A Quick Walk Through The New Hot Stove Rules

With the World Series behind us and free agency officially kicking off on Saturday, the Hot Stove season is now upon us. While it’s unlikely that you’ll see anyone change teams immediately, there are always some free agents that sign pretty quickly, setting the market for others to follow. Before we get too far into evaluating the moves and the contracts of the winter, though, I thought it would be useful to walk through some of the changes that the new CBA has brought on that have a direct impact on free agency and will likely have a trickle down effect on trade evaluations.

Obviously, the biggest change is the overhaul of the free agent compensation system. Gone are the ridiculous Elias ratings that separated players into Type A or B free agents, taking with it the necessary component of offering arbitration to a pending free agent in order to collect that compensation. Instead of offering arbitration, teams must now submit a qualifying offer equal to the average salary of the 125 highest paid players in the game – this year, that works out to $13.3 million. In essence, a team that wants to be compensated for losing a free agent has to be willing to bring that player back for $13 million in 2013, which will greatly reduce the amount of players who get tagged with a compensation requirement.

Jeff’s going to have a full write-up on who should expect a qualifying offer later this afternoon, but it won’t be anywhere near the 37 players who received an arbitration offer last winter. After all, that list included guys like Rod Barajas, Jose Molina, Frank Francisco, Jon Rauch, Freddy Garcia, and Dan Wheeler. This puts an end to the manipulation of the system to gain draft picks (I’m looking at you, Tampa and Toronto) but also takes away a payroll floor for lower tier free agents. Last year, David Ortiz, Francisco Rodriguez, and Kelly Johnson all accepted arbitration offers after finding their markets less than robust, but Johnson never would have received a qualifying offer and it’s unlikely that Rodriguez would have as well.

The compensation tag has always had the effect of pushing back the free agent timetable, as teams would wait to see whether a player was going to be offered arbitration before agreeing to a deal in order to gauge whether or not it would cost them a draft pick to do so. Now, qualifying offers are due on Friday, so every team will know which players will cost them a draft pick before free agency begins.

Not only has the pool of players requiring compensation changed, so too have the specifics relating to the draft picks and where they go. Previously, the top 15 picks were protected, so any team finishing in the lower half of the standings could sign a free agent and only have to surrender their second round choice. That protection has been altered to only cover the top 10 selections. Additionally, because the Pirates get the ninth pick in next year’s draft for failing to sign Mark Appel, only the teams with the nine worst records in 2012 have draft pick protection – the Astros, Cubs, Rockies, Twins, Indians, Marlins, Red Sox, Royals, and Blue Jays will get to keep their first round selection even if they sign a player who received a qualifying offer. Everyone else would have to forfeit their first round pick.

And now, forfeit really does mean forfeit. Under the old system, a team’s first round pick was essentially transferred from one organization to the other as compensation for signing a Type A free agent, but now, that pick simply disappears. If, for instance, the Mets sign a player who received a qualifying offer, their 11th overall choice would simply be eliminated, with every team moving up one position in the first round. The only compensation awarded to a team for losing a free agent with a qualifying offer is a pick in the compensatory round between the 1st and 2nd rounds of the draft – essentially, a pick somewhere between #31 and #40 or so.

Previously, a team could collect two draft picks for letting a free agent leave, including one as high as #16, which incentivized teams to not sign their own free agents in some cases. Now, that incentive has been significantly reduced. The compensation cost of signing a player has only gone up a marginal amount for a small window of players, but the value of losing a player with compensation attached has gone down significantly. While we’re dealing with a small number of free agents, it will be interesting to see if fewer high end players switch teams, as there is no longer as large of a benefit from letting that kind of player walk.

Relief pitchers are the other area where we’ll likely see significant change in strategy due to the new compensation rules. Because the Elias rating drastically overvalued relievers, they made up a disproportionate number of Type A and B free agents who received arbitration offers, as teams could essentially treat their bullpens as revolving doors and get numerous additional prospects as a result. The qualifying offer is going to remove compensation from every middle reliever in the sport, which may drive salaries up for some of the guys who have previously come with the loss of a draft pick for their new teams. It might be hard to believe now, but in 2010, the Tigers gave the Astros the 19th pick in the draft for the right to sign Jose Valverde. How much more would he have gotten had that loss of a pick not been a factor? We may find out this winter.

Finally, there’s one other possible alteration that could develop over the course of the winter due to the new CBA. This one’s speculative and unlikely to happen, but there is some chance that a team could see the new rules as an invitation to bring the NBA’s sign-and-trade deal to Major League Baseball.

In the NBA, it’s common for free agents to technically re-sign with their own teams, then immediately get traded to the franchise they’re actually agreeing to join, because it’s a salary cap loophole. Players can receive larger paychecks from their original organizations than they can by signing outright with a new team, and obviously, the former team gets players or assets back in the trade that compensate them for letting that player go. In MLB, there is no salary cap, so there’s never been any reason for teams or players to engage in this kind of transaction.

There’s still no salary cap on Major League payroll, of course, but the new CBA did enact limits on spending in both the draft and international free agency. And that’s where a team could decide that free agency gives them an opportunity to spend on prospect acquisition.

Let’s just say make up an example to show how this might work. The Houston Astros have a massive amount of budget space this year, but they’re unlikely to sign a multitude of impact free agents to improve the team’s talent base from 65 wins to 75 wins, since they’re in full scale rebuilding mode. The CBA won’t allow them to simply shift that money to the draft or international free agency, so their only real choice is to spend it on Major League players. But there’s no rule that says they have to keep those Major League players.

Say — and again, I’m making all of this up for illustration purposes only — the Astros hear through the grapevine that Shaun Marcum is asking for $8 million on a one year deal in order to build back up his value and hit the market again next winter, and that the Royals are interested in bringing him in, but aren’t sure they can afford to sign him and still have money to afford Anibal Sanchez, who is their primary pitching target. The Astros could then approach both Marcum and the Royals and suggest that a sign-and-trade is in everyone’s best interests. The Astros would sign Marcum for $8.5 million — enough of an incentive to get him to go along with the plan — and then immediately trade him to Kansas City in exchange for, say, Lorenzo Cain, while picking up the tab for the entirety of the contract Marcum just signed. (Royals fans, don’t freak out. The actual names don’t matter. This is just an illustration.)

The Royals would essentially get the Major League free agent they wanted without increasing their payroll, allowing them to pursue everyone else on their target list, while the Astros would spend their Major League surplus acquiring guys with more long term value than the veterans who populate free agency. And Marcum would get $500,000 for the trouble of agreeing to waive the provision that says a player can’t be traded without his consent until June 15th after signing a free agent contract. He’d get a little more money, the Astros would put their budget surplus to better use, and the Royals could essentially trade for a free agent in order to keep their payroll flexibility.

Previously, there just wasn’t an incentive to pull off these kinds of moves, since Major League payroll could be reallocated to the budgets for the draft or international free agency, but the new limitations cut off that avenue for increased spending while rebuilding. While I don’t expect any teams to pursue this course, it is possible that a team like the Astros or Cubs could take some of their Major League payroll and use it to essentially establish sign-and-trades in MLB. Whether the commissioner’s office would go along with such transactions is an open question, but from my reading of the CBA, there’s nothing prohibiting a team from trying.



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Dave is the Managing Editor of FanGraphs.


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CaliforniaJag
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CaliforniaJag
3 years 8 months ago

Wouldn’t Marcum still get that $8.5 million from the Royals if he was traded in that scenario? The Astros would have to also pick up cash in the deal, which would have to be approved by the league office, correct? I doubt the league office would sign off on cash changing hands in a scenario like this since they don’t seem too keen on the idea of sign-and-trades (or else I’d figure they’d have included it in the CBA somehow). I could be wrong; just my initial thought.

Ixcila
Member
Ixcila
3 years 8 months ago

Right … all this is contingent on the Astros having the go-ahead to cover Marcum’s entire salary.

Bwentloag
Member
Bwentloag
3 years 8 months ago

Maybe I read this wrong, but I didn’t quite understand something. In the Royals-Astros scenario, the Astros would pay a chunk of Marcum’s salary? If so, that would make a LOT of sense for Houston or Chicago to try and do.

Pirates Hurdles
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Pirates Hurdles
3 years 8 months ago

“a pick in the compensatory round between the 1st and 2nd rounds of the draft – essentially, a pick somewhere between #31 and #40 or so.”

The comp picks would occur even earlier if the signing teams are forfeiting their 1st round picks. Say 6 compensation eligible guys sign to teams outside the top 10 picks in the draft. Then round 1 would only be 24 picks long and comps would start at #25.

Also, in your sign and trade scenario, wouldn’t the Astros have to send $8 million to KC for the deal to work? The commish could veto that type of nonsense.

wiggly
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wiggly
3 years 8 months ago

Sounds like nonsense when we read it here, but as Dave said, it’s similar to the existing system, only faster. Say the ‘stros take Marcum and pay him whatever part of the $8.5M is appropriate for pitching the first half of the season for them, and then they trade him to the Royals, agreeing to eat his salary. This is the same as that, just sooner, so maybe MLB will allow it, no?

josh
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josh
3 years 8 months ago

Don’t forget the 6 Lottery picks that come immediately after the first round and before the Compensation picks.

Pirates Hurdles
Guest
Pirates Hurdles
3 years 8 months ago

Josh, I’m fairly sure the Comp picks come before the lottery picks, not after.

TKDC
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TKDC
3 years 8 months ago

How does the order for comp picks work? And yes, since very few of the players who will be signing these top FAs are in the bottom 9, the comp picks should start around #25ish.

TKDC
Guest
TKDC
3 years 8 months ago

*teams, not players.

Well-Beered Englishman
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Well-Beered Englishman
3 years 8 months ago

The sign-and-trade loophole makes too much sense not to happen. The CBA’s new rules read like a list of ways to punish rebuilding teams and force clubs to the free agency trough, so teams like the Astros might as well use free agents to buy up prospects.

llellolovesace
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llellolovesace
3 years 8 months ago

Very interesting. Though, I’m assuming (in your example) the AAAstros would pickup some money of Marcum’s contract in that trade. Otherwise, you’d be trading Marcum and his new 8.5 M contract to Royals, as if they had signed him. Am I getting this right? or missing something?

llellolovesace
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llellolovesace
3 years 8 months ago

oops sorry, should have refreshed the page to see comments above before posting mine. Makes sense!

Steven
Member
Steven
3 years 8 months ago

Doesn’t compensation also require that the pending FA needs to be with the team for the full year? So even if the Angels make a qualifying offer to Grienke, even if he declines and signs elsewhere, the Angels don’t get the compensation pick, right?

Also, according to budget rules, wouldn’t that still technically count against the Royal’s cap/luxury count? I would assume that the Astros would be sending Marcum and cash to cover the 8.5M +500k (which would still require approval from the commissioner)… Now that wouldn’t matter much for the Royals in this case since they’re not anywhere near the luxury threshold, but say it was the Yankees instead of the Royals, then it would make a big difference.

Pirates Hurdles
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Pirates Hurdles
3 years 8 months ago

Correct, Grienke is not compensation eligible. A player has to spend the entire season on his team to be eligible.

Also, traded salaries count towards the luxury tax, no? I think this is correct. If you trade for player X who makes $15 million a year and you also get $8 million, your payroll is $15 million and the $8 million is simply revenue.

guesswork
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guesswork
3 years 8 months ago

Is there some rule forbidding the Astros from just giving the Royals several million dollars for Cain? Then the Royals just use that money to sign Marcum without any sign-and-trade nonsense.

TKDC
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TKDC
3 years 8 months ago

Seems like it would be easier for the money to go the other way. For instance, the Astros take a guy like Francouer and his whole salary along with Cain for a non-prospect. Seems like there would be plenty of opportunities like that without the commissioner sign-off hurdle.

TKDC
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TKDC
3 years 8 months ago

And the Royals might not be the best example, as they might value Francouer at around the 6.75 million he’s due, but a team like the Mets with Jason Bay would seemingly be willing to throw some pretty good prospects in on a deal that sent him packing.

Steven
Member
Steven
3 years 8 months ago

It would make sense to do it this way if it wasn’t the Royals… say it was the Mariners, then the Mariners wouldn’t have to surrender their 1st round pick, while the Astros get a better prospect for a 2nd round pick.

Ben
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Ben
3 years 8 months ago

they could send the Royals Cassius “Cash” Considerations

Tomcat
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Tomcat
3 years 8 months ago

The issue is that if the Royals payroll rises above a certain level they lose a chance at being in the competitive lottery and lose the compensation picks low payroll teams receive.

wepuckett
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wepuckett
3 years 8 months ago

I am a Ranger Fan and the Idea sounds nice for a team like the Astros or Cubs but also sounds like a way the Yankees could buy thier way under the luxury Tax threshold and still sign the best players. Although not sure thier farm system is deep enough for a team to do that with a top tier tallent.

Mike
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Mike
3 years 8 months ago

I know you were just making up a random example, but why would the Astros want to pay 8.5 mil for Lorenzo Cain? I thought you were gonna use an example where the Royals sign an international FA then trade him for Marcum, not a 27 year old (in April) outfielder.

josh
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josh
3 years 8 months ago

This isn’t a new “loophole”. Players have had the right to approve a trade before the June 16th reassignment date since at least 2002.

The “sign-and-trade” option has always existed and never been used before. If teams thought this was a viable way to acquire young talent it would’ve been exploited long ago.

I also have my doubts about teams wishing they could transfer money from their mlb budget to their draft or international free agent budgets. Most clubs haven’t had to cut their amateur budgets much due to the new caps. And for those who did spend less this year than last, there’s little evidence that that savings was re-routed to big league payroll.

KCDaveInLA
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KCDaveInLA
3 years 8 months ago

If I were the Astros in this scenario, Cain, given his fragile health and inconsistency, is not what I would want. It’s understood that Houston needs major-league ready players, but 1-2 WAR players aren’t even going to make the Astros competitive now.

obsessivegiantscompulsive
Guest
3 years 8 months ago

Cameron said that he was just making up an example for illustration, not that it was one that made total sense.

His main point is that teams can buy prospects by using their available funds (which can’t be used for the draft or international free agents with the new CBA) to sign free agents and then trade that player to another team who don’t have the money, but do have prospects they are willing to trade. His example was just meant to show how that would work. He probably should have went with “Team A” and “Team R” instead, and Free Agent M and Prospect C.

Baltar
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Baltar
3 years 8 months ago

I knew that at least one commenter would miss the point that this is just an example, but I didn’t think that anyone would miss the point that the Astros would be signing the player just to trade him.
I am aghast.

joser
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joser
3 years 8 months ago

Fangraphs commenters: just when you think you can’t underestimate them…

obsessivegiantscompulsive
Guest
3 years 8 months ago

Very interesting wrinkle on sign and trade potential in baseball, thanks for the article, very informative.

obsessivegiantscompulsive
Guest
3 years 8 months ago

Thinking further on this, I don’t think Marcum would necessarily need more money in the deal. Maybe Team A can give him the most money but would need to trade to Team Z because they would rather have that packet of prospects. If he don’t take the $8M being offered by Team A, he risks that no other team would match that and maybe be forced to sign with Team X for $7M instead. So he won’t necessarily need more to incent him to do the deal, that deal might be incentive enough.

Joelskil
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Joelskil
3 years 8 months ago

Do the compensation picks come before or after the “competitive balance” picks?

Baltar
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Baltar
3 years 8 months ago

So the players and owners collaborated to create a scheme to make the rich richer at the expense of the poor and made it so complex that it would obscure the real reason for it.
When will the rich teams and players realize that they could not make all that money without the poor teams and players to compete against. It is even in their best interest to junk the status quo and replace it with a simple plan that benefits everyone.
Eliminate any and all provisions that punish teams for how they spend their money (limits on draft spending, foreign amateur free agent spending, luxury tax, et. al.). Institute a very progressive revenue tax/subsidy, one that would, for example, tax the yankees say $200M and subsidize the lowest revenue teams say $40M and other teams somewhere in-between. Make all amateurs free agents (no draft).
This would make the teams much more equal, reward good management and punish poor management (since the tax/subsidy is on revenue, not profit) and eliminate Byzantine structures that are always going to be abused by someone.
Each team could make their own choice on how to try to improve their team, thru pro free agent signings, amateur free agent signings, investing in minor league instruction, spending on foreign or domestic players, and anything else they could think of.
And, yes, I know it will never happen, so don’t bother to tell me that. I just wish it would.

Gasman
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Gasman
3 years 8 months ago

Why not just require the teams to kick in all TV revenue into a pot that get divided out equally to all teams.

The Rajah
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The Rajah
3 years 8 months ago

I would love to see something like this happen, but you would also need to allow free movement of franchises to create a true free market. To prevent the A’s from moving out of Oakland restricts their ability to create a revenue stream that will compete with the big boys. They say that they would like to move to San Jose, but I think they would much rather become the third franchise in the NYC market. But the Yankers would blow an artery fighting this one to preserve their oversized and underrepresented market.

Talsla Ron
Guest
Talsla Ron
3 years 8 months ago

Did they eliminate the rule that major-league free agents can’t be traded until June 15?

josh
Guest
josh
3 years 8 months ago

No, the rule has always been that a player must give consent to be traded before June 15th. It has never been against the rules.

Aaron (UK)
Member
Aaron (UK)
3 years 8 months ago

Since you don’t get free-agent compensation for a player traded midseason, doesn’t it follow that decent qualifying-offer types, with one year left on their contract, at teams unlikely to be competitive, should be traded now – unless an extension can be worked out.

David Wright / Josh Johnson seem to be the biggest names who might fit into this category this year, and Felix Hernandez could be in this position next year.

joser
Guest
joser
3 years 8 months ago

In theory, yes; in practice, Felix will get an extension.

Trent
Guest
Trent
3 years 8 months ago

Can teams trade there international free agent pool to other teams? Like could the Royals trade there pool to the Astros for like 15 million and then use the 15 million to get free agents and then the Astros would be able to get more international prospects?

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