Free Agent Compensation Must Die

Howie Kendrick's value this past winter was depressed due to the qualifying offer. (via Arturo Pardavila III)

Howie Kendrick’s value this past winter was depressed due to the qualifying offer. (via Arturo Pardavila III)

I don’t know how gauche it’s considered to link to one of our own, but Devin Shaw’s recent article here at the Hardball Times first got me thinking, and then it got me fired up.

The aspect of Shaw’s piece that I want to focus on is free agent compensation. Ever since players were granted the right to free agency, owners have been doing what they can to devise punitive measures to apply to teams that sign free agents. Their stated desire has been to maintain competitive balance throughout the game, but in reality their primary goal has been to reduce their expenditures on player salaries.

My question is this: Why should teams that lose players to free agency receive any sort of compensation whatsoever?

Let’s do a quick review of current and previous compensation methods first before delving into the discussion of whether these methods are at all appropriate.

Currently, baseball uses the Qualifying Offer system, which has been in place since the 2012-13 offseason. When a player becomes eligible for free agency (and was not traded during the season leading up to free agency), his former team has the option to offer him a one-year contract priced at the average of the top 125 player salaries. This past offseason, that price was approximately $15.8 million. If the player rejects this offer, any team signing the player must forfeit its first-round pick in the following year’s First-Year Player Draft, often called the amateur or Rule 4 draft. Subsequent signings cost the team its second-round pick, then third-round, etc. A team “losing” a free agent receives a supplemental pick after the draft’s first round.

As Stephen Drew, Kendrys Morales, Howie Kendrick and others have experienced, this system can severely clamp down on a free agent’s ability to sign a new contract. There have been calls for the next CBA to severely modify or eliminate the QO system to prevent this restriction.

What’s amazing is that this system is probably better than what existed before.

Prior to 2013, a ranking system overseen by the Elias Sports Bureau categorized players as Type A (top 20 percent), Type B (next 20 percent), or neither (remaining 60 percent), and draft picks were surrendered by the signing team and awarded to the team that “lost” a free agent based on the player’s ranking. The system relied upon a mix of useful (on-base percentage, innings pitched), dubious (fielding percentage, ERA), and awful (RBI, pitcher wins) stats to determine these rankings. They were particularly brutal toward middle relievers, the “top 20 percent” of whom often had a tough time inking a new deal at a salary commensurate with their abilities because of this draft pick penalty.

This history leads back to the main thrust of the discussion. Why is it necessary to compensate teams for “losing” a free agent at all? The quotation marks around the words “losing” and “lost” are purely intentional, because it could be argued that the team previously controlling the player’s rights lost absolutely nothing, that their exclusive benefits pertaining to that player simply expired after several years.

Consider the depth and length of those benefits, and it becomes obvious that they are numerous and significant.

The first benefit a team receives regarding any player growing up in the U.S., its territories, and Canada is the exclusive right to sign that player upon selecting him in the First-Year Player Draft. Changes in the last CBA put teams in an even better position in regards to this draft. A slotting system was created that assigned rather firm signing bonuses for each draft position, thereby restricting how much players can sign for.

Previously, players at least had the ability to negotiate a deal based on their particular skills and situation, though their pacts often paled in comparison to what international players signed for. As an example, Stephen Strasburg — he of the new seven-year, $175 million contract — originally signed a five-year, $15.1 million deal with Washington in the summer of 2009. Five months later, Aroldis Chapman put his signature on a six-year, $30.25 million contract with Cincinnati.

Certainly, the circumstances for those two specific contracts were far from identical, but one of the most celebrated amateur pitchers ever signed for an average annual value 50 percent below what a Cuban defector did, and neither of them had throw a single pitch in affiliated baseball.

Now the situation is worse, with the top amateur players limited to deals in the $7-$8 million range despite several years of MLB-level inflation. Meanwhile, top Cuban players such as Jose Abreu and Rusney Castillo are signing contracts guaranteeing them eight-figure salaries over a half-dozen years.

A Hardball Times Update
Goodbye for now.

So owners receive an immediate financial benefit due to draftees’ earning power being artificially limited on Day One. And this benefit continues to accrue for at least the next half-dozen seasons.

When a player does work himself up to the major leagues, his salary is restricted by the rules of the CBA. Teams are permitted to pay players a league-minimum amount for the entirety of a player’s first three major league seasons. To some, being paid “only” a half-million dollars to play a game many claim they would play for free may appear as nothing more than the lamentations of spoiled children. However, when some of their contemporaries are reeling in 20 times that amount, there’s reason for their discontent. Just ask Gerrit Cole and Jacob deGrom.

After those first three seasons (or if a player is a Super Two — among the top 22 percent in service time of those with between two and three years of service), players become eligible for arbitration. Through this process, a panel of judges is asked to assess a player’s contributions (as presented by his agent) and limitations (as presented by his team) and determine his salary for the following season based upon precedent, the negotiating skills of both sides, and the panel’s admittedly limited knowledge of what constitutes a good baseball player.

Congratulations, young men! You’ve now reached the point at which you can earn – very roughly – 40 percent of what you could expect to earn were you a free agent. Have another successful year, and you’ll be up to 60 percent. Do it again, and your salary jumps to about 80 percent of market value.

And finally, after six major league seasons – and often 2-4 years in the minors – you now have the option to choose for yourself where you will work, for whom, and at a salary that has been freely negotiated. Well, assuming your team didn’t play service time games — as happened with Kris Bryant and Maikel Franco — by keeping you in the minors just long enough to prevent you from reaching the five years and 172 days necessary to become a free agent. If that’s the case, you’ll have just shy of seven years in major league baseball at an artificially depressed salary.

Throughout this process, teams often have banked tens of millions of dollars in savings on drafted players compared to what they would have paid similar players on the open market. And at the end of said process, teams then want to cash in once more by gaining another draft pick, with which they can choose the next fortunate soul who gets to go through this same ordeal. And the Players’ Association is complicit in this endeavor, since the MLBPA thinks the money not spent on minor leaguers will be directed to big league payrolls. However, recent history shows this is not necessarily the case.

Teams receive amazing value from their pre-free agency players. Yes, to some extent, it does help competitive balance. But it largely benefits teams’ bottom lines at the expense of players throughout the game, and it’s time to say enough is enough.

Free agent compensation is on life support. It’s time to pull the plug.

Greg has been a writer and editor for The Hardball Times since 2010. In his dreams, he's the second coming of Ozzie Smith. Please don't wake him up.
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Mike T.
5 years ago

I am pretty sure the real FA compensation started was because the NYY signed everyone and you had Blue Jays and Pirates situations – hopeless 20+ years

5 years ago
Reply to  Mike T.

Those 20 year draughts though had nothing to do with FA compensation, they happened in spite of FA compensation. I could go even farther and say such situations were made worse by FA compensation, though I haven’t done a full study to say so definitively.

It certainly seems like the big market teams have benefitted more from compensation picks. One of the worst examples is a big market team coming off a world series win, the 2005 Red Sox, and drafting Ellsbury, Buchholz, and Jed Lowrie all as compensation picks.

But I admit that is just one anecdote. If someone wants to do a full study of who gained and lost the most through the FA comp system I’d love to read it.

Mike T.
5 years ago
Reply to  Rally

so I never offered an opinion on the actual outcome of FA compensation

I merely offered an opinion on why the system was put in place

if one puts on the thinking cap, the misguided rationale exposes itself as you have outlined

this means rich teams win and get to make rules to ensure they continue to win

win win? sadly no

5 years ago

Yes, I totally agree with all of this. This “lost” to Free Agency builds a negative connotation in peoples’ minds. Instead, we must change the language so that it shows the team gave up (how about “forfeited”) their control over the player. Players that meet the requirements are free to roam, and we should applaud that. And pay them – they’ve earned it.

5 years ago

I’ll bet the writer supports a big-market team.

Compensation for lost free agents, and the residual effects from that system, is the only thing keeping small-market teams competitive.

If Stephen Drew can’t feed his kids on $15.8 million a year, maybe he should learn Japanese.

Lee Trocinski
5 years ago
Reply to  Shawn

That’s the common narrative, but this post shows that Melvin Upton is the only player who played their entire career in a small market and got a QO. The large-market teams are the ones getting most of the compensation picks.

5 years ago
Reply to  Lee Trocinski

I agree that large-market teams are able to get value out of the compensation picks, partially because they’re better suited to make a QO to their players. If Murphy or Desmond played for the Rays, maybe they don’t even receive a QO because the Rays won’t want to risk paying them $16MM this year.

On the other hand, the article glosses over the trade value of the QO. Many small-market teams trade away their top players a year (or two) before free-agency so they can re-stock their farm system. Yes, the large-market team gets the compensation pick once the player goes to free agency, but the small-market team gets extra trade-value as a result of the potential QO. That’s factored into the trade.

Marc Schneider
5 years ago
Reply to  Shawn

What Stephen Drew gets is besides the point. What other business in America allows caps on employee compensation on the basis that “they already make enough?” It’s certainly not Wall Street or corporate America in general. The argument about Stephen Drew already making enough begs the question of whether we should expropriate income to the owners, who make far more. When people that complain about things like this are willing to support moving away from a free-market economy, I will have more respect for their opinions.

And saying “I’ll bet the writer supports a big market team” is not an argument; it’s simply an ad hominem attack. As others pointed out, the big market teams still benefit from this system.

5 years ago

At some point the players have to start making the teams pay for offering a QO. Most of them reject them and then hamstring themselves. Then you will start to see only players who were going to make more than the QO reject them.

I also think they could do something where you need to offer a multi-year contract to get a first round/supplemental pick. So if you want a first round pick you need to offer a 3 year $48 million. second round pick 2/$32; third round 1/$16. or something along these lines. It would force the team to actually offer a contract the player would want and allow the player to have less of a burden around their neck if only a 3rd or 2nd round pick was attached to them.

5 years ago

The current situation certainly can help smaller market teams stay competitive… but by the same token, it definitely hurts the players. I am really split on this… On the one hand I think the salaries that the top players get is kind of ridiculous (and what minor league players get is immoral, but that is another rant)… but by the same token, I would prefer see the players get it than the owners since the players are the real product that is being sold.

The problem is, how do you give small market teams a chance to be competitive in a market where the star players bring in salaries that they can’t afford, and all the teams are savvy enough in sabermetrics that its hard to build a great team on a tight budget.

5 years ago
Reply to  Greg Simons

Revenue sharing might be one way to go… though I thought that the majority of revenue in baseball is generated locally as opposed to football where it is the national broadcasting rights that are the real money maker. Owners that generate a lot of revenue might object to teams that play in empty 3/4 empty stadiums getting a good chunk of their revenue.

An alternate arrangement might be to set a salary cap and floor linked to MLB overall revenue.

DG Lewis
5 years ago
Reply to  MarylandBill

They’re not alternate arrangements, they’re three legs of a tripod – a salary cap, a salary floor, and strong revenue sharing.

A salary floor without strong revenue sharing means that low-revenue teams (and let’s be honest, a team in a market like Milwaukee, Minneapolis/St Paul, or Pittsburgh will inherently generate less revenue than a team in a market like New York, Chicago, or Los Angeles, regardless of how good their play or marketing is) will have payroll requirements that exceed an affordable share of revenue.

A salary cap without strong revenue sharing means that high-revenue teams will simply generate additional profits for their owners without significantly affecting competitive balance.

And strong revenue sharing without a salary floor means that low-revenue teams can also generate additional profits for their owners instead of using the additional revenue for player salaries.

5 years ago

In order to extort taxpayer $$$ for 30 stadia, there has to be a promise in each and every case that said team has a reasonable shot at a championship. Ergo, some degree of competitive balance is required (never mind the huge market differentials still involved). Said balance in a form according to however ownership and the labor representative (MLBPA) so negotiate.

5 years ago

Good article, i kind of agree however i’d follow what the NFL does and just not penalize the team signing the player but give the team who lost the player a comp pick based on the value of the contract signed by the new team comparative to other players signed during the off-season. (it isn’t what the nfl does but it’s my own twist)

Example: Greinke signed for the largest contract this off-season of all SP pitches, Dodgers would get the first comp pick in the first round and so on. Maybe it’s the first 10/20/30 players so there isn’t a massive amount of comp picks.

Matt P
5 years ago

But the point isn’t competitive balance. The point is to make it easier for teams to keep their stars. Then again, it isn’t very successful at this.

Maybe there should be a change. Let clubs have the opportunity to match any contract offered to one of their free agent players that they’ve controlled for the past three years. If they sign that free agent (whether via match or normally), they receive a certain sum via a Revenue Sharing fund to pay for a percentage of the contract. This also would kick in for extensions (after the player has six years of service time). Small market clubs (21-30) would get this benefit for a certain number of eligible FAs over a 5 year period. Mid market clubs (15-20) would get the same benefit for half as many.

This way, small market clubs are more able to keep their best players longer and it would improve competitive balance. On the other hand, it wouldn’t hurt player compensation.

Barney Coolio
5 years ago

If there’s no penalty for singing free agents, than a team could endure a period of suffering, save their money, sign a big time free agent, all the while drafting studly draft picks, and become a super team. I think I prefer the gamemanship of the current system

Paul G.
5 years ago

Free agent compensation is not really a good system. The problem is there may not be such a thing as a “good” system. The ideal system would provide competitive balance without propping up non-viable markets or punishing large markets for being successful; dole out ample earnings to players, owners, and other personnel; allow teams to keep their own stars; allow players to go wherever they want; block rivals leagues by depriving them of markets; provide fans with the best experience at the best possible price; and so forth and so on. Good luck.

Of course, we could always go with Finley’s free agency idea and make everyone take one-year contracts. The players did not like that idea for some reason….

Joel Sneed
5 years ago

If a team makes a qualifying offer it should be permanent. Then if the market does not beat the offer the player could always come back and accept the offer. This would keep teams from making offers to players they do not want back in an attempt to get a draft pick. This would have helped Kendrick.

Yehoshua Friedman
5 years ago

There are two major problems with the business of baseball. One is that the current system encourages owners to give priority to making money and keeping a positive balance sheet as opposed to producing the best possible baseball product. The owners of a small-market franchise produce the most marginally competitive team and make money off the TV and other deals. They devote a large percentage of years to rebuilding and spending minimal money while they restock their farm systems. They make a hell of a lot of money on a relatively small MLB player budget. The only solution to this is Green Bay Packers type community ownership. The interest of the fans in seeing a winning team should be paramount. The second problem is low minor league salaries. Players who gamble several good years of their lives when they could be doing academic and professional advancement should be minimally compensated against the high likelihood that they don’t win the MLB jackpot. They have lives, eventually families, they need to make a living wage. Considering how good high minors baseball is, the dropoff from MLB to AAA and AA should not be so great. Maybe only the lower levels of baseball should be affiliated and there should be a promotion/relegation system as in English football or something like that. I keep thinking of the heyday of the PCL and its open status. Ideas, anyone?

Marc Schneider
5 years ago

Yehoshua Friedman,

So, how are you going to convince MLB owners to adopt a community ownership model? These are privately-owned businesses. Any government attempt to force them to give up the team would run afoul of the Fifth Amendment. I think it would be difficult to use eminent domain to acquire the teams and, even if you could, this would require paying something close to fair market value which would run to billions of dollars. The Green Bay Packers are not exactly a typical sports franchise. I don’t know why the interest of the fans in seeing a winning team should be paramount anymore than the interest of customers is paramount in any business. If I go into Safeway, the store’s interest is in making money; to the extent that that interest incentivizes Safeway to provide better service, prices, etc., our interests are aligned. But, make no mistake, Safeway’s paramount interest is in making money.

I don’t see why it should be any different with sports teams, with one caveat: to the extent that teams play in taxpayer-financed stadiums, I agree that the teams should be required to do whatever it can to have a winning team. But, even at that, it’s not clear that spending a lot of money is necessarily going to produce a good team. I just don’t see why we need socialism in sports. Let the market determine how much players make and how much owners make. If they want to put a bad product out there, fans have no obligation to attend the games. But, this is dependent on cities not giving in to extortion by the owners/leagues to build new stadiums.

Moreover, it’s not as if the Green Bay Packers have always been winners. Prior to Vince Lombardi arriving in 1959, the Packers struggled, and they struggled after he left. They have been a good team for roughly the last 20 years, but I see nothing to suggest that is connected to their so-called community ownership.

In short, I don’t think your idea is either practical or desirable.