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January 31, 2007

Doctoring The Numbers

The Hidden Market Boost

by Rany Jazayerli

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Part of the allure of baseball is that, while players and teams come and go, the game itself changes at such a glacial pace that a 90-year-old fan today would have trouble coming up with any differences between the games he watched as a child from the game he sees today. Basketball before the invention of the shot clock was a vastly different game than the one played today. The shot clock wasn't even adopted by the NCAA until Michael Jordan had already left school. Football adds and subtracts penalties like an accountant furiously trying to make the books balance. The NHL made more rule changes after their lost season of two years ago than Major League Baseball has made since 1920.

The game's changelessness can lull the players, the media, and the fans into a false sense that nothing ever does change, and can make otherwise rational people into complete Luddites when it comes to the game's off-the-field evolution. You've heard the refrain--free agency will destroy the game, or arbitration, far from being a fair method of providing both sides with leverage in contract negotations, is an abomination. Perhaps some of us are still a little too hesitant to accept the eight-team playoff format that's been in place since Derek Jeter was in the minor leagues.

Off the field, however, the game changes, and in the Bud Selig Era those changes occur more quickly than ever before. The wild card, three divisions, interleague play, "This Time It Counts." With a new CBA in place for the next five years, more changes are in store, even if the ramifications of those changes are still being worked out. The Rule 5 Draft looked like it had been completely neutered after the CBA allowed teams to hold on to minor leaguers for an additional year before adding them to the 40-man roster or risk losing them in the draft. Rumors of its demise were greatly exaggerated, at least the first time around; 19 players were selected in the major-league phase December, seven more than were picked in 2005.

While it's still too early to know if the new CBA will have a dramatic impact on the Rule 5 draft, there's no disputing that it's already had an impact on the Rule 4 draft, the one that's held in June and actually matters.

For the last two decades, draft-pick compensation for free-agent signings had remained unchanged. The process works like this: all major players are ranked according to a formula agreed upon by the MLBPA and the owners (the formula they use is so archaic that at some positions, fielding percentage is one of the categories) and assigned an overall score by the Elias Sports Bureau. Players are then ranked with all other players in their "category"--second basemen, third basemen, and shortstops are combined into one category; first basemen, DHs and outfielders have their own category, etc. Through 2005, player ratings were assigned as follows:

Top 30% of players in your category: Type A
31-50%: Type B
51-60%: Type C
61% and lower: no rating.

If a rated free agent was offered arbitration by his current team, declined it, and subsequently signed with another team, his original team was rewarded with compensation in the following manner:

Type A: Conditional first-round pick + supplemental first-round pick.
Type B: Conditional first-round pick.
Type C: Supplemental second-round pick.

By "conditional first-round pick," I mean "a first-round pick from the signing team if the signing team drafts in the last half of the first round, otherwise their second-round pick." This means that the highest pick that could be obtained from the loss of a free agent is the 16th overall pick. Also, keep in mind that picks from other teams can move down even farther if one team signs multiple free agents--in this case the team that loses the highest-rated free agent gets compensated first, and so on down the line.

Supplemental first-round picks, on the other hand, are picks in the "sandwich round" that is created between the first and second rounds. The main difference between the two is that while conditional picks are taken away from the signing team, supplemental picks are created out of thin air and don't penalize any specific team.

So if you look at compensation from the standpoint of the signing team under this system, it looks like this:

Type A & B: Conditional first-round pick.
Type C: Nothing.

Those were the old rules; the rules under the new CBA are a little different. The same formulas are used to rank players, but now the rating system works like this:

Top 30% of players: Type A
31-50%: Type B
51% and lower: no rating.

And the compensation looks like this:

Type A: Conditional first-round pick + supplemental first-round pick.
Type B: Supplemental first-round pick.

Only two changes have been made, and one of them is almost irrelevant. Type C free agent compensation has been eliminated, but you would be forgiven if you didn't realize it existed in the first place. Type C free agents ranked in the 51-60% range of all players, which is to say that they're not generally very good, and not highly sought after on the free-agent market. In the last seven drafts (since 2000), there have been no more than two Type C compensation picks awarded in any season.

But the other change, to Type B free-agent compensation, has changed from a conditional first round pick to a supplemental first-round pick. This is far more significant than you might realize.

From the standpoint of the team losing the player, their compensation has not changed all that much. In the past, they had about a 50/50 chance of getting a first-round pick or a second-round pick, depending on the identity of the team that stole the player from them. (Between 2000 and 2006, 41 teams received a first-round pick as compensation for a Type A or B free agent, and 42 teams received a second-round pick.) The new rule change splits the difference, giving the original team a supplemental pick between the first and second rounds. If anything, the new system provides more draft pick value for the original team, because it eliminates the possibility of getting a pick after the second round. Over the last seven drafts, 18 teams received third-round picks, three received fourth-rounders, and one had to settle for a fifth-rounder.

But if the original team comes out ahead in the new deal, the team that signs the Type B free agent makes out like a bandit. As before, teams that sign Type A free agents lose a conditional first-round pick. But teams that sign Type B free agents, who previously were as costly as Type A free agents to the signing team, no longer owe any compensation whatsoever.

Teams have noticed. A total of 17 Type A free agents have switched teams, and none are left on the market. That's a high total, but not unprecedented--there were 17 Type A free agents that switched teams in 2005, and the average from 2000-2006 is 11.4. By comparison, over the last seven drafts an average of just 3.6 Type B free agents switched teams every year, and in no year were there more than five of them. So far this winter, 16 Type B free agents have changed teams.

Signing a Type B free agent is now a win-win situation, or rather, a win-win-win situation. The team that loses the free agent gets a guaranteed supplemental first-round pick, whereas in the past those picks frequently dropped into the second round or lower (over the last seven years, only 10 of 25, or 40%, of Type B compensation picks were awarded in the first round). The team that signs the free agent wins big, obviously, as they no longer have to give up a draft pick in return.

The biggest winner of all might be the player who is designated a Type B free agent. These are players that fall in the 31-50% range, players who are generally good to have on your squad but not usually good enough that a potential suitor would be willing to give up a valuable draft pick without at least thinking about it. Some Type B free agents (e.g. Ted Lilly, Gil Meche) were highly sought after this winter, and a team willing to throw $40 million or $55 million at a free agent isn't going to hold back just because they have to throw in a draft pick. But for the lesser tier of Type B free agents…I mean, would you give up a first-round pick to sign Scott Schoeneweis, or Craig Counsell, or Alan Embree?

Now, you don't have to.

In the past, those players--if they were lucky--would not be offered arbitration by their previous teams, freeing them up to sign with any other team without any compensation due. If their previous team did offer arbitration, they would have to at least consider accepting it, as potential suitors would have their interest dimmed by knowledge that they would forfeit a high draft pick as part of the deal.

Put it this way: Ryan Klesko was offered arbitration by the Padres, declined, and signed with the Giants. In the past, there would be no chance on God's green earth that a 35-year-old DH who had four at-bats all of last season would be offered a contract by another team knowing that they would lose a draft pick as a result. (Although these are the Giants…)

So if both teams win, and the player wins because he is attractive to more teams, who loses? In a nutshell: bad teams.

The huge jump in Type B free agents that switched teams, and the fact that compensation from them now comes from the pool of all teams rather than the team they signed with, has led to an even larger increase in the length of the supplemental first round. From 2000 to 2006, the supplemental first round never ran longer than 18 picks (in 2005) and was as short as seven picks in 2003. In 2007, there will be 34 supplemental first-round picks (33 if Max Scherzer, the sole first-round holdout from last season, comes to terms with the Diamondbacks before the draft). The supplemental first round will be longer than the first round itself.

The chart below lists the total number of compensation draft picks from 2000 onward, separated into "team" picks--those that were taken away from the team that signed the player--and "pool" picks, which were supplemental picks created solely for the purpose of compensation.

 

Year  Total  Team   Pool
2000   24     14     10
2001   33     17     16
2002   24     12     12
2003   16      9      7
2004   24     13     11
2005   41     21     20
2006   35     19     16
2007   52     17     34

As you can see, from 2000 to 2006 there were at least as many "team" picks as "pool" picks in every year. For the 2007 draft, there are twice as many "pool" picks.

What this means is that bad teams, teams that could look forward to their second-round pick knowing it was nearly as valuable as a contender's first-rounder, will have to wait longer than ever for that pick to come around. Last season the Royals, with the #1 overall pick, had to wait until the 45th overall selection before their second pick. This year the Devil Rays will draft #1 overall…and then have to wait until the 65th pick to select again.There is some dampening effect in that bad teams can sign Type B free agents--such as the Royals signing Gil Meche--at lower overall cost. In previous years, they would have lost their second round pick in compensation, and instead they just have the pick lowered 15 or 20 slots in the draft as a result of the longer supplemental round. It's a worthwhile tradeoff.

The first pick of the second round will come just one pick earlier than the last pick of the second round in 2003.

It's important to note that the supplemental first round may not always be this large. The definition of Type A and Type B free agents remained unchanged for 2007, but starting next winter the new CBA calls for only players in the Top 20% of the Elias rankings to be rated Type A, and players from 21-40% to be rated Type B. This means players in the 41-50% range will be unrated and yield no compensation, meaning that roughly one-fifth of the free agents that currently would earn their old teams a draft pick will not do so in the future. That's a loss of about seven picks in the supplemental first round.

On the other hand, starting in 2008, get ready for the other draft twist--teams that don't sign their first-round pick this summer will be compensated with the equivalent pick (plus-one) in the following draft, not simply a pick at the end of the supplemental first round. Fail to sign the fourth pick in the draft? Get the fifth pick the following year for your troubles. As with Type B compensation, these are "pool" picks, not "team" picks, and while teams already earn a "pool" pick at the end of the supplemental first round under the current rules, the higher compensation may encourage teams to drive a harder bargain in negotiations and lead to more unsigned picks (which will, in turn, lead to more compensation picks).

Is the change good for baseball? Well, it encourages more free-agent mobility, though whether that's a good thing or a bad thing depends on your perspective. It certainly leads to more off-season buzz. The downside is that the progressive effect of rewarding bad teams with high draft picks has been dampened, which in the long run may impair a team's ability to rebuild quickly and thereby hurt the game's parity. It's a small effect, but it's one likely to be noticed by the worst teams when they realize that they have little margin for error with their first-round pick, because their second-round pick is a long time in coming.

On the other hand, teams that are savvy enough to pick up on these changes and stock up on Type B free agents are likely to do very well indeed. Rewarding teams for intelligent use of their resources is never a bad thing.

No doubt the mechanics of the draft will continue to change as teams learn to weight the impact of letting a Type B free agent go, and as we see how teams deal with their increased leverage in signing draft picks. But for now, be prepared for the supplemental first round that just won't end.

Thanks to Baseball America, whose invaluable archive of draft information from previous seasons contributed to the research for this column.

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

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