The new collective bargaining agreement between Major League Baseball and the Players Association was announced yesterday, and while the majority of mainstream media outlets highlighted items of questionable enforceability like human growth hormone testing and mandatory All-Star Game appearances, those closest to the game reacted most strongly to new rules placed on free agent compensation, the first year player draft and international signings.

Let’s quickly (at least in relative terms) go over the new rules surrounding these three items, before discussing their effect and possible exploitation points:

Free Agent Compensation

Beginning next off season, the entire Elias ranking system, which used to dictate compensation for signing free agents, will be scrapped. There will be no more Type A or Type B free agents. Instead, teams can make a qualifying offer to their impending free agents in the form of a one year contract that guarantees a salary equal to the average annual earnings of the 125-highest paid players from the prior season. Players offered this contract will then bring back compensation in the form of a first round draft pick assuming that the free agent signs elsewhere. A team that finishes in the bottom 10 in the majors cannot not lose a first round draft pick, but can lose their next highest pick.

First Year Player Draft

The new CBA sets limits on the total amount of money each team may spend on players selected in the amateur draft. Beginning with the next Rule IV draft, clubs will be given assigned a dollar figure from the Signing Bonus Pool depending on that team’s position in the draft and the recommended signing bonuses to be handed out for their draft picks. This amount of money will apply to that team’s selections in the first ten rounds of the draft. If someone drafted after the tenth round is given a bonus of $100,000 or more, that figure will also be included in the Signing Bonus Pool.

If a team’s draft spending exceeds their assigned Signing Bonus Pool by 0%-5% they will be forced to pay a 75% tax on their overage; if they exceed it by 5-10%, the team will not only be taxed 75% on the overage, but also lose a first round pick in the following year’s draft; if they exceed it by 10-15%, the team will not only be taxed 100% of the overage, they will also lose their first and second round draft picks from the following year’s draft. Teams that spend in excess of 15% of their Signing Bonus Pool will be penalized with a 100% tax and the loss of two first round draft picks from the following two drafts.

In addition, draft picks are only eligible to sign minor-league contracts, which must be registered between July 12-18.

The new CBA also introduces the Competitive Balance Lottery. The ten teams with the lowest revenue from the previous year, plus the ten teams in the smallest markets will be entered into a lottery from which six teams will win a bonus draft pick immediately following the completion of the first round.

International Free Agents

In December, MLB and the MLBPA will form an International Talent Committee with the intention of creating better regulations for the development and acquisition of international talent. For the 2012-2013 signing season, all teams will receive the same amount of money limits for international signings by the Signing Bonus Pool. After that, different amounts will be given out based on the previous season’s winning percentage. At that time, teams will be allowed to trade portions of their pool allowance.

As with the amateur draft, if a team’s international spending exceeds their assigned Signing Bonus Pool by 0%-5% they will be forced to pay a 75% tax on their overage; if they exceed it by 5-10%, the team will not only be taxed 75% on the overage, but also lose the right to sign more than one international player to a bonus that exceeds $500,000 in the next signing season; if they exceed it by 10-15%, the team will not only be taxed 100% of the overage, they will also lose the right to sign any international player to a bonus that exceeds $500,000 in the next signing season. Teams that spend in excess of 15% of their Signing Bonus Pool will be penalized with a 100% tax and not be allowed to sign any international player to a bonus that exceeds $250,000 in the next signing season.

What Does It Mean?

Most immediate reactions to these rule changes claim that the new agreement hurts the teams that were attempting to “game the system.” Teams with smaller revenue streams like the Tampa Bay Rays and Toronto Blue Jays, who compete against the largest revenue streams in baseball in the American League East, were signing free agents based on their future status as compensation bait, while investing heavily in the draft and foreign born players instead of free agents.

There is a difference between gaming the system and finding value where competition hasn’t found it yet. Singing players based on their potential Elias ranking the next off season in order to acquire additional draft picks seems to me to be a clear case of gaming the system. It exploits the arbitrary and unrealistic methods that Elias used for ranking players and allows clubs to justify transactions that aren’t directly related to how the team performs on the field.

However, investing heavily in signing bonuses for draft picks and international free agents is only taking advantage of the competition’s shortsightedness when it comes to the value of having multiple years of team control over players at a reduced rate before they hit free agency.

Eliminating the Elias ranking system allows the market to more ably dictate a player’s worth while simultaneously limiting the degree to which a smart front office can take advantage of unrealistic rankings. Henceforth, only the most valuable free agents will bring back compensation to the team losing him from their roster. To me, this is what was originally intended and the new rules are better described to be closing a loophole rather than oppressing the smaller franchises.

It’s been stated that this should open up organizations to more trades, and while it’s true that the quantity of deadline deals may increase, the quality of players on the move isn’t likely to increase. Where the previous agreement limited wheeling and dealing by forcing teams in need of  a veteran with an expiring contract to come up with the equivalent in prospect quality to a first round and supplemental draft pick, teams will now have to make such deals without the assurance that whatever they give up in acquiring the rental player would at least be compensated when he signed elsewhere. That’s no longer possible with rules stating that only players that have spent the entirety of the season with their club will be subject to compensation.

The trade value of expiring contracts, outside of their effect on the field, will only exist during the off season. What I see this translating into is fewer one year contracts being handed out like the ones that Tamapa Bay gave to Johnny Damon and Manny Ramirez this past off season and more attempted trades for missing pieces in December and January involving soon to be expiring contracts from teams that don’t expect to compete.

In other words, instead of paying money for free agents this off season, pay prospects in an attempt to acquire players like Brandon League and Andre Ethier, in their last year of team control before free agency. Both the Seattle Mariners and Los Angeles Dodgers would then be able to speed up their rebuilding process based on the return, and the acquiring team gambles that neither player would accept a one year $12.4 million deal at the end of this season as they replace the prospect(s) they gave up with the compensation received when they sign elsewhere in 2013.

Next, let’s look at how the changes affect the first year player draft. But before we delve too deeply into it, we must agree on a few principles. Drafted players represent an incredibly good value to teams over the early part of their careers compared to the relatively exorbitant cost of free agents. A limit on signing bonuses for these players should increase their value even further by pushing down their cost. A rebuilding team has less of a need for free agents than they do young players, and so, they are more likely to reallocate their budget to acquiring players via the draft than on the free agent market.

While a rebuilding team will theoretically have a larger Signing Bonus Pool than a currently successful team, they don’t have the luxury of spending as they see fit. A middle of the road team, looking to improve, has even fewer luxuries. I would solve this disparity by embracing the penalties handed out by Major League Baseball and taking advantage of other teams’ unwillingness to do so.

Of course, I’m writing in a theoretical sense and making assumptions at the behaviour of teams under these new rules. This is more in the realm of ideas, and because so much of a team’s decision on how to react to the new rules will be based on how other teams react, we’re not going to know the full effect that these changes have on baseball’s future.

However, there is one major accepted part of all this with which I don’t agree. Dave Cameron claims in his FanGraphs piece on the new rules dictating the amateur draft that:

These penalties are so severe that they essentially eliminate any benefit a team would get from signing a player for more than the slot recommendation, so they equate to de facto hard slotting. Teams no longer have the ability to spend heavily to convince players who were strongly committed to colleges (or other sports) to forego those options and begin a career as a professional.

If one win above replacement is worth $5+ million on the free agent market, as FanGraphs suggests, I don’t see how this can be the case. Only fifteen players in the history of the draft have received a signing bonus of $6 million or more, and almost all of them returned at least one WAR in their first taste of big league action.

The monetary punishments for what would essentially be going over slot still don’t compare to the value gained by attaining the top talent at the draft, and the loss of a first round pick isn’t nearly the punishment it seems to be considering the limits on spending that other teams will follow and the aversion to risk that other teams have exhibited in the past. Not only is there no less reason to be aggressive in the draft, there’s more of a reason to do so because of the likely increase in passivity of other organizations attempting to remain in line with MLB’s expectations.

Instead of increasing the value of drafting top caliber players, these tactics actually decrease the value because of the spending on overage penalties. Of course, drafting like this would work best with prep players who still hold leverage over teams wanting to sign them with the threat of attending college instead of pursuing a Major League career. That threat will theoretically be enough to scare away pool conscious teams and make them more attractive to pool irrelevant teams that may have to wait until the second or third round to select this type of player anyway.

I’m not advocating overpaying for high school talent, merely never avoiding the best available player because of concerns over the Signing Bonus Pool. It should be remembered that one team’s willingness to spend won’t change the leverage balance as drastically as the many more that are attempting to stay under the Signing Bonus Pool.

Most of these principles remain the same for international signings, but with one major exception. Disobeying the limits placed on signing foreign born amateurs actually results in a lack of freedom to sign more elite players in the future. Again, the penalties shouldn’t stop a team from pursuing a player, but if they’re going to do so, they might as well really do it.

In other words, prepare to spend more than any other organization on international free agents every other year. Once again, embrace the punishment as part of the overall cost of doing business (the value added still compares well to the cost of free agency), and pick the spots at which you can land elite talent without regard to what Major League Baseball attempts to impose.

Once again, these ideas only work if all of the other baseball clubs act the way we assume they will. At some point in this attempt at spotting new ways to gain an advantage, it must be mentioned that if the majority of clubs do follow the new rules, the new CBA can be accurately described as being blatantly unfair to amateur players, both domestic and (especially) foreign, groups that without coincidence aren’t properly represented by the MLBPA.

It’s funny to think that baseball’s history is littered with past players sacrificing so that future players can be paid what they’re worth when the newest bit of labour peace between owners and players seems to be so largely at the expense of players yet to be.

Let’s finish this piece with words taken from The Platoon Advantage, one of the more outspoken blogs against the new CBA.

For most of these players, they get one opportunity for a big payday, as at least some compensation for starting their adult lives later than the rest of us. And that’s the day they sign their first professional contract. They get a chance to negotiate a bonus for signing with their new club (understanding that that player doesn’t actually have any choice in who he plays for). These players live hand-to-mouth, some of them supporting young families. To take away from the relative pittance they’re offered by their parent clubs is a crime.

But that’s what the new deal hammered out by the MLB and MLBPA does, essentially limiting the potential for young players’ one big payday. It limits the free market and artificially lowers the amount each player is worth paying. It’s fundamentally unfair in that it demands sacrifices from those who not only are least able to bear that sacrifice, but who have absolutely no voice in the process. What do these amateurs get in return? Nothing. Their earning potential is curtailed after they get absolutely screwed over and betrayed by the people who know exactly what it’s like to be in their position.

Comments (28)

  1. Saying that there’s no less reason to be aggressive in the draft while also saying that most other teams will be passive it’s a relic of when there were only a handful of smartly run organizations in baseball.

    • Have you seen the last ten drafts? There are definitely aggressive and passive approaches to the draft still in play.

      • agreed. Those approaches are going to be even more defined now. More teams are going to take the Billy Beane/JP Ricciardi approach to the draft and go the safe College player route, opening the door even further for AA and his scouting staff.

  2. What this is doing to amateur players is what makes it a terrible deal. You’re right in saying that there are still things smart teams can do to gain an advantage, but the MLBPA completely sold amateur players down the river for their own labour peace. I was reading something online earlier (and of course I can’t find it now) that was saying this could embolden Minor League Baseball players into forming a union. That would have the potential to really cause some problems for the owners.

    I think minor league and amateur players will look at this deal and realize how stupid it is to hand over their negotiating rights to players who’ve already had their payday.

  3. Does this also mean that a team that hugely overspends in the draft one year, will also be more inclined to chase a high-proifle free agent during the following offseason?

    Let’s say the Jays overspend 10-15% on the draft, losing their first two picks for the following year; having already lost their first-round pick for the next year, will they be more likely to chase someone like Joey Votto, knowing they’ll only give up a third-rounder if they sign him?

    I’m sure Cinci won’t be pleased with that sort of outcome, but as you’ve said in your post, this system seems to promote a “go big or go home” approach, and I’m sure AA is already looking for new loopholes to exploit.

    • I think you’ll see AA trade for lottery draft picks in this scenario.
      e.g. Blue Jays have David Cooper and Michael McDade, if they lose a 1st rounder, they could use one of these players to trade for a 1st round pick to a team looking for a young first baseman.

  4. Great work Parkes.

    How are the numbers looking for the draft slots? Are they competitive? It definitely makes you wonder if someone like Starling would be playing in Nebraska in the fall rather than the Royals farm system.

    And just for good measure, HAHA Tyler Beede.

    • The numbers are out. I haven’t looked at them yet, but I know that they’re significantly higher than the slots for last year.

      • 1-4 is all I’ve seen released.

        1-1 is $7.2MM
        1-2 is $6.2MM
        1-3 is $5.2MM
        1-4 is $4.2MM

        After that, I think we can expect drops of 500K per slot in the top 10, another 250-300K for the next 10, and even smaller dips after that. If anyone could cite my source that would be cool, because I don’t remember where I read that.

  5. This is going to create an interesting dynamic between agents and clubs, especially if some clubs decide to go big in the draft. There is nothing to stop you from shelling out $5M in the 15th round, so if the players are aware of this they may choose to scare off teams.

    What also comes to mind is preemptive drafting. Come 10th or 15th round teams might draft players just to deny them to the “go big” clubs in the late rounds, with no intention of signing them.

    I think draft just became way more interesting :)

  6. So if AA and rogers don’t mind spending the extra money, can they not just say screw first round picks, then go and spend whatever they want. I mean I’m sure there will be lots of 1st round high school players who wont be drafted because they will not sign for slot. They just grab all these players in the later rounds and spend what is needed. They will still get 1st round talent just not with one of the first 30 picks. Knowing teams will go over slot will also make other draftees less likely to sign for slot money, at least to the extent of balancing the drawback of the pick going to another team (meaning it will have a negative impact on at least 1 pick).

    • Yep. That’s pretty much exactly what Parkes is suggesting.

      • if they can get Daniel Norris in the 2nd round before these rules were put in place, imagine how far down they can get players with high bonus demands.

  7. Love this type of stuff Parkes. Incredibly well reasoned ideas.

  8. So any team that expects to pick in the bottom part of the first round every year might as well concede to the fact that they will lose said pick.

    With the constraints that, presumably, most teams will follow, one could reasonable expect players who are going to college unless they get huge money to drop even further than in past years.

    A team could easily pick multiple first round talent in the 2nd round and on each year, pay them as much money as they want, and come out with a better crop of youngsters each year than if they adhered to the spending limit and kept their first round picks this year.

  9. There is just a butt load of hypocrisy going on here. So people are against the ridiculous contracts relievers get, but are ok with amateur talent that are very unlikely to ever make the big club holding the “signability” card at the draft. Most of these draft picks are bad investments just leveraging their way to multi-millions or the team losses their pick (well unguaranteed comp pick – which sucks). This new system creates essentially a hard cap – which is good and puts the onus back on the scouts to pick the best player available. What leverage does a player have when teams just pick the best player available and offer the slot + allowable overage. None right.

    • Apples and oranges.

      Yes, ridiculous contracts given to relievers are often stupid, but that doesn’t mean MLB should ban teams from spending money on relievers.

      If teams want to spend their money on amateurs, they should be able to, just as they are allowed to spend their money on veteran relievers if they wish.

      • Umm teams are allowed to go over slot they just get harshly penalized by losing draft picks. The same way that teams get penalized for spending ridiculously on a free agent. There is no ban here – apples to apples.

        • No its not the same.

          The MLB has legislated consequences against paying out money to amateurs. The only penalty that comes from paying money to a relief pitcher is perhaps getting less value than you could get elsewhere. (Unless the reliever requires compensation, but that applies to all positions)

          • The position was arbitrary. The compensation was the point. Teams legislatively lose draft picks when spending money on good free agents thus applying an infringement on demand and thus lowering the offers they’d receive.

  10. So if I am interpreting this correctly, the team would have to go over by at least 15% for this strategy to properly work though. Lets say If you went between 10 and 15 over in 2012, you would lose the first and second picks for 2013. If you did that again you lose first and second for 2014, and so forth. So you are always starting in the 3rd round. However, if you went at least 15 over though, you would get to keep the second rounder each year. I think I am missing something to this because it encourages you to spend more. And yes I’m aware you lose two first rounders but if you’re committing to this strategy it’s irrelevant. Furthermore, how many first rounders are you allowed to lose before adding another penalty, like losing higher rounds, because it seems infinite.

  11. All this talk about the draft and the penalties is fine, but the only thing that stands a chance for the smaller market teams to compete is a fixed salary cap.

    • A salary cap would effectively kill the established player for prospects trade market as all sorts of salary equalization would have to take place. Salary cap = Bad for baseball if you like cool baseball trades.

  12. What I find interesting, legally, is with the fact that you can’t offer drafted players major league contracts anymore, which I assume means none of these drafted players become members of the MLBPA.

    Which leads me to wonder how can a CBA between current owners and unionized employees dictate compensation terms for non-union employees of effectively another organization, the milb.

    I’m assuming this relates to baseball’s anti-trust exemption and it’s generally being above the law, but it doesn’t really seem legal to a non-lawyer like me

  13. Do the limits on draft signings come into effect for the 2012 draft, or later? I assume it will come into effect immediately, but have not heard a date.

  14. The reason teams were over spending in the draft under the old system is that lots of teams weren’t and early round talent was falling to later rounds due to sign ability issues. If every team is refusing to overpay for draft picks, I don’t think this becomes an inefficiency to exploit because Daniel Norris isn’t falling to the 74th pick.

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