First Round Compensation (Part Three)

In part two we looked at the data and found that the system fails miserably if the goal is to compensate for homegrown players. In this part, let’s talk about what could be done.

At this point, there are three options:
1) Leave it as is.
2) Get rid of compensation completely.
3) Tweak the system.

The first two seem completely unrealistic, which means tweaking the system is the only plausible solution. One of the better ideas I’ve heard about this came from our own Joe Pawlikowski. Joe’s idea was simply to downgrade the compensation for those players who spend little time with their new team. Bring back the Type-C classification if you need a new name.

Instead of first round compensation, give these teams a pick after the second or third rounds, which does not completely punish teams for employing journeymen or rental players, but it places a tier or two in between those who are losing homegrown talent and those who are losing a player who barely played with them. Billy Wagner with the Red Sox comes to mind.

I’m not sure if there’s a silver bullet answer that magically cures the ailments, but the system appears broken enough that just about any kind of reform should represent an upgrade. The draft compensation system is no longer a market inefficiency used by insightful teams. Over the timeline each team but the Pirates raked in at least one first round compensation pick, and the teams that netted the most were the Braves, Red Sox, Angels, Athletics, Diamondbacks, and Rangers. The bottom five saw a jam of teams with three picks, leaving the Rays as the only team with fewer than two. The Royals, Rockies, Phillies, Orioles, Nationals, Marlins, and Astros held three apiece.

With the exception of the Phillies and Rockies, those lower teams usually do not field contenders. The upper teams do. Is the purpose of the draft not to help raise the lower team’s talent levels? And yet, baseball’s compensation rules are directly contradicting the entire purpose of the draft by supplying the better teams with more high-end picks than the teams that need them. Given the inherent variability of draft picks working out, sometimes all it takes is more ammo to hit the lottery.

We’ll examine the top pick fetchers and who gamed the system best later on, but for now let’s leave it on this note: the Yankees held as many first round compensatory picks as the sum of Rays, Orioles, Royals, and Pirates picks.

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21 Responses to “First Round Compensation (Part Three)”

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  1. lexomatic says:

    i think that has the effect of reducing trades, or making them a lot more complicated as no team will give up any players of value for a rental if their compensation is reduced. it will create delays whlie teams try to negotiate extensions before completing the deal. i think it makes it much harder for teams to rebuild and ensures longer periods of mediocrity – teams with low budgets may not be able to afford to offer arbitration to their stars on the chance they will accept, and therefore get nothing form a star player. i don’t think this is unrealistic the way some franchises have operated in the recent past, whether it’s a matter of actual finances or willfull penny pinching.

    i like the system how it is better than with this change.

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  2. Blueyays says:

    R.J., in this entire series of articles, you’ve misunderstood the purpose of Free Agency Compensation. It was never meant as a system to compensate teams for the loss of homegrown stars. Rather, it was, as as Michael Lewis put it in Moneyball, “a tax on Free Agency”. Since clubs that wanted to sign the player as a Free Agent would have to give away draft picks, but the player’s current team would not, the hope was that the players’ current teams would, because they were losing no more than money, be able to field stronger offers, and I think in that respect it has done quite well.

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    • kab21 says:

      If the intent is to be a tax on free agency then it fails since the teams that sign the most FA’s (losing picks) also gain the most picks. And the side of effect of this failure is that contending teams (mid market or lower) that depend on their farm systems have an even more difficult time signing Type A FA’s since they need to value their picks higher than the Yankees/Red Sox.

      I think the whole system is a bunch of complicated nonsense that doesn’t do anything to level the playing field while introducing all kinds of other issues.

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    • hank says:

      Type B is sandwich pick only… how is that a tax on a team signing that FA? Other than rewarding a team by creating a new pick between rounds for losing a player, what is it?

      Same thing with Type A’s – there is a ‘tax’ on the signing team for one pick, but again the sandwich pick is a reward scenario for losing a player – that is not a tax for the signing team (why bother with the sandwich pick if FA compensation was mereely a tax). If this was purely meant as a tax on free agency than all the comp picks would come from the team signing the FA.

      Also it is a bit of a anti-regressive tax as the more free agents you sign the lower the tax is.(as the first round comp pick becomes a 2nd or 3rd rounder if that teams signs multiple FA’s)

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  3. Bryce says:

    This seems like a bad solution to a non-problem. It doesn’t matter who ultimately gets the picks, because their very existence helps the original team. All teams understand the value of draft pick compensation, and factor that into the asking price when making a trade. Reducing the value of free agent compensation would simply reduce the value teams could get in exchange for their departing players. Forcing a team to hold onto its upcoming free agents for draft compensation would hurt their ability to “rebuild” and time a solid team arriving at the MLB level together.

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    • Rust says:

      “This seems like a bad solution to a non-problem.”

      This is exactly how I feel. I read through the entire series of articles hoping that maybe I missed some shocking insight, but basically RJ has completely misidentified the problem, confused himself, and turned in some drivel.

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      • Jon S. says:

        I hope he’s reading the comments at least. The community at large seems as confused as you are by his stance on this.

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    • Jon S. says:

      Thumbs up to this. The system currently rewards a team that develops a star player, whether that means drafting a potential star and grooming him until he succeeds, trading for an up and coming minor leaguer and having him reach stardom on your team, or trading for a major leaguer with potential and watching him breakout on team. If a player becomes a star on your team, you get the right to compensation picks when he becomes a free agent. If you trade the star player, the team trading for him pays for the compensation picks as well as the services of the star player, increasing your prospect haul. Simple economics RJ. There’s really no injustice here. The team a player became a star with gets compensated by this system one way or another (and in general, it seems teams prefer prospects to picks).

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  4. Just Some Guy says:

    At present, teams have two options with an upcoming free agent:
    (1) Trade the player for prospects & save on salary, or
    (2) Eat the salary and get the drafts picks.

    It’s entirely up to the team what they do, and they should pick whichever option allows them to obtain the most talent.

    Your solution is to get rid of (1), and force them into (2). How can less options be an improvement? It literaly only takes options away from the selling team, and provides no benefit. All you are really saying is “you are too dumb to make the correct decision, so we are taking it away from you”. But if they are too dumb to correctly evaluate the value of the prospect they are offered vs the draft picks, then they will probably suck at draft evaluation too.

    You can’t turn dumb, low budget teams into winners just using draft picks – the differential is too large.

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  5. theperfectgame says:

    RJ, I think you’re ignoring a major point. The way the system is currently set up, free agent compensation picks are the only tradeable draft picks in MLB. Making them non-transferable, which is essentially what you’re proposing, would HURT the teams losing their homegrown talent by eliminating their option to trade future picks (along with the player they’re attached to) for current, and often more advanced prospects. You’re looking at who’s getting draft pick compensation in your analysis, but you’re ignoring the non-pick compensation that the original team is getting, as well as the facts that they’re getting it roughly a year ahead of when they’d be getting the picks and that they’re not absorbing any of the risk that the player in question will lose his status or accept arbitration.

    I think the system is working just fine. If you still disagree, please present an example of its failing, from soup to nuts (i.e. what each team ultimately got out of and gave up in transaction, when they got it and gave it up, and what risks were present and transferred in the process).

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  6. JBrew says:

    I’d also like to know who lost the most picks. The reason is that perhaps the Red Sox gained 12 picks, 7 first round & 5 supplemental (just guessing numbers) but also lost 7 first round picks due to their FA signings, thus only gained the 5 supplemental. I don’t know what these numbers may show, but the result may not be as surprising.

    I still feel like you have glossed over the whole system. You’re ignoring the player compensation that the homegrown team received in their trade. Maybe the homegrown team didn’t want to risk offering arbitration (and the player accepting although highly unlikely) and would thus lose the picks anyway. Different teams value their assets differently, some play the lottery with the draft while others prefer the partially developed minor leaguer.

    My thoughts on the only fixes would be changes to the Elias rankings (would may correct some of the issues you have), allow draft pick trading, and either do away or change the slotting system.

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  7. realitypolice says:

    RJ – There are certainly plenty of things that need to be fixed in the FA compensation process, but I think you’re missing the mark here. As previously noted, surrendering picks is supposed to serve as a cost of business for teams that go heavily into free agency. However, because many of those teams are the same ones which have money to spend on deadline trade acquisitions who are about to become free agents as well, they’re not losing picks.

    An easy and equitable first step would be to net out compensation round picks. So, if you lose 2 Type A free agents but sign one, you net one additional compensation round pick. For example, this year the Red Sox had picks #36 and #39 in the supplemental round for “losing” Wagner and Bay as Type A guys. However, they also signed two Type A free agents (Scutaro and Lackey) and a Type B guy (Beltre). In the proposal above, they wouldn’t have had either of those picks.

    If the draft picks are supposed to be a penalty for FA signings, why is a team like the Red Sox, who spent in excess of $100M on free agents, gaining picks in the process?

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  8. Rich says:

    “In part two we looked at the data and found that the system fails miserably if the goal is to compensate for homegrown players. In this part, let’s talk about what could be done.”

    Again, we didn’t find that at all.

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    • Someanalyst says:

      Second that. There is clearly some compensation taking place. The comments are full of remarks noting that the compensation draft picks granted to those that have rented impending FAs are paid for in the trades to acquire those players. R.J. might have some much higher standard in mind when defining “sufficient” compensation. Otherwise, it is very hard indeed to understand where the problem is.

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  9. Mark says:

    R.J. I like that you took a look at the specific teams that netted the most compensation picks to show why you think the system is failing since all those teams have been great. Beyond what everyone is discussing that this really isn’t about helping teams that developed homegrown talent, I don’t have a problem with the current system because it encourages pennant contenders to take on talent. I know that usually means the rich get richer (the Angels add Teixeira for example), but it also gives teams like Milwaukee the opportunity to trade Matt LaPorta because they know eventually they can replenish his loss.

    When you eliminate compensation for teams that won’t have 25% of their work with that team, you are going to eliminate many of these trades from ever happening. It would be a very drastic measure to take.

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  10. realitypolice says:

    Another of the issues around compensation is the requirement of offering arbitration. The market has shifted a lot in the last few years, drastically increasing the odds that a player will accept arbitration. This has the twin unintended consequences of increasing players’ annual salary and reducing the likelihood of a low-revenue team getting compensated for losing a player.

    For example, as of today, Miguel Tejada would be a Type A guy. By rule the lowest he could get through arbitration is $5.4M for next season. Unless something freakish happens in the Padres’ playoff push, it seems unlikely he’d get anything approaching that as a free agent. Since that organization can’t risk – and really shouldn’t be – spending that kind of salary on Tejada in 2011, they’re not able to access the compensation picks they would theoretically get for him.
    Meanwhile, the Red Sox could potentially go out and grab Hawpe for nothing today, and then gamble of offering him arbitration in the offseason. If he accepts, he takes one of a few “overpaid fungible veteran” (AKA Bill Hall) roster spots the Red Sox have, and if he doesn’t, they’ve claimed two more picks for the 2011 draft.

    (Yet another piece that has to be addressed is the Elias formula. It’s pretty patently absurd for Miguel Tejada, Brad Hawpe and Grant Balfour/Matt Guerier/Darren Oliver to be Type A players this offseason.)

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    • theperfectgame says:

      “By rule the lowest he could get through arbitration is $5.4M for next season.”

      Actually, free agent arbitration is different from non-free agent arbitration, in that it has no floor. For Super Twos and guys with at least 3 years of service, but less than 6, the club’s arbitration offer can’t be less than 80% of his prior year’s total compensation OR 70% of his total compensation from 2 years ago. But for free agents, there aren’t any such restrictions.

      Agree that the Elias formula is pretty far from ideal.

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  11. BJsWorld says:

    1. The original team does receive value for the player they are trading. That value is not draft picks but it should be equivalent to draft picks plus additional compensation. Also, the original team saves salary.

    2. We should do everything possible to make trading more OPEN not closed. The proposed system would stifle trades of home grown talent. That’s a loss for the player, the original organization, and for teams pushing to the post-season.

    3. I do agree that you could tweak the system to improve the effectiveness of it. However, all modifications should seek to make roster changes easier not more difficult.

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  12. Jon S. says:

    RJ – Do you think that some of this compensation discrepancy comes from the fact that the good teams are more likely to have a star destined for free agency on the roster at seasons end? Oftentimes these star players join these good, competitive teams via trade from a weaker team, and in such cases, the weaker team is willingly trading away both the star player and the right to compensation picks for proven minor league talent. The weaker team (the one trading the right to draft picks) isn’t getting hosed in this process. If it were, it wouldn’t be making the deal in the first place.

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  13. Ben F says:

    For all the complaints about RJ’s approach, it is hard to argue with this:

    “Is the purpose of the draft not to help raise the lower team’s talent levels? And yet, baseball’s compensation rules are directly contradicting the entire purpose of the draft by supplying the better teams with more high-end picks than the teams that need them.”

    Although, I’m not sure we’ve gotten to the true goals of compensation picks, the root cause of high-payroll teams getting more picks than low-payroll ones, or what changes would (fairly) level the playing field.

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  14. Manfred says:

    Is Hawpe an “A.” I would have thought he’d slipped to B status?

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