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August 17, 2007

Lies, Damned Lies

Slotto Bonanzas, Part One

by Nate Silver

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Maybe you've had this experience. Your wife's annoying cousin is in town, and you've managed to get him out of the house for the evening. Eventually, he walks back in and states emphatically, "I just paid 20 dollars for a steak dinner!" You are at a complete loss for how to react. Is he telling you this because he thinks $20 for a steak dinner is really expensive? Or because he thinks it's really cheap? If you guess wrong about his intentions, you will either make him feel like a cheapskate, or some kind of country bumpkin. So, you shrug your shoulders and just say "huh."

That's sort of how baseball fans tend to react when they hear about draft signing bonuses. So the Tigers just committed $7 million and change to Rick Porcello. Is that a rip-off or a bargain? Well, we don't know; clearly it's a rip-off if he turns out like Brien Taylor, and a bargain if he turns out like Josh Beckett. But are above-slot signing bonuses generally a good deal for the club?

I've long asserted that the answer to this question is yes, simply because we've established elsewhere that draft picks usually provide a very good return on investment to their clubs. It does not necessarily follow that paying extra for draft picks produces sufficient extra reward. By definition, draft picks go for below-market value because the player has limited bargaining power; that's why compensation scales up so much when a player becomes a free agent on a technicality, or can make a credible threat to play another sport. However, teams might not be discerning enough about just who they give that extra money to. Among others, players receiving bonuses way above their slot include Gavin Floyd, Michael Garciaparra, Eric Munson and Mike Gosling. It is hardly a guarantor of success.

If for any reason you haven't read Kevin Goldstein's outstanding background piece on the subject of draft slots and signing bonuses, please take a moment to do so. Basically, the draft slots are quasi-official numbers (though not binding) provided to each club by MLB. In 2006, for example, it was recommended that the first pick make $4 million and the second pick make $3.25 million. All teams follow the draft slot recommendations much of the time, and some of them follow them all of the time. In any given draft, there are perhaps a dozen or a half-dozen players out of the first 100 picks that come in materially above slot.

Teams have two ways to ignore the slotting bonuses if they so desire. First, they can simply give the player the bonus they want to give him, and brush off the angry phone call from Park Avenue. Alternatively, they can guarantee a major-league contract to the player, which has much the same effect, but can preserve the appearance that they've respected the slot system. The Royals, for example, gave Luke Hochevar a $3.5 million bonus last year, which was under MLB's recommendation of $4 million. But they also guaranteed him $1.8 million in major-league money, bringing the total value of the package to $5.3 million.

As far as Luke Hochevar is concerned, that was an above-slot offer, because for all intents and purposes, guaranteed major-league money is just as valuable to the player as a signing bonus. The typical major-league package will guarantee a salary over a period of four or five seasons, including the season in which the player was drafted. He does not have to actually be in the majors to receive this money. A typical sequence for a player with a five-year guaranteed contract might be:

  • Year 1: Drafted by MLB club. Joins minor-league club in August, does not reach majors.
  • Year 2: Player gets recalled to majors after September 1, which doesn't count against his service-time clock.
  • Year 3: Player begins the year in the majors and spends the season there. At its conclusion, he's accumulated 1.0 years of service time.
  • Year 4: Player's sophomore season in majors. He's accumulated 2.0 years of service time by year's end.
  • Year 5: Player's third season in the majors. He doesn't have quite enough service time to qualify for arbitration under "Super 2" status, so he continues to be paid under the reserve clause.
  • Year 6: Player is finally eligible for arbitration. However, at this point his original deal has expired, and the team needs to come up with some fresh money.

In other words, the way that these deals are structured, the guaranteed seasons almost never overlap with a player's arbitration years, when he can actually begin to earn some real money. Since pre-arbitration players are generally paid close to the league minimum, all the team is doing is making a down payment on a couple years' worth of the minimum salary, and that's if the player reaches the majors in the first place. Between 1998 and 2001, for example, there were 11 draft picks who received guaranteed major-league packages. Only one of those players (Mark Prior) reached an arbitration season while still under the terms of his original contract, and he had a clause to opt out of his deal once he did (which he exercised).

The chart below presents several different conceptions of slot value for the first 100 picks in the draft. The green line indicates the actual slotting bonuses as recommended by MLB in 2006. The blue line represents the average amount that the players in each draft slot were actually paid between 1998 and 2006, including any guaranteed major-league money. As you can see, this number generally follows the recommended slot money, but it's noticeably higher in the case of the first four or five draft picks. This is even more apparent if we look at the orange line, which sorts the players not by where they were drafted, but by how much they were paid. So Mark Prior rates as the #1 pick in 2001 rather than Joe Mauer, for example, since he was given $10,250,000 in guaranteed money to Mauer's $5,150,000.

image 1

It is this orange line that represents the truest conception of how MLB teams value their draft picks. As you can see, the teams are fairly well-behaved in general, but they will go well above slot for roughly the five most talented players in a given draft, and especially for the best one or two players--the highest-paid player in each year's draft class can expect about $6.5 million in guaranteed money, well above MLB's recommendation of $4 million for the #1 pick.

Teams are doing this for a simple reason: it's much more proportionate to what these elite players are actually worth. The next graph presents a comparison of the de facto and de jure slot values to lifetime WARP scores of players in particular draft slots as calculated by Rany Jazayerli. The most noticeable difference is that the first five picks in the draft, and particularly the #1 overall pick,, are worth considerably more than the MLB slotting system provides for:

image 1

If I were running Major League Baseball, I might provide a range of acceptable bonuses for the first dozen or so picks in the draft, rather than simply one number. Something like the following would work pretty well:


Pick    Range (in $100K)
 #1     $4,000-7,000
 #2     $3,500-6,000
 #3     $3,000-5,000
 #4     $2,750-4,000
 #5     $2,500-3,500
 #6     $2,250-3,250
 #7     $2,100-3,000
 #8     $2,000-2,750
 #9     $1,900-2,500
#10     $1,800-2,225
#11     $1,750-2,000
#12     $1,700-1,850
#13     $1,650
#14     $1,600
#15     $1,550
[etc.]

Now, you can argue that if you provide teams with a range, they're naturally going to gravitate toward the upper end of that range. But all drafts are not created equal, particularly toward the top of the spectrum; Justin Upton was a substantially better prospect than Luke Hochevar, and everyone knew it. More importantly, teams are already ignoring the slotting system where the talent is strong enough to warrant it, usually by "hiding" bonuses in the form of guaranteed MLB money. If you got the teams to abandon the practice of providing major-league contracts to draft picks, you could go up to the top of these ranges without creating any inflation in the draft system.

Frankly, all that the rigid slot structure is doing is impeding the talent from being distributed to those that most need it, because the teams that refuse to go above slot are usually the teams that are--how can I put this nicely--economically illiterate. It's bad for the competitive ecology of the sport when the Pirates draft a mid-first round talent with the #2 pick because they want to ensure they have a prime seat at Bob DuPuy's Christmas Gala. Some clubs need protection from themselves.

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

Related Content:  Draft,  Draft Picks,  Money

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