A Recipe for Competitive Imbalance

A new collective bargaining agreement is currently in the works. There are many issues that need to be addressed, from drug testing to the international draft, but today I am going to focus on a somewhat obscure mechanism in free agent compensation.

To call the free agent compensation system and Elias rankings anything but sucky would be sophomoric to say the least. I am sure that many of you, as forward thinking saber-nerds, have looked with disgust at how the Elias Sports Bureau ranks ball players. Elias uses stats like AVG, RBI, Total Chances (defense), Fielding-Percentage, Assists, Wins, W-L Percentage, ERA and Saves. They also use OBP and K/BB, so at least they use some worthwhile metrics, but unfortunately the list ends there. It is also important to note who is responsible for this compensation system. I called the Elias Sports Bureau, and they made it clear that they had nothing to do with the equation used to rank players, they were simply given an equation by Major League Baseball and asked to calculate the final rankings. Don’t blame the Bureau; blame MLB.

Compensation pick are nothing to pshaw about as they are very valuable to teams. According to Victor Wang at the Hard Ball Times, compensation for a Type A player is worth between $3-5 million in surplus value. What interested me most about Wang’s article is the situation he chose to ignore; what happens when teams sign more than one Type A free agent?

In the case that a team signs multiple Type A free-agents, its draft choices are distributed to the losing teams in descending order of the respective free agents’ rankings. For example, in 2009 (2008-2009 off season) the New York Yankees signed three Type A free-agents; they signed Mark Teixeira from the Anaheim Angels, CC Sabathia from the Milwaukee Brewers, and AJ Burnett from the Toronto Blue Jays. Teixeira had an Elias ranking of 98.889, Sabathia had a ranking of 98.11, and Burnett had a ranking of 89.729, meaning that Anaheim received New York’s first round pick, Milwaukee received their second round pick, and Toronto received New York’s third round pick. Again, referring back to Wang’s analysis, the Yankees first round pick was worth about $5 million, their second round pick was worth just under 1 million, and their third round pick, (I am extrapolating here) far less. It can be informative to speak in averages, but it is also nice to look at the actual players the Angels, Brewers, and Blue Jays received. The Angels drafted some kid by the name of Michael Trout with the Yankees’ first round pick. The Brewers drafted Maxwell Walla with the Yankees’ second round pick, and the Blue Jays drafted Jacob Marisnick with their third. Trout is an absolute stud, the other two remain as big question marks. All this is to say that first round picks (on average) are worth way more than second round picks, and second round picks are worth way more than third round picks (aren’t you glad I told you this).

When the Yankees signed their first Type A free agent, it cost them a draft pick worth about $5 million in surplus value. When they signed their second Type A free agent it cost them a draft pick worth about $1 million, and by the time they signed their third Type A free agent, the value of the forfeited draft pick became largely trivial.

What we see here is an “economy of scale.” The more Type A players a team signs, the lower the marginal cost of forfeiting a pick. This, in theory should encourage wealthier teams to sign more Type A free agents. On the other hand, because the cost of compensation diminishes as a teams signs more and more Type A free agents, the value of compensation to the teams that lost said Type A free agents diminishes, by definition. What Major League Baseball has unintentionally created is a recipe for competitive imbalance, which ironically is exactly what free agent compensation was designed to mitigate.

Signing three Type A free agents is a rare occurrence, but never the less, it is clear that the compensation mechanism needs reform. One possible solution would be to treat Type A free agents like Type B free agents. This way teams that lost a Type A free agent would still get compensation picks in the sandwich round, but the signing team would not forfeit any picks (there would be no “economy of scale for the signing team”). Another option would be to get rid of compensation all together.

Compensation also has an adverse affect on the free agents themselves. Because the team that signs a Type A free agent has to forfeit a pick, the team typically will adjust their offered salary to take that added cost into account. Many players feel that their Type A status is burdensome financially and have added clauses to their contracts where teams are not allowed to offer them arbitration, thus circumventing compensation all together (a team cannot receive compensation picks if it does not offer the departing free agent arbitration). Those players include Orlando Hudson, Brad Penny, Justin Duchscherer, Ben Sheets, Javier Vazquez, Kevin Correia, Carl Pavano and most notably, Carlos Beltran.

Major League Baseball and the Players Association have a lot to discuss in the coming weeks, I just hope they can agree that it would be beneficial to both parties to reform the current compensation system.



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Guest
4 years 8 months ago

Another perversion is that the rankings do not follow the players’ value. Jose Reyes is worth less, comp-wise, than Michael Cuddyer. So if a team signs both, the Mets get the lesser pick.

filihok
Guest
4 years 8 months ago

“they were simply given an equation by Major League Baseball ”

MLB couldn’t find someone to put numbers in a spread sheet?

Maybe, given the equation they came up with, it was best that they went out of house

Eminor3rd
Member
Eminor3rd
4 years 8 months ago

I’m pretty sure Elias’ leverage is that they have all the statistics.

Yirmiyahu
Member
Yirmiyahu
4 years 8 months ago

Elias is basically just the record-keeper. MLB doesn’t maintain its own stats database; they contract everything out to Elias.

Eric R
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Eric R
4 years 8 months ago

“I called the Elias Sports Bureau, and they made it clear that they had nothing to do with the equation used to rank players, they were simply given an equation by Major League Baseball and asked to calculate the final rankings. Don’t blame the Bureau; blame MLB.”

I don’t understand how the ‘head’ of a multi-billion dollar industry can come up with a formula for ranking players for compensation, but doesn’t have a single person capable of some pretty basic Excel work to run the numbers…???

Yirmiyahu
Member
Yirmiyahu
4 years 8 months ago

Elias is the official stat-keeper of MLB. I imagine that MLB has an exclusive contract with them that requires them to use Elias whenever they need anything done with stats.

Steve
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Steve
4 years 8 months ago

There are going to be some very unhappy type A relievers this offseason. The player union will probably lobby to scrap the whole system.

Everett
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Everett
4 years 8 months ago

The idea of compensation is a good one, in my opinion. The problem is that part of the compensation requires taking picks from other teams, which is then in turn affected by the ranking of the signed players. As mentioned, use the Type B system for all players. Give sandwich 1st picks for type As, 2nds for type Bs (or something along those lines). And come up with a better ranking system. This way teams that lose players still get some compensation, and players aren’t punished for having a status. The downside to this is that teams could game the system another way, essentially swapping a pair of type B shortstops and both receiving a 2nd round pick. Maybe make it a cumulative thing at the end. A team loses 2 Bs and signs one B, thus they get one 2nd round pick. A team loses a type A and signs a type B, they get one 2nd round pick.

Blue Jays Fan
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Blue Jays Fan
4 years 8 months ago

Jacob Marisnick is looking like a pretty good prospect right now. I wouldn’t lump him in with Walla.

SF 55 for life
Member
SF 55 for life
4 years 8 months ago

haha I knew someone would say this. agreed.

SF 55 for life
Member
SF 55 for life
4 years 8 months ago

The rankings are the biggest problem in my opinion. Too many players receiver type A/B status that don’t deserve it, especially relievers. Receiving a first round pick and a comp pick for a reliever is WAY too much compensation.

If the formula used to rank players was changed so only the very top echelon players receieve A/B status I think a lot of the other problems would fall into place.

Eric M. Van
Guest
4 years 8 months ago

There are absurd inequities that haven’t even been mentioned yet. Imagine the Phillies sign Jonathan Papelbon and the Red Sox respond by signing Ryan Madson to a significantly smaller contract. They’d swap first round picks — but the Phillies would be moving up in the draft and the Sox down, even though this was essentially a trade that favored the Phillies. Even worse, each time would also get a sandwich pick, even though neither had lost anywhere near that much value. (A version of this scenario has actually played out at least once, in 1999, when the Rangers and Orioles swapped Rafael Palmeiro and Will Clark.)

Fixes:

1) Value players by the average of WAR(P) from here, b-ref, and BP, last three seasons weighted 3-2-1, times the length of the contract.

2) Teams don’t have to offer arbitration to get compensation. If Papelbon had had a terrible off year and was likely to sign just a 1 yr, $8M contract, the Sox would decline to offer arb … but why shouldn’t they still be compensated for losing a 1 yr / $8M type player? It makes no sense at all.

3) Teams are charged or credited with the *net* WAR they sign or lose in a given off-season, including all players. There is no arbitrary division into categories. (And they are charged for options as they are picked up, at the WAR / year rate originally determined).

4) Invite the saber community to come up with papers for the best possible system for translating WAR into draft slots (extending Wang’s work). Have the results reviewed by a panel of respected analysts, who will integrate / judge among the findings and ideas, and settle on a system. (The system need not be linear, i.e, it may recognize that signing a 6 WAR / year player is significantly more valuable than signing three 2 WAR / year ones. That sort of thing is what we want the best minds in the business to be looking at as closely as possible.)

5) Using that system, teams losing value will be compensated by appropriate extra sandwich picks, between the 1st and 2nd round and/or the 2nd and 3rd round. Unused fractional value is rolled over for use in a future draft. (A team that loses the equivalent of 1.5 2nd/3rd round sandwich picks rolls over the 0.5, and can gain such a sandwich pick the next year if they merely lose a 0.5 2nd/3rd round sandwich pick value player.) Sandwich round draft order remains as it is.

6) I don’t think any team has ever balked at signing a legitimate type A. It’s the setup relievers, etc., who are rated A by the absurd current system that act as a deterrent to the signing team. So teams signing a net excess of WAR will forfeit picks. Depending on value lost, they might forfeit a first, second, or third … and again, any unrealized value will be rolled over to the next year. The first n picks in the first round are protected and are never forfeited, the n to be determined as part of the process deciding on the system. (It’s the point where the curve plotting draft slot versus expected career value ceases to be linear — it’s probably somewhere between 3 and 10.)

In other words, every club would have a FA WAR account, and it is used each year to forfeit 1st through 3rd round picks or receive 1/2 or 2/3 sandwich picks. Your account is credited or debited with the WAR value of the actual pick forfeited or received, and unused value is rolled over to the next year.

Eric M. Van
Guest
4 years 8 months ago

7) A “credit limit” would need to be determined, that would effectively limit the number of net star players a team could gain over a given time frame. IOW, you might want to allow teams to be expecting to forfeit their next three years of late-first round draft picks, but not four.

Eric M. Van
Guest
4 years 8 months ago

Oh, one more tweak:

7) A “credit limit” would need to be determined, that would effectively limit the number of net star players a team could gain over a given time frame. IOW, you might want to allow teams to be expecting to forfeit their next three years of late-first round draft picks, but not four.

Ableem
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Ableem
4 years 8 months ago

Is this the Eric Van who likes to say “if you take out X months of the season, Jason Varitek actually had a great year!”

twac00
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twac00
4 years 8 months ago

I think they should do away with the whole offering arbitration thing, get rid of type B free agents, and turn type A compensation into the current type B compensation. It’s not fair that a team won’t offer a player arbitration because their worried he’ll except and cost them more money then he cost the previous season.

Paul Thomas
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Paul Thomas
4 years 8 months ago

Free agent compensation was not designed as a competitive balancer. It was designed as a salary-suppressor. I’d suggest reading “Lords of the Realm”, or rereading it if the lessons contained therein did not adequately sink in the first time.

At that, it is modestly successful, particularly for low-end Type A free agents who may be forced into either very low-paying deals or accepting salary arbitration. However, it’s also rather easily worked around, and has been routinely sneered at in recent years with teams and players agreeing to “no type A arbitration offer” clauses; at this point, it should simply be killed off in return for some minor concession from the players.

If you want competitive balance, how about– this is, I am aware, a radical and completely unheard-of concept in Western Civilization– giving all the teams roughly the same amount of money to spend?

Scott
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Scott
4 years 8 months ago

I think teams should lose multiple first round picks for signing a type A FA myself. For the Yankees that would mean they wouldn’t have had a first round pick in 2010 or 2011. Or swap comps as well. Since the Yankees got a comp in 2009 they should have handed that to the Brewers than their 2010 to the Jays.

kick me in the GO NATS
Guest
kick me in the GO NATS
4 years 8 months ago

Compensation picks penalize every team not involved in the trade because they have to wait longer to sign their second round pick. SO, I think the signing team should lose a pick by being skipped in the draft. The team that lost the player should get a compensation pick.

Old Timer
Guest
Old Timer
4 years 8 months ago

I propose we have 2 leagues. An upper league in which each team has an equal payroll with player contracts in staggered 6 year intervals, and a lower league in which payroll will be determined by fanbase size with player contracts lasting 2 years each.

We’ll call it the Kansas City – New York City compermise.

No one has EVER thought up this kind of idea before!

baycomuter
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baycomuter
4 years 8 months ago

And for good reason. It lowers revenue by a lot in the lower league due to the weaker quality of players for both the home and away teams. For an example of this, look at how the PCL operated during the 1950s before jet travel when it was semi-autonomous, it couldn’t draw anywhere near MLB levels despite MLB-sized markets in LA and SF.

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