With Nelson Cruz signing a one-year, $8 million contract with the Baltimore Orioles, qualifying offers are back in the spotlight. The executive director of the player’s association, Tony Clark, has issued a statement saying he’s “concerned” about how qualifying offers are affecting the free agent market. Unions deal in politics and in this case concerned can probably be read as “we’re going to make this a sticking point in the next round of negotiations.” The current collective bargaining agreement (CBA) is set to expire after the 2016 season, so the MLBPA will have a couple more years of data in their hands before they pursue any changes.
The current CBA was reached following the 2012 season. It included a new rule called a ‘qualifying offer’ that replaced baseball’s old method for compensating a team for losing a player to free agency. Under this rule, teams have the option to offer impending free agents a contract equal to the average of the top 125 contracts in baseball. If the player declines the offer and signs with another club, then the team losing the player gains a supplemental first round pick while the signing team loses their first available pick (the first 10 picks are protected).
Very few people would deny that baseball’s qualifying offer has led to some strange circumstances. It’s been in effect less than two years and already we have had eight players noticeably affected. The complete list includes Kyle Lohse, Nick Swisher, Michael Bourn, Ubaldo Jimenez, Ervin Santana, Stephen Drew, Kendrys Morales, and Cruz. Individually, we can make cases as to why each player may have been left with fewer options than originally anticipated, but the group as a whole points overwhelming to the existence of a qualifying offer effect.
The above list is interesting because, with the possible exception of Swisher and Drew, it’s a Who’s Who list of players that we (internet analysts as a whole) expected to be overpaid relative to their talents. Mr. Cameron spent a deal of time this offseason predicting that Cruz would sign a terrible contract. We all have concerns about Jimenez and Santana after each player posted one strong season in their walk year. Last year, Bourn was supposed to earn more than B.J. Upton right up until he didn’t, and everybody was grumbling about Lohse’s underwhelming stuff.
Not all players suffer from the qualifying offer effect. There appear to be two groups who do just fine. The less interesting group is those players who quickly re-sign with their original club. Mike Napoli, David Ortiz, Adam LaRoche, and Hiroki Kuroda all fall into this bucket. The other group is comprised of free agent powerhouses – Robinson Cano, Josh Hamilton, Jacoby Ellsbury, Shin-Soo Choo and Brian McCann. To a lesser extent, Carlos Beltran, Curtis Granderson and Upton can also be included.
The players who struggle the most are those with some kind of wart. In a truly free market, players like Cruz probably would find a fairly pricey contract. There are plenty of teams that could use an offense first outfielder. My hypothesis is that when the qualifying offer penalty is attached to a player, teams become more focused on the negative than the positive. Whereas the narrative could have been, “this player will add 25 home runs and 80 RBI to the middle of my lineup,” teams might pay more attention to the PED suspension, past injuries and lousy defense when signing Cruz comes with a penalty.
The endowment effect and loss aversion probably comes into play, and they are a big reason why I hypothesize that teams focus on the negatives with players who received qualifying offers. The endowment effect is a behavioral phenomenon where people overvalue things they already own. Loss aversion is what it sounds like, people go out of their way to avoid losing things, sometimes to their detriment. Teams might be too timid about giving up a draft pick in some cases because it’s the proverbial bird in hand.
So, proposals. How can we go about fixing this? Honestly, there are a thousand and one ways that this system can be adjusted or replaced. Each has its pros and cons. It really comes down to the preferences of the owners and players as well as the trade offs that each party is willing to make. I’ll offer one idea as food for thought.
I like the theory behind the qualifying offer system. It’s a lot cleaner than the old arbitration system with its Type A, B and C players determined by an arbitrary Elias Sports Bureau formula. Given the penalty involved with the qualifying offers, my only issue is that too many players are getting caught in the net. The top tier can still sign mega-contracts, but there appears to be a definite point where talent level does not exceed most club’s desire to keep their draft picks.
My proposal is to increase the cost of the penalized qualifying offer and introduce a second tier option that carries no penalty. Let’s call them Type A and Type B as a nod to the past (also because I tried calling them Type I/Type II and it sounded too much like diabetes). Rather than an average of the top 125 contracts, the Type A players will be offered the average of the top 75 contracts. Looking back at the 22 players who received offers, perhaps four to six of them would have received a Type A offer. Incidentally, these are the players who signed large contracts without anybody hemming or hawing over the loss of a draft pick. Signing teams would still lose their top pick and draft pool allocation when inking one of these top players. The team who loses the player will still receive a supplemental first round pick.
Type B would fall in at a lower compensation level – perhaps an average of contracts 51-175. I’ll leave it up to others to get the math right. The idea is to offer some compensation for the loss of decent players like Cruz without affecting their market price. As such, a Type B free agent might net the original club a supplemental third round pick, but signing the player won’t penalize his new team.
Whether you like that idea or not, we can expect some kind of change to be instituted with the next CBA. The players affected by this rule are long-standing, dues paying members of the union. As such, their complaints carry a lot of weight. If Tony Clark is speaking up now about the topic, his goal is probably to prepare the owners to budge. Negotiating a CBA is about give and take, the players will have to give something in order to secure a free agent compensation system that punishes players less severely.
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