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The decision to offer arbitration to a player eligible for free agency is
one of the few bright-line tests of a baseball team’s front-office acumen.
The elements of the decision are fairly simple, yet nearly every year a
handful of teams do things that border on the bizarre, that reflect a lack
of preparation for the problem or a misunderstanding of the issues involved.

Unlike many baseball decisions, offering arbitration to a free agent is a
fairly simple process, with a clear outcome:

  • Offer arbitration, and you can continue negotiating with that player,
    while assuring yourself compensatory draft picks if the players signs with
    another team.

  • Decline to offer arbitration, and effectively end your relationship with
    him (the player cannot rejoin your team until May 1), while forfeiting the
    right to compensation.

If a team offers arbitration, the player has a couple of weeks to decide
whether to accept it. If he does, he is considered to be that team’s
property again, returns to their 40-man roster, and the two parties can
negotiate or have a hearing in February to determine compensation. If he
declines, then he only has until early January to reach an agreement with
his old team, or he cannot return to them until May 15.

Let’s take a look at the first possibility, the one in which the team elects
to offer arbitration. There are three potential outcomes:

  • The player accepts. The team is committed to a one-year deal at, in a
    worst-case scenario, the player’s salary request in arbitration.

  • The player declines. The team has a few weeks to sign the player, but
    will receive compensatory draft picks if unable to do so, assuming the
    player signs elsewhere.

  • The player signs elsewhere before the deadline. The team will receive
    compensatory draft picks from the signing team.

That’s it. The last two are essentially the same, so for the team, the worst
thing that can happen is they go to arbitration with the player is a one-year
commitment, and they’re guaranteed to get something back if the player goes
elsewhere. Of course, all free agents good enough to require compensation
are looking for the security of a multi-year contract, so the risk of going
to arbitration is minimal.

Let’s look at one particular case, the one that really stands out for me
right now. The Astros, a team that is generally run well, declined to offer
arbitration to Moises Alou. Alou is a Type A free agent, so by
declining to offer arbitration the Astros essentially forfeited the signing
team’s #1 pick and an additional selection between the first two rounds of
the draft, gaining only the certainty that they would not have to pay Alou
in 2002 (as opposed to the 95% chance that already existed).

This decision shows a lack of understanding of the actual problem with most
free-agent contracts: length, not money. Alou is a decent risk for one
season, even at the high salary he might earn in arbitration. It’s unlikely
that he, or any free agent of his standing, will accept a one-year deal, but
if he does, that’s a good thing for the Astros. Think about it this
way: offering arbitration is the equivalent of offering him a one-year,
$12-million deal; free agents simply don’t sign that type of contracts, with
the glaring exception of Juan Gonzalez last year.

Even if a team really doesn’t want to pay that salary, a player of Alou’s
caliber in the last year of a contract has a lot of trade value, and can
usually be dealt for a good price. The example that comes to mind is that of
the Blue Jays, who offered arbitration to David Segui solely to get
the draft picks, and were surprised to have him accept the offer. The Jays
then traded Segui before the season began in a three-way deal that brought
in Brad Fullmer.

The Astros weren’t the only team to make a questionable call. The Braves
declined to offer arbitration to John Burkett, a Type A free agent.
Again, the risk involved–a one-year commitment at an arbitration salary–is
minuscule and the cost–a #1 draft pick and a sandwich pick–is high. The
Red Sox passed on Hideo Nomo; granted their negotiations had been
contentious, but again, Nomo would be a good risk for one year, a poor one
over multiple years–and now leaves without compensation. The Dodgers cut
Terry Adams loose; the Diamondbacks parted ways with Reggie
Sanders
.

(Because having to give up draft picks to sign a player increases the cost
of doing so, it reduces a player’s market value (this is the whole point of
the now-20-year-old system). On occasion, a player will work out a deal with
his team in which the team agrees to not offer arbitration to the player, so
the added cost can be removed for teams wanting to sign him. The only
notable case of this is the Angels and Chuck Finley after the 1999
season, although there is talk that the Mariners had a similar arrangement
with Aaron Sele this year. It’s just something to keep in mind.)

These seem like fairly minor points, but to me, they are a gauge of whether
an organization is actually thinking through its decisions, or merely making
them at random. A careful analysis of Alou’s case, or Burkett’s case,
reveals that the teams involved had the opportunity to get valuable draft
picks while exposing themselves to a downside that was 1) not really much of
a downside and 2) an unlikely outcome even at that. It is hard for me to
come up with a rationale for not offering the top free agents in any class
arbitration that doesn’t just come down to extreme risk aversion, and if
your money is that scared, maybe it should be in something safer, like
Treasury bills. Or a pillowcase.

It should come as no surprise that the A’s get it, having offered
arbitration to all three of their big free agents (Jason Giambi,
Jason Isringhausen, and Johnny Damon). Getting any of these
players back for the 2002 season alone would have been an acceptable
outcome, although only Damon remains a free agent. The A’s will reap the
draft picks, and given their recent success in the draft, will no doubt use
those picks to continue the longest-running aberration in baseball.

The flip side of this is teams that offer arbitration to players who have
very little value. With each passing year, it seems more teams are choosing
to cut loose this type of replaceable commodity and take their chances with
the free talent widely available. Still, there are a few doozies each
winter. The Cubs offered Ron Coomer arbitration; Coomer isn’t worth a
roster spot, much less a seven-figure salary. The Yankees offered
arbitration to Mark Wohlers, who really deserves little more than a
non-roster invitation and a make-good contract.

With all of the trades, free-agent signings, and other major baseball news,
it’s easy to let this stuff slip by. It’s these little things, though, that
can make a difference in an organization’s long-term outlook. The A’s will
get draft picks; the Astros won’t. The Cubs will probably get stuck with a
lousy bench player in Coomer; the Marlins won’t be saddled with John
Mabry
.

Good organizations take the right risks and make themselves better. Bad
organizations only see the costs and decline the opportunity to do help
themselves.

Joe Sheehan is an author of Baseball Prospectus. You can contact him by
clicking here.