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Thread: Draft Pick Compensation

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  1. #1
    Lark11 11BarryLarkin11's Avatar
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    Jun 2005

    Draft Pick Compensation

    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.
    Last edited by 11BarryLarkin11; 10-25-2006 at 05:42 PM.

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