What Is a Compensation Pick Worth?

Last week, we spent some time talking about players that may or may not receive a qualifying offer when they hit free agency this winter. The qualifying offer is an important decision, because it grants the original organization a compensation pick at the end of the first round if that player changes teams through free agency. However, it requires teams to be willing to make an offer of at least $14 million in salary for 2014, so it can’t just be handed out to every free agent in hopes of stocking up on draft picks.

On the other hand, draft picks do have value, and especially with the rules that now govern draft spending limits, the extra pool allocation that comes along with that pick gives significant flexibility that can be used to pursue various strategies in the draft. Last year, the six compensation picks that were handed out came with pool allocations between $1.7 and $1.8 million, and the Rays were able to use the pick they got for losing B.J. Upton to draft Ryne Stanek, who had been considered a potential top five pick before a disappointing junior season.

Certainly, these picks have some value, and there is incentive to make a qualifying offer in order to land one of these selections and the draft money that goes along with it. However, if a team is taking a calculated risk in making the offer to a guy on the bubble, they have to first put a value on the pick so that they can know whether or not the reward is worth it at various levels of expectation that he might accept the qualifying offer. So let’s try and help them answer the question of what a compensation pick might actually be worth.

As Jeff Sullivan noted a few months back, the rules restricting team spending on amateur signings inflate the value of a dollar to something more than its face value. We saw this in several trades over the summer where teams swapped international signing slots, and perhaps the Carlos Marmol-Matt Guerrier trade is the most instructive in helping us see how teams valued the dollars that came with those slots.

In that deal, the Cubs and Dodgers swapped bad overpaid relievers, with the Cubs also sending LA the rights to spend an additional $210,000 on international free agents. In order to acquire the rights to that spending allowance, the Dodgers essentially took on an extra $500,000 in Major League salary this season, which was the difference in cost between the two once the cash payments were taken into account.

Basically, the Dodgers took on $2.38 in big league salary for every dollar they added to their international spending allocation. The Dodgers used their financial flexibility to essentially buy extra money in a market where money is restricted, but because of those limits, they had to pay a premium in order to buy those dollars.

In some ways, the draft and international markets can be looked at as having their own currency, and there’s a non-even exchange rate between dollars that can go to big league payroll and dollars that can be allocated to signing amateurs. Just like the Dollar is only currently worth .75 Euros, a dollar from a team’s big league budget is only worth some fraction of a dollar in amateur signing money. If we were to accept the valuation from the Dodgers-Cubs trade — and assume that neither team actually put any value on the relievers getting exchanged, which may or may not be true — then this summer, one big league dollar equaled approximately .42 international dollars.

However, that’s an sample of one, and one of the parties involved in the transaction was the franchise that has been more aggressive in throwing cash around than any other over the last year and a half. It wouldn’t be fair to take the Dodgers valuation of money and apply it to every other team in the sport, since most teams don’t have the Dodgers resources.

However, the trade is still illustrative of the effects of restricting spending in these markets. If the Dodgers could have bought international spending money for a lower price from another team, they would have. The fact that there weren’t any sellers undercutting the Cubs price speaks to some level of market valuation for those dollars from the other 28 teams. While we might not have seen other teams buy international spending money in the same way, the decision to not sell an item you already have for a particular price can be assumed to be a similar valuation decision.

So, just for ease of math, let’s say that the league as a whole valued international dollars at roughly double the rate of big league dollars. We’re rounding down a bit, but we’re also regressing for sample reasons and because the Dodgers were our buyer. Should that 2X valuation carry over to draft dollars as well?

It’s not an easy thing to figure out, honestly. There are a lot of differences between the two markets.

For one, the overall spending pools for international free agents and drafted players are not the same size. Last year, MLB teams were given $78 million in international signing allocations, but they were given $202 million in draft spending allocations, so draft dollars aren’t as scarce as international dollars. On the other hand, teams are allowed to trade international pool allocations freely during the summer, and can increase their own individual pool by up 50% through transactions with other teams. So, while the dollars themselves are more scarce, MLB has setup an official exchange in which they can be bought and sold, and acquiring international spending money isn’t that difficult.

Draft selections cannot be traded, however, and there’s really no method of inflating your own draft pool other than by receiving a compensation pick for losing a free agent. So, while the number of draft dollars is larger, the ability to acquire more of them is far more limited. If we stick with the currency exchange analogy, imagine what you would have to pay to convert your dollars into Euros if no one was allowed to sell you Euros. Because of the scarcity that is attached to adding marginal dollars to a team’s draft pool, the valuation on receiving increased draft funds should theoretically be higher than it is with international allocations.

Beyond just the market to acquire the spending rights, teams also have to deal with different shapes in the talent pool. In the draft, there is no question that the value of players is a very steep curve, with the best players available returning exponentially more than the players in the middle to late rounds. In the international market, it is not clear at all that teams are able to positively identify the best players with the same success rate, and since there is no structured selection process, a team could acquire $200,000 in international money and use it to sign the prospect that they felt was the best talent on the market.

Compensation picks come with nearly $2 million in extra draft allocations, but a team can’t receive those funds and then use them to outbid the team with the #1 pick. You can only use those funds to sign players that you can actually select, so a team that picks towards the end of the first round might not get as much value from the dollars associated with a compensation pick as a team with a high selection that can use it to sign a premium player who might have slid a few spots.

For instance, having a few extra million in spending room would have been very helpful to the Pirates in 2012, when Mark Appel fell to them at #8, but they didn’t have a large enough allocation to make him the kind of offer he felt he was worth. At the top of the draft, increase your pool allocation is likely to be very valuable, while a team who is going to be picking in the 20s might not see the same kind of return on getting an extra $1.8 million to spend, since by that point, there won’t be the same kind of talent available as there is at the top of the draft.

In reality, teams are probably going to place very different values on those compensation picks. There probably is no single number that will apply to all 30 organizations. However, because of the inability to acquire draft allocation money in any other way, I have to think that some teams are going to put a premium on obtaining those selections, perhaps even pushing up to a 3X or 4X valuation, which would translate to $5 to $8 million in big league dollars.

But, even once you have that valuation, there’s a bit of a problem in how you approach the qualifying offer decision with that figure in mind. You can’t just take a $6 million player and make him the $14 million qualifying offer because you value the pick at $8 million; the player would take the QO every single time, and your valuation of the pick would be useless because there would be a 0% chance of receiving it. Forcing a QO onto a non-worthy player in hopes of acquiring a draft pick is a great way to get stuck with an overpaid player.

But, with players on the margin, the valuation of the pick could make the difference between an offer or not. Last week, a number of Red Sox fans disagreed with the notion that making Drew the offer is too risky, pointing out that he’ll be the best SS available in free agency and got $10 million coming off a poor season last year, so offering him $14 million coming off a good season is totally reasonable.

Of course, he got $10 million when compensation was not attached, and the markets for compensation players and non-compensation players are quite different, so that is not an apples to apples comparison. But, say the Red Sox internally valued Drew as an $11 million player, and they valued the potential draft pick at $5 million, they would only need to believe that there was about a 50/50 shot at getting the pick to make him the offer.

The actual odds of another team giving up their own pick to sign Drew is out of the scope of this post, which has already wandered slightly from the original point. But, these are the kinds of questions teams are going to have to ask themselves this winter. What kind of valuation do we put on acquiring draft dollars that we can’t acquire any other way? What do we think the chances are of actually getting the pick?

These answers aren’t so straight forward, but they’re required calculations for a team to really take advantage of the qualifying offer system. If a team wants to maximize the assets they’re stockpiling for both the short term and long term, they have to know what kind of value they put on a compensation pick.




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Dave is a co-founder of USSMariner.com and contributes to the Wall Street Journal.


32 Responses to “What Is a Compensation Pick Worth?”

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  1. Terence says:

    Can’t teams trade the competitive balance picks?/and didn’t a few teams do that? That should greatly help us understand the value of compensatory picks since they are in the same neighborhood of draft order.

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    • Pirates Hurdles says:

      The Bucs traded their pick in 2013 (35th overall I believe) with Gorkys Hernandez for 3 years and 2 months of Gaby Sanchez. Feel free to place a dollar value on that ;-)

      FYI, he has been worth 1.4 WAR so far with two years of control remaining.

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  2. murphym45 says:

    We need to keep in mind that this “price tag” is for the right to spend money, and does not include the money that then has to be spent. So, if a team is willing to spend $2 for $1 of international spending allocation, then the exchange rate is really $1 free agent dollar to $3 international free agent dollar, since they have to pay the actual money after they acquire the right to spend it.

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    • Baltar says:

      I was writing a comment (below) along the same lines before there were any other comments. You said it more simply and better.

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    • piratesbreak500 says:

      So I think the question there would be what is a dollar spent in the draft worth (granted, this might vary by draft position). The potential net value would then be (multiplier minus 1) times the extra dollars available to spend.

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  3. stan says:

    Though I think its inarguable that the value of a draft pool dollar is higher than an actual dollar, I think its unfair to use the Dodgers as the barometer of what a draft pool dollar is actually worth. This is a franchise that has blown the roof off all reasonable spending limits in the last 15 months as if they are printing (real) money.

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  4. Baltar says:

    There must be something in your analysis that I am not understanding.
    The Dodgers are essentially paying $.5M for an option to sign an international player for $.2M. That does not mean they are paying $.5M in one market for $.2M in the other market. It means I am paying a price of $.5M for an option to buy something for $.2M. That means I think that thing is worth $.7M.
    If that’s the way the Dodgers see it (they may think they did better on the trade, in which case this entire analysis is irrelevant), then they made a poor bargain.

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    • Iron says:

      The Dodgers are paying $.5M for the right to spend $.2M.

      This means that they value $.2M intl signing dollars to be worth $.5M actual dollars. It also means that they view the international player they will eventually sign using the extra $.2M ISD to be worth an extra $.7M actual dollars, but this is not relevant to the excahnge rate between actual dollars and ISD dollars.

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    • ChrisS says:

      It’s a right to buy something additional than they otherwise would be able to.

      If Cokes were a $1 and restricted to one per person per day, me trading $2 with someone for their ticket to buy an additional Coke doesn’t mean that I think that the 2nd coke is worth $3. It means that I think that having two Cokes is worth spending $4. It means that in a world with competitive advantage and limited Cokes, I now have two to everyone else’s one.

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  5. Joebrady says:

    It’s a good article, but I think there are a couple of missing points.

    1-The first is that I am not sure how you arrived at the 50/50 proposition. If he is worth $11M, then the marginal cost is $3M v a benefit of $5M. Even at 40/60, they would be cash positive.

    2-You would have to cover the marginal cost/benefit of the player. For Ellsbury, for example, we have Bradley. We have no guarantees, but I would feel comfortable with my chances there. But for Salty, since we have no immediate replacement, I can easily afford to adjust the cost factor accordingly. If Ells and Salty were worth exactly $11M, I would adjust the ‘real’ cost to the RS as $10M for Ells and $12M for Salty.

    3-A while back, FG had an article valuing how much each range of draft picks was worth. It has probably changed since $$$ are now slotted, so the NYY can’t sign a 17th rounder for $10M, but I would think that study would be a good place to start. If a #31 is now worth $3M net, that would automatic be your benefit side.

    That would also help in the issue of deciding if he’ll accept a QO. StL will calculate how much it will cost to lose maybe their #25 pick. That will be a completely different calculation of what TO would lose by forfeiting their #11 pick, and completely different than what it would cost the Mets, since their pick is protected.

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    • vivalajeter says:

      Your last point doesn’t really impact the question at hand – what is a compensation pick worth? – but it does impact whether or not to give an offer. If the Mets have a protected pick, I can see them opening up their wallets and signing both Drew and Choo. They’d lose their 2nd/3rd picks, but they’d still have a good 1st rounder and they need the help. If I’m the Red Sox, I certainly take the gamble on Drew with the assumption that the Mets will make a play.

      If they win a few more games and have the 11th or 12th draft picks, I wouldn’t be surprised if the Mets don’t sign either player.

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      • Paul says:

        Your point about how top 10 pick is protected is very valid. But on the other hand, the point remains, and it was not addressed by Dave, that making a qualifying offer to a free agent like Drew comes with considerably risk if he accepts. This risk factor makes qualifying offers to players like Drew less likely, which means that a similar player who might have also received a qualifying offer from some other team, is out there available but a team does not have to lose any pick to sign them.

        It happens that Drew is not a perfect example of this, since the SS free agent market is essentially bare this year and pretty much always is. But in the case of a team like Cincinnati with Choo, the risk is going to come into play much more so than the benefit you could receive from a pick. In other words, it will always come down to if you want that player to play for you next year for $14m. The Red Sox might actually not be so bad off having Drew back on the QO and bringing Boegarts along slowly at 3B, using Middlebrooks for depth.

        But the downside risk to a player accepting the offer is a significant factor that affects the value of these picks, and Dave does not address it at all.

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        • Joebrady says:

          +1

          Some guys are automatic to decline or accept, say like Ellsbury and Hughes. So it is only the guys in the grey that you need to worry about. So with Drew and Salty, it makes no difference to me if they accept or decline. Basically, I can’t figure out if we are better off with both for $28M for one year, or trying to figure out how to replace Salty, and spend the extra money.

          OTOH, the NYY really don’t want Granderson to accept. They have a LF and CF, and will have trouble hitting their proposed $189M if he accepts.

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    • Matt says:

      ‘1-The first is that I am not sure how you arrived at the 50/50 proposition. If he is worth $11M, then the marginal cost is $3M v a benefit of $5M. Even at 40/60, they would be cash positive.’

      You are both correct – he was simply making a point that at 50/50 it would be worth the risk, the same way that you point out that at 40/60 it would be a cash positive choice. based on the numbers 37.5/62.5 would be the break even point.

      Of course, there are far more factors in play (e.g. trading Drew, signing an extension, etc.) and these numbers aren’t necessarily correct for the whole picture.

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  6. IamConfused says:

    I know this article isn’t about Drew, but you disproved your intial thought from the other article (if I’m reading correctly)…

    The top ten picks are protected, yes? If the Astros were to sign a player with a compensation pick, they would lose their second round pick (I think). So one of these teams doesn’t lose nearly as much as, say, a team with an 11-20th overall pick.

    From reading what you write here:

    “but they didn’t have a large enough allocation to make him the kind of offer he felt he was worth. At the top of the draft, increase your pool allocation is likely to be very valuable, while a team who is going to be picking in the 20s might not see the same kind of return on getting an extra $1.8 million to spend, since by that point, there won’t be the same kind of talent available as there is at the top of the draft.”

    This looks like losing a 21st-30th overall pick isn’t that big of a deal (including the loss of cap space). Wouldn’t these teams be the most likely candidates to sign good free agents? The pick loss and draft cap room losses don’t mean much, while getting a the top available player at a position does.

    With this in mind, why would the Sox not give Drew a QO? Especially since they have a lot of MLB payroll flexibility.

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    • chuckb says:

      From Dave’s article on the prospect of Drew not being offered the QO:

      “However, he’s never been the healthiest guy in the world, and his replacement level 2012 performance still has to be a factor in deciding how much he gets paid going forward. He’s earned a raise over what he got as a free agent last winter, but is there really a mutli-year deal out there for Drew that is more attractive than $14 million for 2014? I doubt it, especially once you factor in the draft pick compensation…

      The Sox aren’t going to want to pay $14 million to a guy who may very well end up as a backup to Bogaerts and Will Middlebrooks, so Drew should be allowed to hit the market without draft pick compensation attached.”

      The fact that a draft pick around 20 isn’t as valuable as a draft pick in the top 5 or 10 doesn’t change anything Dave wrote the other day.

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      • Spit Ball says:

        Drew is going to get a Qualifying Offer. And he’s not going to take it. Check the shortstops available. He’s good for 3/30 no problem.

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        • db says:

          yeah, but if you are Drew, do you take 3/30 or 1/14 and a chance for more after next season. If he thinks he will do better than 2/16, he may prefer the latter. It certainly is not a foregone conclusion either way.

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        • Joebrady says:

          If Drew takes the $14M, he is likely tradable. Lots of teams will face the same issue.

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      • Joebrady says:

        To be honest, the part about the 2012 replacement value is pretty misleading. It would be more accurate to say he was recovering from a devastating injury, started slow, and had a .722 over his last 52 games.

        You could take it a step further and say that, if Oakland was willing to pick up a pro rata share of an $8M salary, that an injured Drew was still worth $8M.

        And the RS can pretty easily use Drew at SS, Bogaerts at 3B, and WMB at 1st. It would be different if we had Naps signed for multiple years, but we’ll probably a hole there to fill anyway.

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  7. Bip says:

    The Dodgers aren’t playing Marmol as if they don’t value him. Sigh…

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  8. pft says:

    I don’t see anything here that helps answer the question on how much a pick is worth.

    The main value of a pick is the surplus value of the player picked (or trade value), if he even makes the majors, minus bonus and development costs.

    That is variable year to year and depends on the pick. Thats really what we want, that’s the starting point .

    Whatever it is, teams have to balance short term and long term needs. If a FA player can put them in the play offs this year, the surplus revenue generated over and above the players salary may dwarf that of the lost picks value. For lesser teams, if a player simply makes them an 85 W team instead of a 80 W team, it makes no sense to lose a 1st round pick.

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    • jessef says:

      i disagree. that’s exactly the type of team that should be interested in adding a player like that.

      if a player can improve your team from a true talent 80 wins to a true talent 85 wins that would put them around a tie for 6th in the AL or NL (assuming Baseball Prospectus 3rd order Wins as an estimate of true talent) and make you a contender for a wildcard slot with a little help from chance. not only does this mean greater attendance, it also means that you have a better reason to try and improve your team a little bit more later on. The whole

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  9. raysfan says:

    There are too many variables in drafting to even write an article. Appel was drafted intentionally to not sign and get the compensation pick the following year, while freeing up money for their later picks.

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  10. Spit Ball says:

    This is ridiculously unquantifiable through statistics. Until we have a better idea of quality of baby formula, Meth use per day and an extensive history of DNA/Quality of success………….forget it.

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  11. d_i says:

    It was the old system, but I will never forgive Terry Ryan for resigning “proven closer” Matt Capps before the 2012 season in one of his first moves back on the job and forfeiting the comp B pick (could have been Eddie Butler) they could have had if they had signed any other scrap heap reliever.

    That was the definition of throwing good money after bad for which there is/was simply no defense.

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