View Full Version : Draft Pick Compensation

10-25-2006, 05:28 PM
I think it's a bit unfortunate that MLB didn't take the opportunity to revamp the free agent compensation during negotiations for the new Collective Bargaining agreement, deciding instead to curtail it to prevent some teams from abusing it.

The original intent of compensatory picks was to compensate small market teams for losing free agents to large market teams. Basically, the draft picks were designed to take the sting out of losing a free agent that a low revenue team could no longer afford to keep. And, I think it's actually a very good idea and worked well for quite some time.

The A's were the first team to figure out the true value of the system and they learned how to utilize it very effectively. And, of course, that's all well and good because the A's are a small market organization for whom the compensation system was designed. They cranked out significant hometown talent, who they could no longer afford to keep when they reached six years of service time. When these players left via free agency, the A's were able to restock their farm system by utilizing the compensatory picks. The additional picks really cut down on the risk that the overall draft would not bear any fruit.

But, the real problem with draft pick compensation came when Theo Epstein took over the BoSox and began to rebuild the Red Sox organization using Beane's playbook. The BoSox focused on on base percentage, exploiting market inefficiences uncovered through statistical analysis, AND also how to utilize draft pick compensation to improve the farm system. The small-market A's used the compensation system effectively, but the BoSox, through their huge revenue stream, EXPLOITED it.

The Red Sox don't need to be compensated for lost free agents, as generally speaking no one can outbid them. They never lose a free agent due to financial restrictions, because for all practical purposes they don't have any restrictions.

The Red Sox figured out how to "churn" players to increase the number of draft picks they have each year. The system is setup to award TWO draft picks to those teams who lost a free agent after they offered him arbitration. But, the system only penalizes the team who signs the free agent in question ONE free agent. The other draft pick is a sandwich pick that is awarded between rounds. Basically, the extra pick is created out of thin air.

So, the Red Sox's financial advantage enables them to consistently churn players. They can afford to bring in free agents to replace the free agents they lose. They lose one $8M dollar player and sign a replacement $8M player. The production and salary are essentially the same between the player lost and the replacement player, but by doing it this way they forfeit ONE draft pick for signing the replacement player, but gain TWO draft picks as compensation for losing the free agent. So, they lose nothing in terms of production or increased costs, but GAIN an extra draft pick as compensation.

And, their financial advantage enables them to do this consistently. So, not only can they afford to stock their MLB roster with the best free agents, but they actually get to rebuild their farm system while doing it. In the past, other organizations (see: NY Yankees) used to have to choose between signing high cost free agents OR building their farm system by keeping their draft picks. By adapting Beane's philosophy and adding their huge revenue stream advantage, the BoSox were able to have the best of both worlds. They no longer had to choose between winning now or building for the future.

A couple of years ago, the BoSox had something like 7 picks in the first two rounds. And, in the 2006 draft, they landed UNC fireballer Daniel Bard with an additional draft pick which they received for losing Johnny Damon. And, to compensate the BoSox for losing out on those free agents they just couldn't "afford", they had three picks in the first round and sandwich round.

Unfortunately, MLB chose not to fix this problem with the compensation system, but instead scaled it back in the most recent Collective Bargaining Agreement. Personally, I think it's a very worthwhile system, which needs to be tweaked to ensure that it is serving it's intended purpose. The idea is to improve competitive balance by ensuring that small market team's are compensated for their loss at the hands of large market organizations, not to enable large market organizations to build for both the present AND the future at the same time. And, I think a few small changes could get the system back to its original purpose, which is to improve competitive balance and create a better overall product.

Sadly, it doesn't appear that MLB is interested in doing so, despite the fact that this is a very effective method of improving competitive balance, which should be a goal of every collective bargaining agreement. But, again, cash is king. Everything that isn't directly related to dividing up the revenue stream gets second billing.

10-26-2006, 08:14 AM
Very interesting read 11BarryLarkin11.

Maybe you could answer another CBA question. At the beginning of the season I heard of talk about allowing teams to trade draft choices. Also drafted player must remain with that team that drafted them for at least one years time. Did any of that change?

10-26-2006, 07:21 PM
Very interesting read 11BarryLarkin11.

Maybe you could answer another CBA question. At the beginning of the season I heard of talk about allowing teams to trade draft choices. Also drafted player must remain with that team that drafted them for at least one years time. Did any of that change?

As far as I know, that has remained the same. Every once in a while rumors fly that the rule against trading draft picks will be lifted in the next CBA, but nothing ever comes of it. And, the one year prohibition on trading prospects serves the same purpose as not trading draft picks. It prevents teams from skirting the rule on trading draft picks by working out a "draft and trade" type deal. The one year restriction ensures that there would be too much risk in that type of deal, as too much can happen to the prospect in one year to make the deal viable. Not to mention, the traded prospect would be controlled by the other organization for the whole year, which could raise some problems.

But, oddly enough, I can't figure out the reason behind the rule against trading draft picks. I would imagine it has something to do with competitive balance, but I don't think they've ever explained it. It would seem to be just another technique that could be used or abused like every other team building tool.

You could make a strong case that trading an impending free agent for draft picks would be in the best interests of a small market team and, in fact, it may be the best strategy for a small market team. And, in fact, that's essentially what draft pick compensation does, albeit indirectly. So, it doesn't seem very logical to utilize a draft pick compensation system, while banning the trading of draft picks.

But, maybe, it has to do with the unpredictability of MLB prospects in comparison with other major sports. Maybe MLB wants to ensure that every team has some high draft picks every year to avoid too many barren farm systems. They also may want to ensure that the "next Albert Pujols" isn't traded away by a small market organization for draft picks that never pan out. Giving up Pujols Part Deux and getting nothing to show for it would be bad business. But again, there doesn't seem to be much rhythm or reason to the policy.

It would be very interesting to sit in on the CBA negotiating sessions. I have a sneaking suspicion that anything that isn't directly tied to revenue takes a back seat. In fact, when possible, I would suspect that MLB uses most non-revenue issues to improve their bargaining power on the "important" revenue issues. Bud probably used every arrow in his quiver in an attempt to offset the power of the Union. I suspect that's why the drug testing never got anywhere. The Players' Association didn't want it due to privacy concerns of its players, but I suspect that MLB only raised it when they wanted a concession from the union. They'd drop the drug testing policy idea in exchange for a bigger slice of the revenue. Or, maybe I'm just jaded. ;)

But, it's certainly interesting to talk about. :)