The Padres have a strict budget to adhere to thanks to possibly the worst television deal in baseball and an ownership transfer that may last through 2013. Because of that, Jed Hoyer’s team has to approach free agency with creativity if they hope to compete against teams with financial flexibility for the same players. Factor in how their ballpark limits offensive production and Hoyer has to do a great job of selling his team for desirable players to buy in. As it turns out, Hoyer is already using a clever solution by promising not to offer arbitration if his newly inked free agents reach Type A status, according to Corey Brock of MLB.com.
Jack Moore wrote about another small market team’s dealings with free agent compensation yesterday. Unlike Alex Anthopolous, Hoyer is not intent on adding draft picks – at least not with this class of free agents. By promising Aaron Harang, Orlando Hudson, and Brad Hawpe that Type A status essentially disappears in their cases, he has given the players a win-win situation to embrace. At the same time, Victor Wang estimates the value of the Type A package return (two draft picks) at $7.8 million. Multiply that by three and Hoyer seems to be gambling with nearly $24 million in projected surplus value.
But Hoyer’s not taking a loss anywhere near that figure. In fact, he might make a profit. Each of the newly-signed player’s contracts run through at least the 2011 season. From there, Hudson’s 2012 is guaranteed and the other two have mutual options. Since only Hudson and Hawpe earned compensatory status this offseason (both were Type Bs) it would take a Herculean effort for any of the three to reach the Type A threshold before the end of the 2012 season.
It will not take an epic season for these players to be worth the draft picks in surplus value. Harang will be paid under $4 million this season. If he pitches to a three-win season, he would be worth more than the $7.8 million in one season alone, but he would not be able to qualify for Type A status. The other players are in similar boats, as Hawpe makes $2 million this season and Hudson $9.5 million over the next two seasons.
The table above shows the guaranteed money each player will take home, how many wins they would need to be worth over the length of their guaranteed contracts in order to exceed $7.8 million in surplus value, and how many wins they’ve averaged over the last three seasons (using a 5-4-3 weight for hitters and 5-3-2 for pitchers). If the players live up to those WAR requirements, they would earn the equivalent of the Type A return, but would not qualify for Type A themselves, meaning Type B status could still bring back an additional $2.6 million in the form of a supplemental pick. If the players somehow do earn Type A status, then it is safe to assume they’ve more than exceeded the minimum surplus value of the two draft picks.
Two other things to keep in mind with this strategy and the Padres’ cash issues. Having too many high picks and not enough of a budget to select the best players at each pick creates a law of marginal returns situation for teams like San Diego. By waiving the Type A compensation, the Padres could then be artificially lowering the player’s desired contract demands, especially if competitors are unwilling and the player has concerns about being the next Juan Cruz.
The technique appears on so many various levels that it becomes difficult to discuss without throwing superlatives out left and right. Hoyer and the San Diego front office may lack in financial resources, but they appear to have wit for days.