A Thought on Free Agent Compensation

With current Collective Bargaining Agreement set to expire on December 1, 2016, one thing that is likely to be heavily negotiated in the new contract is the rules concerning compensation to teams that lose players to free agency.  There are things I don’t like about the current compensation regime, and there are things both the players and some teams don’t like.

The idea of the qualifying offer makes a lot of sense, and my expectation is that this portion of the compensation regime will continue on to the next contract.  However, the current system doesn’t work in terms of the loss and gain of draft picks.

First, some background on what teams and the player’s union hope to accomplish in terms of free agency compensation.  The teams hope to accomplish two things: (1) compensation for teams that lose their elite players to free agency; and (2) strong disincentives to teams signing free agents in order to reduce the amounts of free agent contracts.  The players’ union has only one true goal: to put as little restriction on free agents as possible so that they can command the largest free agent contracts possible.  If a system can be created to compensate teams losing elite free agents that does not impair free agents’ ability to obtain maximum free market contracts, the union is certainly willing to listen.

The current system contains a strong disincentive to signing a free agent: the loss of a first round draft pick to any team that does not have one of the first ten picks in the upcoming Draft.  This means that teams can lose a first round draft pick by signing a free agent even if they are coming off a losing season, and creates a strong disincentive for teams with the 11th to 15th picks of the Draft from signing any free agent linked to compensation, since the probability of getting a great ballplayer who can be controlled for six seasons is pretty high for these draft picks.  However, it discourages teams that might benefit most by signing an elite free agent (those teams at or just under .500 the previous season) from doing so.

This problem could easily be fixed by providing that only teams with winning records lose a draft pick.  This would mean that the number of teams that could potentially loose a draft pick would change every year, but it’s obviously easy enough to figure out which teams didn’t finish with winning records.

More importantly, the current system does not adequately compensate the teams losing elite free agents.  Since teams no longer receive the first round picks other teams lose and instead receive only a sandwich pick at the end of the first round, teams are beginning to trade off their elite upcoming free agents before they reach free agency.

This is how I understand the Reds’ recent trade of Aroldis Chapman for four B-grade or lower prospects.  Some of Chapman’s reduced value was due to the pending domestic violence charges against him.  Some of it is also that the Reds got quantity over quality.  However, I think the biggest part of it is that trading Chapman with one year to go before free agency wasn’t going to bring a big return, but more than the Reds would get with a single sandwich pick, if they retained him and left via free agency next off-season.

In this sense, the current system doesn’t effectively discourage teams from signing elite free agents.  The current system makes it more likely that pending free agents will be traded during their last season before free agency, as happened with David Price and Johnny Cueto last summer.  Players traded in season can’t be given a qualifying offer; thus, there is no detriment at all to signing them as free agents, and they will get maximum free agent contracts, which thanks to salary arbitration pushes up all player salaries over time.

Aside from taking draft picks away only from teams with winning records, I would return to the system were the teams losing elite free agents get the first round pick of the signing team (or a sandwich pick from a team with a first round protected pick).  However, I would give the team losing their first round pick by signing an elite free agent a sandwich pick to replace the higher pick they lost.  This would do a better job of compensating teams that lose elite free agents without making the cost of signing an elite free agent as onerous.

More compensation to teams losing an elite free agent would make teams at least a little more likely to hold onto these players until they become free agents and would likely be readily accepted by the players’ union because it also lessens the cost to players signing elite free agents.

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