The Cubs, the Red Sox and a Blank Check

The Cubs and Red Sox are doing interesting things for their ambitions. Boston overhauled their young and unpredictable club with two of the top free agents on the board while the Cubs’ rotation makeover coincides with a slew of young offensive talent already in place. Neither team is yet finished as the outcomes of Scherzer, Shields and whatever we’re calling San Diego still loom toward the New Year. Regardless, their intent for 2015 and beyond is the same: win.

But these two teams are interesting for another reason. It’s not often that clubs expected to contend in one year also happen to have top 10-selections of that year’s amateur draft, but that’s exactly what will happen this coming June. The former club of Epstein and Hoyer will select 7th overall. Their current club will select 9th and if all goes according to plan, each club’s 2016 selections figure to fall well out of protection.

But rising from this is a fascinating opportunity. It’s a very rare opportunity requiring the unique but exact convergence of factors surrounding these two teams, swinging the cost/benefit ratio to an extreme. The Red Sox intend to be at the top of the standings this season and based on what they’ve done, chances are good that they will. The Cubs are not far behind and as opined by Dave Cameron may be just a leap or two from the same goal. Whatever happens, each of the next two seasons project to be followed by two of the strongest free agent classes in history. 2015 should include Justin Upton, Jordan Zimmermann, Jason Heyward and more. The 2016 elite is likely to be headlined by Stephen Strasburg. There is going to be a hefty number of qualifying offers and little reason to care.

Focusing upon the next two years is important. The current collective bargaining agreement is in effect until December 1st, 2016, specifying the rules that govern draft bonus allotments and the penalties for their violation. Summarized below:

–        0-5% overage: 75% tax on the overage

–        5-10%: 75% tax on the overage and loss of 1st round pick in subsequent draft

–        10-15%: 100% tax on the overage and loss of 1st and 2nd round picks in subsequent draft

–        15% or higher: 100% tax on the overage and loss of 1st round picks in subsequent two drafts

o   Note: If a team lacks the selection subject to penalty due to a prior penalty levied from draft overages, the team will be penalized in the next draft in which said selection is conveyed.

To date, no team has spent beyond the 5% threshold and thus no team has been penalized a selection.

But then no team has been in this particular position before, a situation perhaps too unlikely to have been considered during CBA negotiations. Under the rules above, teams are pressured either to adhere to slot value or to strategize by shifting their allotments in favor of two or three top talents. The Cubs and Red Sox will have no such limitations this June. They can spend with complete and utter impunity.

Part of how this is possible is due to the language of the CBA and the impending sequence of events. A theoretical chronology:

1)     The 2015 draft begins

2)     Boston or Chicago picks who it wants and spends as much as it wants

3)     Boston or Chicago receives the maximum penalty, including tax and forfeiture of 2016 and 2017 1st-round selections

4)     2015 free agent class – Either team signing a QO free agent forfeits its next highest 2016 selection (2nd round)

5)     2016 free agent class – Either team signing a QO free agent forfeits its next highest 2017 selection (2nd round)

6)     Draft Penalty completed

Why would they do this? Because of who they are and because there is every incentive for doing so. Consider the maximum penalty – forfeiture of 2016 and 2017 first round picks – only for these two clubs, it’s entirely probable that none of these picks project to exist. Notice I said project, which is a critical distinction, because at the time of the 2015 draft their 2016-17 selections are officially still in place.

Implying, what if they can be sacrificed? The Cubs and Red Sox each operate at the highest levels of revenue and at their current win-curve trajectory are virtually guaranteed to be major players on the free agent market in each of the next two years. As a demonstration, both have already signed major targets this off-season. It’s easy then to imagine either team having to relinquish their top selections anyway, except either club can decide that in June as opposed to November. Given enough information by then, they’d have to ask themselves: What do they have to lose?

Lets assume each team performs toward the fringe of the playoffs and we assign them the 23rd selection in 2016 and 2017. In Boston’s case we could argue this will be even lower, or a few spots higher for the Cubs if you think they aren’t quite playoff ready, but as a middle ground the 23rd selection is a good place to start. Keep in mind by June, enough games will have been played to know this with some certainty. Let’s also assume that the first-round selections in each year will be lost to FA compensation. This isn’t an exact process since picks will be added or removed to a varying degree, but using 2014’s values will give us a rough estimate going from one year to the next:

2014 7th 9th 23rd
Round ($M) ($M) ($M)
1 3.30 3.08 1.95
2 1.19* 1.13 0.90
3 0.68 0.66 0.53
4 0.47 0.46 0.39
5 0.35 0.34 0.29
6 0.26 0.26 0.22
7 0.20 0.19 0.17
8 0.16 0.16 0.15
9 0.15 0.15 0.14
10 0.14 0.14 0.14
Total 5.71 6.57 2.93
% Decrease -48.7 -55.5

*Boston forfeits 2nd round selection (Hanley Ramirez)

In addition to forgoing the top 30 prospects, dwindling bonus pools severely damage teams’ ability to pay for any talent at all. By employing this strategy, Boston and Chicago can essentially punt drafts in which they might have expected to extract little value in the first place. In exchange, they take full reign to obtain as much talent as they wish in the coming draft – and the talent will be there. Even as restrictions pressure draftees to sign close to slot nevertheless talent falls due to signability, particularly when coming from high school. In the scenario above, a team is looking at one 7-figure talent, maybe two if slots can be shifted. Compare that to what they might obtain with 40 limit free selections.

Just as important, where these teams select has a significant influence on realistic return. Where top ten selections can result in impact talents, selecting early in each round is an opportunity to grab a falling talent well before other teams consider themselves able. Within current strategies, teams have to be cautious of the round in which they decide to risk on higher prospects as the ability to pay is tied directly to their selections in other rounds. But if money is no object, the Cubs and Red Sox can simply pick whomever they want whenever they want, in which case having the higher position becomes a huge advantage.

This isn’t foolproof. It would have to be a “calculated risk” decided upon almost the day-of. For one thing, it’s impossible to predict exactly what a free agent class will have to offer. If several projected free agents instead sign extensions, it becomes more difficult to justify devaluing your top selection. By June, teams should have a better sense of the picture ahead but it won’t be crystal clear. These teams will have to be reasonably confident not only that targets will exist, but that they’ll have a reasonable desire to sign them.

For another thing, at a certain point the cost in payable tax becomes a bit unwieldy. Perhaps the key then isn’t to sign as many top prospects as possible but rather enough to make up for impending losses in the two subsequent drafts. Because their pools are relatively large both teams will be partly insulated, but past that you’re paying double what you normally would per prospect. That requires confidence that the talent available is worth the additional costs, something not often expressed by teams prior to the current CBA.

That’s an argument to be made however, simply because the successful development of a few can exponentially result in surplus value. Should you prefer a direct measure of dollars, studies such as this one routinely demonstrate the windfalls in appropriately identifying and obtaining draft talent regardless of where they’re picked. In today’s league with today’s prices, that’s as tempting an idea as ever and if you wonder whether teams still place premiums on potential, look no further than the international market. Furthermore, the value of a prospect is predicated not on “Will he produce major-league value?” but rather “Can he?” The extractable value of potential in trades should be evident as I write this.

But the third and perhaps the most critical obstacle is the league itself and whether it takes the power to reject bonus agreements. This is suggested in the CBA document linked above, where the “uniform player contract” specifies required-approval by the Office of the Commissioner. Whether this suggests the Office would actually exercise its right of refusal isn’t clear. The only precedent as far as I know is MLB’s refusal to allow a $6M bonus to Matt Purke, a unique situation in which MLB had control of the Rangers’ finances. Particularly controversial deals have drawn little more than ire. Strict stipulation of penalties in the current CBA implies a team’s right to accept said penalties should it choose to do so. For the Commissioner to explicitly prevent a team from exercising this right is bordering on breach and may be actionable or subject to a grievance by the club or by the MLBPA. This is where the issue gets a little messy and comes down to debates beyond the scope of this article.

I won’t hesitate to call this what it is: a gambit. Strategies like this enliven the game and introduce an element of danger that can either pay off or egg face. Regardless, it highlights yet another flaw to the system in place. In one sense, this strategy is a novel way of playing within the rules, which is at the very heart of high competition. In another sense, it goes against sportsmanship in that this strategy is available only to teams who can realistically devalue their top selections, i.e. teams operating with enough capital to consistently invest at the top of the open market.

But rules are rules. The Cubs and Red Sox have the chance to align their playoff ambitions with a prospect bonanza not yet seen. They’ll have their pick among the elite and after that, should the dominoes fall along the way, they can – and should – take full advantage.

Jonathan Aicardi is a researcher with UCSF in the study of glioblastoma and the proprietor of Another Mariners Blog! Because apparently the world needed another one.



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Mark Liu
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Mark Liu

So what you’re saying is that the Cubs and Red Sox’ll draft 2nd-3rd round quality players in the later rounds and sign them and not care about their bonus pool? Why don’t other teams do that?

attgig
Member
attgig

from the article…
It’s not often that clubs expected to contend in one year also happen to have top 10-selections of that year’s amateur draft, but that’s exactly what will happen this coming June. The former club of Epstein and Hoyer will select 7th overall. Their current club will select 9th and if all goes according to plan, each club’s 2016 selections figure to fall well out of protection.

nick
Guest
nick

Did you read the article?

Damian
Guest
Damian

Keep in mind, there’s also the matter that they’d sacrifice first-round selections that they can reasonably assume they won’t have anyway. With so many good players on the free agent market and their ability to lure them, they can basically pass on their picks.

Steve
Guest
Steve

With the Cubs current prospect setup though, I’m not sure they are planning to have to heavily invest in top end free agents in the next few years. Possibly still with regards to SP1s, but they have to be hoping their position prospect redundancy leads to viable ML players at most positions.

elmedius
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elmedius

Great article! Had not thought of this myself, but now that you’ve done the thinking for me it makes perfect sense. Could definitely see these teams doing this particularly because both of them have treated the recent international market in a similar fashion.

billyshears
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billyshears

Where is the language you’re relying on that if a team signs a FA subject to a QO they only forfeit their next highest selection in that draft rather than their first round pick in the next draft in which they have such a pick?

Brad
Guest
Brad

Interesting idea. Risky, but interesting. Doubt they can predict free agency that far ahead though. You’d think more teams would consider this if the benefits are real.

michael
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michael

To make an obvious point, this tells you the flaw isn’t with the Red Sox and Cubs, who are using the system. It with the system, and the real problem with the system is that it tries too hard for parity in performance, revenues, and spending. Get rid of the Rube Goldberg structure, if you have to, give even more revenue sharing to the smallest market teams, dump the slot system, dump protected picks, dump the QO system, dump the competitive balance extra picks, and look for more simplicity. Maybe limit each team to only one $50M+ FA signing per year (or some max AAV) so you don’t have big market teams grabbing multiple very expensive players in the same year. I doubt the MLBPA would like the last suggestion, but they would see benefits as well, such as the end of QO and the elimination of caps at the draft level.

Damian
Guest
Damian

They ought to think about making draft pick trades legal, say limited to the first 5 rounds, as a way of better protecting small market teams forced to trade away their players as they get closer to free agency. Seems silly that every other sport can deal with this.

Sal
Guest
Sal

No one is arguing that the system is flawed, but imposing so many limitations goes against the “open market” concept. Maybe it’s too complicated as is, but part of the fun in baseball is guessing what players fit, when and for how much. That’s just business. You can get rid of QO’s and work under the rules of the last CBA. Teams like Tampa and Oakland were able to do that just fine.

SirDHKnuckleball
Member

By the way I am a Cub fan and I am glad I come here to find this type of well thought out article. It’s a very compelling concept and I hope this one of the first things read in a cubs board meeting in 2015. Talk about a gamble on several fronts, with a monster pay off if it came together. The biggest loser if it were carried out, the artificially deflated signing bonus market in the MLB. This should come with consequences if either or both teams try to pull this off.
Punishment passed down by the new MLB administration to one or both of these teams should be swift and decisive should they choose to go through taking advantage of this…
1)AUTOMATIC EXECUTIVE OF THE YEAR AWARD(S)
2)MAKE THE TEAMS (BASED ON A GIVEN PERCENTAGE SPENT OVER THEIR CAP) MLB “LUXURY TAX EXEMPT” FOR FUTURE WRITE-OFFS OF THAT GIVEN AMOUNT.
3)BUD SELIG CAN’T TAKE CREDIT FOR IT even though the omission happened on his watch.
Either of these teams spending in the upwards (to make it pay off) of 20-$30mil OR LIKELY EVEN MORE in this year’s draft brings in at least a few very talented young athletes that are torn between baseball and any another sport or venture, or even multiple sports as their full-time most focused avocation in the near future. Fifty years ago (at least I am told I wasn’t there) guys like Michael Jordan, Russell Wilson, Colin Kaepernik, Tom Brady, Ricky Williams, Jameis Winston (to name a very select few) most likely would have been drafted and signed by MLB teams. Times haven’t changed for Major League Baseball the times have been literally outsourced overseas. The game is only made better, very obviously by including the most talented regardless of background, nationality, etc. Except in doing so baseball has virtually locked out a large chunk of the most talented athletes in the league’s native country rather than compete at all with any other US major sports. The above names mentioned are just a few of thousands of young men that went on to play other sports at the highest levels (other than baseball) while being baseball standouts at the prep or even college level, especially in the last thirty years during which time the NFL has lapped (several times)the MLB in popularity. New leadership at the top in the sport has an opportunity, if not an obligation to get creative in making where the virtuoso athlete spends their time the next 1-5+ years a much tougher decision than it is now.

Andrea G.
Guest
Andrea G.

Based on the history of the As drafting players and developing them, only to have them go to the Yankees during free agency for so much more money, it seems like this is kind of the same idea, only on a much grander and no-holds-barred scale.

Honestly though, I would say that MLB has been trending in this direction for some time. Three of the top teams in baseball last year, the As, Royals, and Pirates, have comparatively small payrolls and rely heavily on their draft picks. Once they’ve developed those young players though, and the players have proven themselves in the big leagues, the teams will likely end up losing them to a team that can pay them a lot more money.

Although MLB has tried to equalize teams with the penalties you’ve described and what not, at the end of the day, as you also mentioned, for teams that can afford it the benefits of stacking a team with expensive free agents, may outweigh the costs.

Although I am curious, since you point out that the Office of the Commissioner technically has the ability to block these bonuses…. do you think they should? Should baseball try to maintain some semblance of equality amongst the teams, or do we let it go and wait to see what happens?

Thanks for a great (and super interesting) article!

SirDHKnuckleball
Member

Not a legal expert by any means but if they blocked them from doing this wouldn’t it open them up big time for anti-trust hearings? How monopolistic would it look if MLB blocked signing bonuses for privately run teams, being done within the framework of the rules, and stopping a person from pursuing a career in professional baseball at that time due to no by laws just because “…it doesn’t feel right amongst the ownership community?” I believe that is the textbook definition of a monopoly.