players getting more money overall, and realistically the owners would never allow that, so…

5. Teams can only sign one ranked free agent, not counting players who were previously on their team.  This makes it impossible for one team to spend big on all of the ranked free agents. It spreads the talent around, and it drives prices down to make up for the fact that overall prices will be going up due to rule number four.

The system I presented will still lead to big market teams getting draft picks. But small market teams will also get draft picks. Small market teams can also sign a ranked free agent without worrying about losing a pick. And they can trade for help if they’re in a playoff run, knowing they’ll get compensated for making that move at the end of the season. On the flip side of that, rebuilding teams might get a slightly bigger return at the deadline with players eligible for compensation after the season.

Overall it’s impossible to create a fair system. The reason for this is because MLB has an infrastructure that favors big market teams. Free agency is built for big markets. The draft and international markets were changed to reduce spending from smaller markets. The system I presented benefits big market teams, but it benefits them in the same way it benefits small market teams. The only reason this is a problem is because big market teams see such a huge advantage elsewhere, while small market teams see their advantages taken away. I don’t see that changing.

So baseball is stuck with coming up with systems that are fair, but don’t solve the overall problem in baseball. This proposed compensation system might not be perfect, and it might still benefit big market teams, but it would be a massive improvement over the system that is in place right now.

Links and Notes

**Pre-Order the 2014 Prospect Guide

**McCutchen and Hurdle Are Finalists For BBWAA Awards

**Who Should the Pirates Protect From the Rule 5 Draft?

**Pittsburgh Pirates Minor League Free Agents

**Keith Law Releases His Top 50 Free Agents

**More Free Agency Rankings and Salary Predictions

Winter League Results

**AFL: Hanson and Ngoepe Collect RBI’s in Victory

**Winter Leagues: Jerry Sands Drives In First Run

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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  • CalipariFan506

    IMO the competitive balance picks solve some of these issues.

    All I’d change is each team is only allowed to make one qualifying offer.

    • emjayinTN

      Agree with CF about only one QO per team. Of course, the Pirates exploited the draft by overpaying lower slots which is just a little more devious, and the Pirate Pitching Prospects – Nick Kingham 4th Rd, Tyler Glasnow 5th Rd, Brandon Cumpton 9th Rd, and Kyle McPherson 14th Rd are proof that good scouting and excellent development can overcome the big spenders.

      McPherson and Cumpton have been two of my favorites. Why are we not looking at the numbers posted by Cumpton in his brief stint of 5 or 6 starts and seeing someone who could compare equally with some of our Rotation. This is a kid who gave up about 20 earned runs in his first 3 outings in Lo A and then ended the year with an ERA under 5 for the year. And, he has been on the fast track ever since through the system. I think he will turn 25 shortly, and is someone we will have for 6 years. He is one of the reasons why I oppose a contract extension of 2 or 3 years for Morton.

      • csnumber23

        Because Cumpton is a mediocre talent who will probably be at best a #5 starter. We have about 20 pitchers above him in the long term plans. I do agree not to extend Morton, I think we should trade him while his value is at it’s highest. I said the same thing last off season about G. Jones. He had by far his best season and you could see his value was by far at it’s peak and teams were interested. Now he will just be released. I am not high on Cumpton at all, I see mediocre stuff and nothing special about his minor league numbers. He did give us a couple very helpful starts but I see guy who will get lit up after 1st time thru the league, maybe I’m wrong but that’s my thoughts. I think we could get something solid for Morton right now and should do it, I would not be surprised at another regression from Morton next year.

        • stickyweb

          23, I’m pretty sure MJ was talking about Cumpton as the #5 starter. Nobody expects him to slide into the #2 slot or anything, but if AJ returns and they don’t trade Frankie, you have those 2 plus Cole and Morton as a solid 4 man rotation. If Wandy returns, he’s the last one, but nobody’s expecting him to be back. So it comes down to Locke. Why shouldn’t Cumpton be considered as much as Locke, at least going into Spring Training? Just add Cumpton to the conversation is all.

          If you said trade Jones prior to the year, then you definitely were right on that call. But I’m not sure Morton is at his highest value yet, as he’s only had half a season coming off major surgery. Heck, the Bucs didn’t even want to start him in the playoffs. Another half or full season of success would build his value more even more. What would you realistically see them getting in a trade for him right now?

          • emjayinTN

            Cumpton is not a big thrower, but averaged I think 91.7 on his fastball, and throws three other pitches in addition to the fastball. He knows how to pitch and is a guy who has been very dependable all the way through the minors. Call him a #3, #4, or #5. Morton has to validate a season to be considered at his high value. He pitched well in 2011 and fell apart in 2012. Did well in 2013 and if he does well in 2014, then he may get some interest from other teams. But, at age 30 and in his last year of club control, we have way too many other young kids ready and able to step up and get their chances.

            • csnumber23

              Maybe trade Morton in June if he is having a good first half. That’s when Taillon is hopefully arriving.

              Maybe I am wrong on Morton and Cumpton but I don’t consider either of them part of the long term rotation.

              Cumpton does deserve a look though kinda the same as Lambo deserves a look too.

          • csnumber23

            I can see taking a look at Cumpton n spring training but I see many better options. I am not sold on Cumpton but hopefully I’m wrong.

            The reason I would trade Morton now is because he has been so up and down plus injury risk. I think someone would give a solid prospect if they need a starter. Plus if they did it now and he had a huge year they could give a Q offer next off season. I fear Morton could implode at any time kinda like Locke’s second half this year and Mcdonald’s last year.

            Yeah I could see the G. Jones decline coming, I really hoped we would have moved him last off season.

  • skliesen

    A team is only allowed to sign one FA not currently on their team? So if two players are deemed perfect fits for a team, and this team wants them, and is willing to set the market price for both players, you’re suggesting one of these players must play elsewhere for less money?

    When pigs fly, Tim.

  • Brian

    1. I’d prefer some sort of criteria for each position rather than a subjective top 20.

    2. Don’t understand why the league doesn’t do this unless they are intentionally trying to reduce the amount of trades each year.

    3. Very strongly agree with this point

    4 & 5 – I guess my lack of understanding of the current system plays a role in why I think 5 seems silly. Does the current system that causes teams to lose a 1st round pick essentially limit teams to one big free agent per year? Hence why you proposed rule 5 after making rule 4? Either way, I think I’m against 4 because this would benefit the big spending teams a lot more than the pirates.

  • http://hiddenvigorish.com Hidden Vigorish

    I think the simplist solution would be to cap the number of qualifying offers a team could give at just 1 per season.

  • stickyweb

    I agree with a lot of what Tim says and some of the comments here as well. My question is How exactly was the system broken before? If teams received comp picks by trading for a potential free agent, that was built into the value of the deal. Even if it was after the season. Presumably the team trading the FA was getting a prospect in return that they valued more than the comp pick they would have received.

    This clearly is a case where the “fix” is much worse than the original problem (if you accept that there was one). The QO is ridiculous as Tim points out, it penalizes small market teams. If there has to be a QO, why not scale it to the rankings that should be brought back. The top 10 FAs have the $14 million QO. The next 20 FAs have a $10 million QO, etc. Or just do away with the QO and go back to offering arb as the qualifying event.

  • capirate

    I don’t think the system it broken, it is working just as intended. The overall concept is to funnel as much money and talent as possible to the rich teams. From that perspective, the system is working quite well.

  • Andrew

    I agree with stickyweb sentiment but would go back further and ask when did free agent compensation begin and why does it exist? Any type of compensation system is going to favor larger market teams because they ultimately let more of their talented players reach free agency. Larger market teams have more resources to resign their players and do not need to trade players under team control to ensure some type of return.

    The current compensation system is just an attempt to hold in check player salaries, the entire most recent CBA was a successful exercise in controlling cost which the MLBPAs accepted because it limited money going to new players (draft and international signing limits) thus theoretically meaning more money for current players.

    I think Tim’s point is correct that the system is not fair, but if the rules are changed I ask what was the original purpose of compensation for free agents and start there? There are ways to allow small market teams to overcome their structural disadvantages, but I think any focus on the free agent market is futile.

  • CalipariFan506

    I think there are two simple fixes. The first is as mention, limit each team to one QO. This would permit teams from stockpiling draft picks and would also give a team like the Yankees something if some other team spends $300 mil on a Cano. Then with the competitive balance picks, small market teams wouldn’t need to make a QO to anybody to be on fairly level footing in the draft.

    The other is to maintain unlimited QO a team can make but if a second player signs with another team, his former team gets a pick tacked onto the 2nd round. And if a third player, like Steve Drew or Kuroda leave, then the pick is tacked onto the end of the third.

    • emjayinTN

      Either of those thoughts are OK with me, but If you only get one Supplemental Pick each year, there would be more emphasis on signing guys long term. If a team gets into a situation where they have 3 guys they want to issue QO’s for, why should they get any benefit beyond the one Supplemental Pick. Negotiate with folks you want to keep and quit gaming the system to continue to get Supplemental Picks for guys you have no interest in keeping. If a team has drafted, signed, and developed a player and then loses him to FA, then I can see a difference. But buying talent and stockpiling it to assure another Supplemental Pick is ridiculous.