The Pointlessness of Signing After the Draft

Nelson Cruz got tired of unemployment and signed a one year, $8 million deal over the weekend, taking nearly half of the salary he turned down when the Rangers made him a qualifying offer back in November. However, according to agents Scott Boras and Bean Stringfellow, fellow remaining free agents Ervin Santana, Kendrys Morales, and Stephen Drew aren’t particularly interested in following in Cruz’s footsteps, and are even openly talking about waiting until after the June draft — when they will no longer have compensation picks attached — before signing a new contract. The theory is that, without the encumbrance of draft pick tax, teams would be lining up to sign these players.

There’s a problem with this theory, however; the math simply doesn’t work. Over at MLBTradeRumors, Tim Dierkes did a great job laying out the picks that each team would have to surrender if they signed any of the remaining qualified free agents. He also helpfully included the pool amount allocated to each pick, so we can see that the exposed draft pick “values” range from $2.8M down to $600K.

Now, because the flow of cash into the draft is restricted, draft dollars are worth more than their face value. Any team wanting to acquire draft pool allocation has to pay more than $1 for $1 in order to do so, since draft dollars are a limited resource relative to a team’s access to capital. Last summer, the Dodgers essentially bought $210,000 in international spending money — limited to some extent the same way the draft dollars are — by taking on $500,000 of Carlos Marmol’s salary, putting a 2.4X valuation on those international dollars.

Draft dollars are probably worth more than international spending dollars, since the penalties for blowing your international budget out of the water aren’t as severe as ignoring your draft budget. In conversations with people in MLB front offices, the general consensus has ranged around a 3X valuation for draft pick dollars, so a pick with a slot value of $2 million would be worth $6 million in open market dollars. This hypothesis is supported by transactions like the Bud Norris trade, where the Orioles gave up a pick — currently slotted in at #37 — for a moderate value arm, as well as the difference in contracts signed by the similar-ish free agent starters this winter. Picks certainly have value, especially in the #10 to #20 range, but teams are willing to trade that value for the right price, and that right price seems to be around three times the value of the pool allocation.

Take Nelson Cruz, for instance. When the Orioles 1st round pick — #17 overall, $2.2M slot value — was on the line, they weren’t willing to sign him, even for the 1/$8M he eventually agreed to. With a 3X valuation on that pick — which would make the pick worth $6.6 million — that would have made the true cost of signing him 1/$14.6M, or basically the same valuation as the qualifying offer. Once they signed Ubaldo Jimenez and Cruz’s signing only cost them the 55th pick — which has a slot bonus of $750K, and a 3X valuation would make that pick worth $2.2M — they agreed to terms on a deal that valued Cruz at just over $10M. Essentially, signing Jimenez made Cruz roughly $4 million cheaper for the Orioles, which was enough to push them to make a deal.

So, let’s get back to the threat of waiting until after the draft to sign. At the very top end of the exposed pick range, the value of the potential lost picks, using a 3X multiplier, would be around $8.3 million. That’s the added cost to the Brewers of signing any of the remaining qualified free agents, and is certainly a reason why the team pursued Matt Garza instead. But teams like the Brewers, Padres, and Giants aren’t really rumored to be the teams negotiating with qualified free agents at the moment.

Stephen Drew’s primary suitor seems to be the Mets, whose exposed draft pick is worth just $1.9M after applying the multiplier. The Mariners ($2.3M) have been linked to both Kendrys Morales and Ervin Santana. The Rockies ($4.9M) apparently have some interest in Santana, but not at his current asking price. The Orioles ($1.8M) are still being linked to Santana even after signing Jimenez. The Blue Jays ($3.5M) seem like they’re out on Santana, even though they have been linked to every available starting pitcher this winter, it seems. Of the clubs rumored to be interested, the magnitude of the draft pick tax is just not that high.

And there’s almost no way that the player would come out ahead by waiting until after the draft versus just taking a reduced salary equal to the team’s draft pick tax. By waiting to sign until June 8th, when the draft has completed, the players would be sitting out approximately 40% of the season; the Blue Jays play 64 games between Opening Day and June 8th, for instance. Because players who sign mid-season are only paid a pro-rated amount of the annual salary they agree to, it’s almost certain that 40% of the player’s 2013 salary will be larger than the draft pick tax of any interested teams.

For instance, if Santana is seeking a $50 million deal for four years, just like every other free agent hurler, he’s asking for a $12.5M salary in 2013. By sitting out 40% of the season and signing that exact same deal on June 8th, he’d earn a total of $7.5 million in 2014, meaning that sitting out the first two months of the season would cost him $5 million in salary. He’d be better off just giving that $5 million discount to the interested teams and pitching the entire season, since that $5 million discount is likely to be larger than any of the interested teams valuations on the pick they would lose to sign him.

Realistically, I just don’t see any real advantage to the player for sitting out two months of the season. At the prices they believe they’re worth, two month’s salary is probably more costly than the draft pick tax. It’s one thing to wait until after Opening Day to avoid receiving a qualifying offer next season — if Ken Rosenthal’s report is correct and players can avoid a 2015 QO by signing after April 1st — but sitting out until June in hopes that big offers will come rolling in once the pick expires just seems to overstate the value the teams are actually putting on the picks that are at-risk.