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April 1, 2016

Prospectus Feature

Are Teams Under-Gaming The Draft?

by Grant Jones

With 97 wins, an NLCS appearance, and the successful graduation of several key young players, the Chicago Cubs were one of baseball’s most successful teams last year. Off the field, they had a successful international signing period, as well, inking Cuban star Eddy Julio Martinez, and various other international prospects. The signings of these players came at great cost—the Cubs were taxed at a 100 percent rate on every dollar they went over their spending pool; they lost the rights to sign any international prospects for more than $300,000 in the 2016-17 and 2017-18 signing periods—but the Cubs, as a few other teams have done in recent years, found the gain in talent to be worth the penalties.

The Cubs also had, by all accounts, a successful 2015 draft. While I would tend to agree, I also believe that they missed an opportunity. They were the perfect team to do what no team has done since the 2011 Collective Bargaining Agreement was put in place: blow past their allotted bonus pool. While a number of teams have shown the propensity to spend way beyond their pools in the international sphere, no team has gone past the 5 percent overage in the Rule 4 daft that would result in the first of three possible penalties—let alone blow past the 15 percent overage that sets off full penalties. (Penalties are as follows: the loss of a first-rounder the following year for 5 percent to 9.99 percent overage; loss of a first- and second-rounder for the following year for 10 percent-14.99 percent; and the loss of your next two first-rounders for spending more than 15 percent over your draft allotment.)

During last fall semester, in anticipation of job interviews at the Winter Meetings, I looked into the merits and costs of a team doing to the Rule 4 draft pools what the Cubs, Yankees, Rays, et al have done to the international signing pools. This analysis rests on a number of assumptions—about the value of a certain subset of unsigned draftees, about the costs in dollars to sign them, about the consequences of such a decision, and most especially about the signability of such players—that might, as with any battle plan, wilt upon contact with the enemy. But within the parameters of these assumptions, I concluded there is an opportunity for an aggressive team to add a massive influx of high-end talent into its farm system, an influx that could, thanks to other recent draft rule changes, help a team in the short term as much as the long. And, with the collective bargaining agreement reopened for negotiations, this June might be the last chance to try it.

***

As I mentioned, the 2015 Cubs seem like the perfect team to employ this strategy. They fit all the optimal conditions as a team in contention, a team unlikely to be picking inside the top 20 picks in the next two drafts, and a team with the financial muscle to pull this off. To add to this, the Cubs would go on (unsurprisingly) to sign Qualifying Offer free agents, meaning they lost their first- and second-round picks in 2016 regardless.

In the 2015 draft, Baseball America top 50 draft prospects Donny Everett and Justin Hooper and top 100 draft prospects Kyle Molnar, Brady Singer, Jonathan India, Jackson Kowar, Cole Sands, Cole McKay, Kep Brown, Tristan Beck, Luken Baker, Alonzo Jones, Chandler Day, Joe Demers, and Parker McFadden all ended up playing college baseball instead of signing. Each of the players' circumstances was different, but in general, these players slid down the draft—in some cases due to bonus demands—and didn't get an offer high enough to lure them away from college. Some, aware that they wouldn't be drafted as high or paid as much as they'd hoped, told teams in advance of the draft that they weren't likely to sign.

Within that same draft, Daz Cameron, Baseball America’s fifth-ranked player overall, fourth-best positional player and second-ranked prep player fell (due to anticipated bonus demands) to pick 37, where the Astros signed him for a reported $4 million dollar bonus.

Why didn’t a single team take almost all of these players—Cameron as a potential first-round pick, the rest in rounds 11 onward—and sign them all to over-slot bonuses, injecting all this high-end talent along with the normal picks in rounds 2 through 10?

According to The Hardball Times Expected WAR chart for drafted players, picks 21-25 have an average pre free agency WAR of 3.1, and picks 26-30 have an average WAR of 2.8. That, along with the bonuses paid to these players, is the cost of this strategy. So a team hoping to recoup the value of two future first-round picks must expect to add a minimum of 5.6-6.2 WAR, depending on where they project themselves to finish (and, thus, where they expect to draft in the following two years).

Actually, that might overstate the minimum return to justify such a strategy. Getting these players into the system now, as opposed to one or two years later, adds value. Matt Swartz, in Methodology and Calculations of Dollars per WAR, argues based on market tendencies for a 10 percent discount of WAR—teams choose to spend more on a win today than a win tomorrow, in other words—so we will apply the same discount to gauge the value of getting a player now, as opposed to two years later. With the assumption that a team is losing a 21-25 pick in both of the following years, it is now losing an expected 2.79 WAR player in the following year, and a 2.51 WAR player in the second.

So with those premises in place, we can answer the question: If a team were to have a completely normal draft up until round 11, when signings under $100,000 do not affect the pool, and were to take Donny Everett and Justin Hooper, would it in effect be worth losing the next two first-round picks?

The team would be in line to draft:

· Everett, expected value: 3.1 WAR

· Hooper, expected value: 2.4 WAR

(Expected values based on Baseball America rankings = draft pick value)

If we believe BA’s rankings are a reasonable proxy for actual talent, the team would in effect be gaining 5.5 wins, and losing the opportunity to gain 5.3 wins, for a gain of .2 wins. Of course, .2 wins is of no difference in reality, but as we will touch on there are various other factors that make this a more complicated question, such as QO free agents. More simply, though, this makes for an effective argument that a team expecting to be in contention could reasonably rather have Everett than their 2016 first rounder, and Hooper than their 2017 first rounder.

Ideally the team would, in the succeeding picks after the 10th round, draft not just Everett and Hooper but Kyle Molnar (53rd ranked, drafted 761st, didn’t sign), Luken Baker (58th, 1099th), Tristan Beck (63rd, 1021st), Alonzo Jones (64th, 1073rd), Chandler Day (78th, 904th), Cole Sands (79, 649th), Parker McFadden (81st, 605th), Jonathan India (82nd, 781st), Joe Demers (91st, undrafted), Cole McKay (96th, 910th), and Jackson Kowar (99th, 1210th).

Those were the best players to fall in the draft, get popped in the later rounds, but not sign. That would take you from rounds 11 through 23 while picking up a plausible first-round talent (Everett), five second-round talents (Hooper, Molnar, Baker, Beck, Jones), and seven third-round talents (Day, Sands, McFadden, India, Demers, McKay, Kowar). This would also free a team up to use the first 10 rounds to go entirely Best Player Available (BPA), ignoring signability bonus pool concerns, and get others who slipped less significantly, including Cameron. (Note that the Cameron angle applies less to a team like the Cubs, which picked ninth last June and chose a comparable talent—perhaps its preferred player—in Ian Happ.)

Below is a chart showing the WAR you would be picking up, using Baseball America rankings, and WAR expected values.

Player

BA Rank

Avg WAR, Net WAR*

Everett

21

3.1

Hooper

39

2.4

Molnar

53

.8

Baker

58

.8

Beck

63

.7

Jones

64

.7

Day

78

.7

Sands

79

.7

McFadden

81

.7

India

82

.7

Demers

91

.6

McKay

96

.6

Kowar

99

.6

Total: 13.1

*Molnar through Kowar use Net WAR as opposed to Average WAR; limited publicly available data on Average WAR after the 50th pick.

The issue now becomes how much money a team is willing to be spent, as most of these players did not sign due to their commitments to college programs. Putting Cameron aside: If you assume you need to pay $4 million for Everett, $3 million for Hooper, $2.5 for each of Molnar and Baker, $2 million for Beck and Jones, and $1.5 million average for each of Day, Sands, McFadden, India, Demers, McKay and Kowar—all significantly more than “slot” for their BA draft rankings—then this would result in $53 million total, after accounting for the 100 percent tax on their signing bonuses.

This, more than the cost of two “lost” future draft picks, could be the obstacle preventing any number of teams from approaching this strategy. That $53 million “buys” 13 wins. That’s $4 million per win, a bargain by our normal win-on-the-free-agent-marker math, but on top of that are the costs associated with developing the players in the minors and then paying their major-league salaries if and when they make it to the highest level.

Thanks to the Dodgers, we do have one test case to see if these assumptions are close, though. When the Dodgers traded for Ryan Webb and a competitive balance draft pick last summer, then immediately released Webb (absorbing his contract), they told us that the 74th pick was worth at least $2.75 million to them, on top of the signing bonus that pick would command, on top of his player development costs, and on top of his future major-league salaries. The slot value for that pick is around $800,000, so they were willing to pay more than $3.5 million to add a player who, by our estimates, would be expected to produce .7 wins before free agency. That’s only one team’s estimate—and the Dodgers, at that—but it suggests that a well-funded front office is willing to pay almost $4 million for less than one expected win in the draft. For a team with the cash, $53 million for 13 wins meets that threshold.

“With the cash,” though. Most major-league GMs don’t have $53 million in petty cash to draw from; extrabudgetary cash can be very hard to squeeze out of the typical owner. But one benefit of this strategy is that it might actually help a competitive team save money in the immediate term.

***

Trea Turner’s well-documented trade as a PTBNL led to the rules change that allowed Dansby Swanson to be traded this offseason. This represented the first time in recent history that teams immediately used draft picks to improve the MLB roster. If a team has multiple first- and second-round-caliber players that other teams covet, it would be very easy to improve the roster for a fraction of the cost normally associated with adding veterans. By drafting and signing players at over-slot prices, a team can in the following offseason trade them for major-league-ready players who will, in theory, be paid less than the free agents available.

With this in mind, the way a team rebuilds and revamps could change dramatically. Teams would be able to extend their windows of opportunity, much in the way that the Boston Red Sox in the mid-2000s used draft compensation picks and trades to rebuild and reload at the same time. This could have been a strategy the Tigers could have employed to extend their window. Or, had last year’s Cubs employed this strategy, they might have been able to Go All In by trading considerable amounts of young talent for, say, Jose Fernandez or Craig Kimbrel this offseason, but without completely depleting that young talent. They would have also faced a much lower opportunity cost of signing free agents, since they will have already lost picks in the following years—akin to when a team only has to give up a second-rounder as opposed to a first-rounder because they’ve already signed a QO free agent.

Then why don’t teams do this? There are various explanations that hold some credence. For instance, perhaps the players who "fell" did so because they were all overrated by Baseball America, and our estimates for their future value are too optimistic. Perhaps the teams that might want to gamble on this lack the funds to pull it off, and perhaps others are especially apprehensive about giving away first-round picks (even for the reward of a draft haul like this one). Perhaps teams fear the commissioner, or the lack of control over which players slide in the draft. The last one especially seems daunting: It is a nerve-racking proposition to risk future first-round picks on players you can’t be sure will slide. But every year it happens, and it will continue to.

There is one way to indirectly influence which players slide, though: through pre-draft arrangements that inflate a player’s asking price thus leading to other teams (who are presumably adhering to their bonus pools) passing due to signability concerns and lack of funds. In this way, a team might be able to engineer a draft haul limited not just to Everett, Hooper, et al, but players that the organization even prefers and would like to see fall. This has the potential to get teams in trouble, but pre-draft arrangements are otherwise very commonplace in the current draft environment. A team might have as its defense that it’s using the industry’s de facto negotiating practices, just to different ends.

But there’s one more reason that might explain why teams haven’t tried this, and it goes to a fundamental assumption that we’ve used here: It might be harder to sign these guys than we think. We’ve assumed that most of these players could be persuaded to sign for enough money, even as late-round picks. But, in practice, there are players who simply don’t want to be 13th-round picks. As they slide down the draft board, they feel wounded, disrespected, underrated. The draft is not going how the draft projections and rankings they’ve been reading had promised. They feel the sting of disappointment with each pick that isn’t them; they mentally prepare to go on to college. Their savvy college coach might call them and remind them of the great opportunity awaiting them at Big State University. Their advisor calls to encouragingly remind them that an even bigger payday might be there three years down the line. There are players who, once they start sliding, explicitly tell clubs mid-draft that, on second thought, don’t pick them. (This even happens before the draft, when it is clear to the player that he already has slid.) There are players whose advisors make it clear mid-draft that, as the player slides further, his bonus demand is paradoxically going up. The player didn’t just want the big signing bonus; he wanted the status and security of being a top-round pick. The psychology of signability, execs say, is more complicated than meeting a pre-draft dollar demand.

If there’s a particularly convincing case for why no team has tried this, it’s that it really only works if the club goes huge on the strategy. And there are enough assumptions in play here that it only takes one or two being wrong before one can envision it crumbling. It might be that no team has tried it simply because the costs of employing it are very real, very concrete; the benefits, meanwhile, are uncertain, unpredictable, and—for now—largely theoretical.

***

But let’s say some team tries it this June.

There are various potential repercussions to this that would affect all of baseball. With the upcoming Collective Bargaining Agreement negotiations, 2016 could potentially be the final year that this strategy could be employed; the upcoming CBA negotiations more than likely will change international and draft spending. (If a team were to employ this strategy in June, then changes to the draft pool/penalty structure would probably become infinitely more likely.) It would represent a huge advantage to obtain this much talent before another window of player procurement is closed, as the MLB and MLBPA continue to work toward closing loop holes for spending on amateur players.

Would the league retaliate against such a heist? Maybe. But each individual action employed by this strategy is already done elsewhere on a smaller scale. If push came to shove, a team would very easily be able to find proof of other teams having pre-draft deals or signing players over slot without punishment.

Ultimately, a team would have significant gains in both the near- and long-term future, assuming financial capabilities. The massive influx of talent in a system that tries to suppress this type of spending would be impressive and put the organization involved in a phenomenal position to succeed.

Grant Jones is an author of Baseball Prospectus. 
Click here to see Grant's other articles. You can contact Grant by clicking here

Related Content:  Chicago Cubs,  Prospects Draft

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