Free Agent Compensation

Dave · August 17, 2008 at 9:56 pm · Filed Under Mariners 

Over the last few weeks, we’ve heard a lot of talk about free agent compensation draft picks, especially as they pertain to Raul Ibanez. The Mariners (correctly) decided that they wouldn’t take less than two good prospects for him at the deadline, since they’ll receive two high compensation picks if he leaves as a free agent this winter. They could get two good prospects by not trading him, so there’s no reason to trade him for less than that. By in large, the media has caught on, and we rarely see any more references to a player being traded or “lost for nothing” during the winter. Most people get it – free agent compensation picks are valuable.

However, they don’t make any sense. Seriously, when you stop and think about how the system works and the results it provides, everyone loses. They’re bad for everyone, and it’s pretty remarkable that they still exist. Let’s look at what they’re supposed to do and what they actually do.

Goal #1: Promote parity by allowing teams to recoup talent lost when big market teams steal their players

This clearly doesn’t happen. Go through the list of who gets compensation picks every year, and it’s not the Marlins, Rays, and Royals. It’s the Yankees, Red Sox, and Dodgers, plus other similar big payroll teams. There’s a couple of reasons for this:

1. Type A and Type B free agents are generally good players. Good players make a lot of money, so they are more likely to be on teams with big payrolls. When their contracts expire and they sign with a new team, they’re generally just going from one big payroll team to another, and so the big boys who certainly don’t need extra picks for competitive balance reasons end up with an advantage in the draft anyway.

2. The system requires you to take a financial risk in order to get the draft pick. Teams on strict budgets can’t always afford to take the risk that a player will accept arbitration and eat up a big chunk of their payroll, but it’s just not a big deal to the Yankees if Damaso Marte makes a couple million more than they were counting on. The big payroll teams are more able to take the risk, and thus, more likely to get the reward.

Goal #2: Provide a disincentive for teams to sign free agents away from other clubs, making it more likely for players to stay with their original franchise.

Again, it clearly doesn’t work this way. If you lose a Type A free agent (and you offer them arbitration), you get two high draft picks. If you sign a Type A free agent that another team had offered arbitration to, you lose one high draft pick. In many cases, you actually get rewarded for letting your player leave and bringing in someone else’s exact equal. For instance, if the Mariners were to have to decide between re-signing Raul Ibanez this winter or offering the exact same contract to say, Pat Burrell, then they’d gain an extra pick from signing Burrell and letting Ibanez leave. In fact, we’ve seen teams essentially swap free agents at the same position and both teams have come out with +1 draft picks – the Orioles and Rangers did this in 1994 with Rafael Palmeiro and Will Clark.

Those are basically the two overriding goals of free agent compensation, at least in theory. The current system fails spectacularly at both, and just for good measure, has even more flaws as a byproduct of the system.

Some players are less marketable, and have to sign for less money, after being classified as Type A free agents when they shouldn’t really have been. This is especially true of relief pitchers – rack up the saves and you’ll climb the Elias rankings pretty quickly, even if you’re not particularly good. Most teams have figured out that surrendering a draft pick to sign a mediocre reliever who just happened to notch a lot of 9th inning finishes isn’t a good idea, and they’ll shy away from signing undeserving Type A players who get offered arbitration. For a subset of major league players, they’d be better off getting a worse ranking in the Elias system, because if they become Type As, it will cost them money.

It also, as we saw with Ibanez, keeps non-contending teams from trading quality players at the deadline, making the stretch run and post-season less interesting. Instead of playing for a winning team and potentially getting to play in October, Ibanez has to play out the string for a horrible team because it was in the best interests of the organization not to trade him because they’ll get more for him if he leaves as a free agent.

Overall, it’s hard to find a redeeming quality about the system as currently structured. It doesn’t help small market teams – it does just the opposite, in fact. It doesn’t convince teams to keep their home grown stars, but again, rewards a team for letting their guys walk and replacing them with an equal player from another franchise. It dissuades teams from making deadline trades to help contenders strengthen their clubs, and in some cases, it costs players a chance at a better contract.

If this system does anything right, I have yet to find it. It fails on so many levels and helps no one, but because it has to be collectively bargained (due to how it affects player salaries, which is a big union issue), it’s unlikely to go away anytime soon. So we’re stuck with a failing system that does the opposite of what it’s supposed to do and adds a few lemons on top of that.

Owners, Players Union, I know this isn’t a sexy issue, but when you guys sit down to renegotiate the CBA, can you do us a favor and just rip up the current free agent compensation system? Thanks.


84 Responses to “Free Agent Compensation”

  1. BaltimoreDave on August 18th, 2008 10:29 am

    48 –

    You’re on the right track. Middle-tier free agents would be grossly overvalued, much more so than now. And mediocre young players not yet FA-eligible would be handed contracts not based on merit or ability but because the money has to be spent somewhere. And let’s not even start with how screwed up arbitration could become.

    I’m personally in favor of having fewer rules, not more. Create a structure where intelligence, savvy and any of several strategies can be employed to create a winning team regardless of payroll.

  2. JMHawkins on August 18th, 2008 10:34 am

    Yeah, instead of a salary floor, how about a mandatory sale clause if the team fails to post a winning record for five straight years? Or posts a sub-.450 record for three straight years? Adjust the numbers to make it work, but the idea is if the team is uncompetitive for an extended time, the league commandeers the team and auctions it off. Add some sort of home-town discount for local owners to encourage teams to stay put, but otherwise give the league an ability to cull out bad ownership.

  3. cdowley on August 18th, 2008 10:38 am

    To be clear, I’m advocating trading picks, not selling them. And look, that’s not an ideal solution either, but if MLB is going to attempt to assign a specific value to those picks, then the team ought to choose how it will extract that value, right?

    I realize that’s what you were advocating… I was just saying what *would* happen. Yeah, you’d have trades and such, but you’d also have my scenario playing out a ton, too, unfortunately.

  4. Tuomas on August 18th, 2008 10:55 am

    If a salary floor isn’t the answer, and it’s not, then perhaps revenue sharing payments should be capped by a team’s payroll.

  5. cdowley on August 18th, 2008 11:30 am

    Now that’s a suggestion I could get behind.

  6. DMZ on August 18th, 2008 11:51 am

    There isn’t a single owner or GM in baseball who doesn’t want to be in the World Series. They just refuse to spend money when and where they should to get there. It’s a lack of a plan and ability to execute it rather than a lack of desire.

    That’s partly true. There are teams where the organization wants to win — take the Marlins, for instance — and the ownership would love to be in the World Series because it means a lot of money for them. But the ownership group would rather suck and make a ton of money than chance spending more to make more.

    That’s a lack of desire to win.

  7. DMZ on August 18th, 2008 11:53 am

    A salary floor is an awful, awful idea. Don’t just think in terms of immediate effects — what happens with two, three years of that immediate effect?

    It’s a lazy thought. Reforms to make baseball more competitive should be simple in mechanism, with an eye towards as few as possible, allowing teams to make their own path to success.

  8. Jeff Nye on August 18th, 2008 11:58 am

    Would it make more sense to revamp the revenue sharing system to stop creating situations where teams can simply leech a nice profit off of revenue sharing without actually trying very hard to field a winning team?

    And if so, would it be practical to do?

  9. DMZ on August 18th, 2008 12:02 pm

    Yes. I actually came up with one of them, and others have offered equitable solutions as well.

  10. BaltimoreDave on August 18th, 2008 12:02 pm

    It really is a beautiful thing that in baseball, a team with a $40MM payroll can be more competitive, currently and projected over the next few years, than one with a $140MM payroll. No other major professional sport can make that claim and baseball should be loath to change that.

  11. BaltimoreDave on August 18th, 2008 12:07 pm

    Revenue sharing should have been a temporary, declining-scale system ($X in year 1, $X – 30% in year 2, etc.) from the start, and with much smaller disparities, i.e. payments, between “small” and “large” market teams. And it’s debatable if it’s necessary to have at all at this point.

  12. Willmore on August 18th, 2008 12:08 pm

    As long as we are on the topic, isn’t it about time to allow teams to trade draft picks? Wouldn’t the Mariners accept 2 future 1st rounders for Ibanez, without prospects? Wouldn’t Washington rather trade down their top draft pick, because they don’t want to pay top dollar?

    The competitive argument is bullshit. You can’t force a team to be good by making up silly rules. A team is either well-managed or not. A team is either rich, or not. You wouldn’t expect Derby County to win the Premiership but once in 100 years, and that’s the way things should be.

  13. gwangung on August 18th, 2008 12:10 pm

    It really is a beautiful thing that in baseball, a team with a $40MM payroll can be more competitive, currently and projected over the next few years, than one with a $140MM payroll. No other major professional sport can make that claim and baseball should be loath to change that.


    Can I have a witness, brethren!

  14. galaxieboi on August 18th, 2008 12:13 pm

    you know, we still haven’t decided what to get Dave & Amy … candlesticks always make a nice gift.

    Well, they must be registered somewhere. I’m assuming it’s not the M’s team store.

    I’m not an economist, so I don’t have any good answers for baseball’s current salary ‘problem’. As for the draft, I would be in favor of including international players . Not that I’m not in favor of guys getting what they can from teams, but I believe it’d cut back on some of the more nefarious activities of some scouts and execs in Central and South America.

  15. BP on August 18th, 2008 12:17 pm

    Just for the record, the only thing I said was that a floor would be better than a cap. I agree that there would be problems if a hard cap was put into effect. I do think that the idea of making teams spend money on putting better players on the field is a good one, and if that involves holding back some revenue sharing coin and giving it to teams that spend more, fine.

    But I’m in squarely in the camp of not overhauling anything. The system is surely a bit screwy, but I don’t think I’d change much about it. The smart teams know how to work it. The dumb teams get screwed. The one thing I would change is I’d like the M’s to be one of the smart teams as opposed to one of the dumb ones. Hopefully that changes this year.

  16. cdowley on August 18th, 2008 12:23 pm

    The competitive argument is bullshit. You can’t force a team to be good by making up silly rules. A team is either well-managed or not. A team is either rich, or not. You wouldn’t expect Derby County to win the Premiership but once in 100 years, and that’s the way things should be.

    On the flipside of that is the NFL. Look at the parity that’s emerged there in the last decade, the Patriots’ run of excellence aside. There’s a couple of perennial contenders (Pats, Colts, Seahawks), and a couple of perennial losers (Texans, Cardinals), but other than that the rest of the league is an absolute slugging match year in and year out as teams jockey with each other for supremacy. We’ve literally seen teams win a single game one year and then make the playoffs the next.

    It CAN be done if executed correctly. However, when the NFL implemented it’s salary cap and current CBA structure in ’92, the environment in the league was ripe for it. If MLB wanted to institute a cap, they should have done it as part of solving the ’94 strike IMO. With the way things have gotten since, creating a cap-based system would be nightmarish at best.

  17. BaltimoreDave on August 18th, 2008 12:29 pm

    I do think that the idea of making teams spend money on putting better players on the field is a good one, and if that involves holding back some revenue sharing coin and giving it to teams that spend more, fine.

    As long as “spend money” means investing in their baseball operations – however they see fit – then the concept of RS can work and an equitable split can be found. If “spend money” means paying major league players more salary, then it’s an awful system that will have disastrous effects for years, as Derek alluded to.

  18. BP on August 18th, 2008 12:40 pm

    67 – Yeah absolutely. Player development, scouting, amateur signing bonuses, etc. is fine with me. If they want it to be in the form of major league salary, that’s fine too. Taking their revenue sharing money and not investing it in the team is what gets me.

  19. zeke5123 on August 18th, 2008 12:42 pm

    You all miss the point. You all are arguing 101 ECON. You need to look beyond it. In a basic Supply and Demand Curve there are roughly 16 assumptions made such as perfect competition, perfect knowledge, perfect mobility along with a host of others.

    In a baseball market (as in the real world market) these assumptions aren’t met. Some of those assumptions being made (perfect competition, knowledge, mobility) are part of the equality doctrine. Certain Economist’s such as Marx’s argued that a free market needed equality (since it was one of the main assumptions made behind the model) to operate perfectly. Otherwise, there are major distortions to the market. The answer is the destruction of capital ala the third stage of economic development per Marx (note different then communism, which wasn’t a structural advancement, it was advanced by the vanguard of the revolution; the government).

    How this is applied to salary cap’s is that while it doesn’t destroy capital, it at least equalizes it. This allows for the market to be MORE NATURAL. Not less natural.

    As to the points that small market teams are competitive, you are right. However, ceteris paribus, a team with more resources will do better then a team with less resources. That is kinda the point, if you equalized everyone’s capital it would allow the smart teams even more of an advantge. A small market team has built-in market disadvantages. With a salary cap, you eliminate the disadvantages allowing the smartest (and luckiest) teams to win.

  20. cody on August 18th, 2008 12:51 pm

    Two things:
    1. No matter how many (or few) rules and regulations you make, in the end the smart teams that make prudent decisions will come out on top and the ones that don’t have a clue will come out on the bottom.
    2. Sometimes having 1-3 really, really, good teams can do just as much for a league as having competitive balance can do. Some teams may suffer, but overall the league would attract more fans than it might usually. For example, look what the Bulls did for the NBA in the 1990’s.

  21. BaltimoreDave on August 18th, 2008 12:52 pm

    A small market team has built-in market disadvantages. With a salary cap, you eliminate the disadvantages allowing the smartest (and luckiest) teams to win.

    What? How does that work? You’re tying together a cause and effect that have no relationship. A salary cap does not suddenly make small-market teams more intelligent. It just creates another artificial restraint on teams’ maneuverability.

    A smart team watches with glee as the Yankees spend $16MM a year on 36-year-old free agent pitchers while it quietly stockpiles youthful arms that could provide 90% of the value at less than 5% of the cost.

  22. marjinwalker on August 18th, 2008 12:56 pm

    re: 35
    “The union has a strong interest in keeping some sort of draft pick compensation tied to free agency because, if I am not mistaken, it is the only part of the CBA that relates directly to the Rule 4 amateur draft. If the draft pick compensation system is eliminated, the Rule 4 draft would no longer be a subject of collective bargaining, and the owners could implement changes without the union’s approval. Thus, the union has an interest in keeping some control over the Rule 4 draft.”

    Couldn’t that change, though? Could MLBPA walk into the next round of negotiations and say something like, “Look, this whole FA compensation thing isn’t working out for anyone involved. We only care about it because it lets us negotiate on the Rule 4 draft. So let’s do away with that compensation and just negotiate an article on the draft.” Don’t know if if the draft is part of MLB’s Anti-Trust exemption, but I would imagine if MLB flatly refused to bargain the Rule 4 draft, they would be subject to an unfair labor practice filing.

  23. DMZ on August 18th, 2008 1:08 pm

    A salary cap does not equalize capital. If you’re going to lecture everyone on how simplistic their thinking is, you might want to spend a little more time forming your thoughts.

    This is like arguing that limiting the maximum cost of a car at $100,000 will allow everyone to drive better cars.

    It won’t.

    Teams that don’t have $100m to spend won’t spend $100m if that’s the cap.

    Teams that make $20m a year putting a $30m payroll on the field and sucking at the teet of revenue sharing won’t field a $100m team either.

    And so on, and so on.

  24. cody on August 18th, 2008 1:45 pm

    The whole thing about whether a cap is a good idea or not is sort of pointless since the chances of the players accepting a salary cap are pretty close to nothing.

    Even with a cap, the teams with the desire and the brains to win will always come out on top.

  25. JMHawkins on August 18th, 2008 2:30 pm

    It really is a beautiful thing that in baseball, a team with a $40MM payroll can be more competitive, currently and projected over the next few years, than one with a $140MM payroll.

    Well, a big reason for that is that enforced pay gap between young and old players. There are around 150 starting pitchers in the league, and Felix is better than all but a handfull of them, and yet is one of the lowest paid. Is that ultimately a good thing?

    Also, far fewer teams with $40M payrolls are playoff contenders than teams with $100M+. The disparity in resources between the Yankees and the Royals is not a good thing for baseball, even if the Yankees don’t always make the playoffs.

  26. BaltimoreDave on August 18th, 2008 5:42 pm

    75 –

    Yes, it is a good thing, from a team-building perspective. That’s the incentive for organizations to spend millions of dollars each year drafting and developing a system full of players.

    Free agency is just one of several ways for an organization to import players, and if the trend of signing top young, pre-arb players to long-term deals continues, free agency won’t be nearly as attractive an option as it is now. The $4MM to 5MM/win on the open market could jump 50% as less impact talent becomes available.

    Fewer rules, fewer restraints, spend as much or as little as you wish – just build the best team you can with your unique resources and limitations. It’s not a perfect system by a longshot, but with more organizations getting smarter and smarter each year, it is proving to be a reasonably fair one.

  27. DrivelineKyle on August 19th, 2008 5:31 am

    #9, #28,

    Salary caps. Mandated contracts for rookie salaries.

  28. zeke5123 on August 19th, 2008 7:26 am

    DMZ you are committing a fallacy in your thinking. You are right when you say a cap will not equalize capital, some teams will probably still spend more then others. However, they will be much closer in terms of capital. Just because the solution isn’t perfect (yet better then the current system) doesn’t mean you should dismiss it. Thats like saying someone created a way to reduce crime by 10 % but you claim thousands of people will still be victimized therefore we should maintain the status quo. So with the cap. We may not be able to equalize capital perfectly, but we can make it a lot better then the status quo. Perhaps there are valid reasons not to have a cap. I have yet to hear one.

  29. zeke5123 on August 19th, 2008 7:29 am

    That’s the problem Bmore Dan. Every team is getting smarter every year. If two teams are equally smart the one with more resources will probably prevail. This current system doesn’t benefit the Yank’s because they are stupid. However, it does benefit the Red Sox’s greatly. They can do things other smart franchise simply can’t do over the long run.

  30. DMZ on August 19th, 2008 8:07 am

    I’m committing a fallacy in my thinking?

    The Twins don’t have capital to spend. A cap would reduce the amount of money the Yankees can spend.

    That doesn’t give the Twins additional capital.

    If you want to equalize capital, equalize capital through flat revenue sharing so each team starts with the same amount of money. Caps don’t do that.

  31. zeke5123 on August 19th, 2008 8:27 am

    Well, that would work. A question as to how the flat revenue sharing would work, would the Yanks still have more money because of things like YES network? If so then a flat revenue sharing in addition to the cap might be the best solution.

  32. DMZ on August 19th, 2008 8:38 am

    The cap still doesn’t help. And there’s a whole other issue around TV rights but essentially you also do have to go reform MLB’s current territorial rights situation if you want to equalize footing between teams.

    There are many ways to resolve the revenue disparity. Woolner and I put out pretty sweet plans @ Prospectus a couple years back that deal with all of that quite equitably.

  33. zeke5123 on August 19th, 2008 10:44 am

    Cool, I’ll see if I can find them. Thanks for the argument, though it would be interesting to see how this all gels in normative economics. Is forceably creating equity the most just thing to do? But that is a discussion for another day.

  34. BaltimoreDave on August 19th, 2008 6:31 pm

    79 –

    Yes, more teams are getting smarter every year. Some have a lot of money to work with, some have much less. But intelligence is the great equalizer. Yes, more money gives a team a greater margin for error, but so many other factors go into on-field success that I much prefer tweaking the overall system at the margins rather than implement something as huge and constricting as a salary cap. I don’t want to see 30 teams all attempting the same path to success.

    And come on – it’s Baltimore DAVE.

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