MLB's New Free Agent Compensation Rules Are Incredibly Complicated, So Let's Break Them Down
As of today, MLB free agency has officially begun, with 150 players (and more to join them as the winter goes on) now free to auction their services to the highest bidder. Free agency itself is a wonderfully straightforward process: If a team wants a player, said team signs said player, and life goes on. What isn't as easy or streamlined, though, is the compensation process tied to certain free agents—namely, those who received and will reject qualifying offers—thanks to the machinations of the new collective bargaining agreement.
Let's start here. Any player who is extended a qualifying offer has two options: Accept it and play next season on a one-year, $17.4 million deal (the average of MLB's top 125 salaries); or decline it and hit the market. Those free agents who reject qualifying offers, though, are now subject to compensation from their signing club. That's not new: MLB introduced the qualifying offer back in 2012 to replace its old free-agent compensation system in which teams were gifted draft picks based on a calculus that divided players into two pools, Type A (the top 20% available) and Type B (the top 21–40%). But in the latest CBA, the qualifying offer was overhauled. Before, signing teams would have to forfeit their highest draft pick (unless they were in the top 10 of the draft) to the player's old club. Now, things are a little more complicated.
If your team signs a qualified free agent, it still has to surrender a draft pick. However, that's no longer its top unprotected pick by default. Instead, here's what your team will give up:
• If your team exceeded the luxury tax last season, it will forfeit its second- and fifth-highest picks and will have its international bonus money pool reduced by $1 million; an additional qualified free agent will cost the team its third- and sixth-highest picks. In other words: All first-round picks are now protected, and the highest pick a team can lose is from the compensatory sandwich round immediately following the first round.
• If your team received revenue sharing last year, it will forfeit its third-highest pick. An additional player will cost the team its fourth-highest pick.
So that's what a team gives up to sign a qualified free agent. But what does the team losing the player gain in exchange?
If your team received revenue sharing last year and the departing player signed a contract worth more than $50 million guaranteed, the former team will receive a compensatory draft pick from the sandwich round between Rounds 1 and 2. If the player signs a deal for less than $50 million, however, that pick will come after Competitive Balance Round B, which comes after Round 2.
But there's more! If the former team was over the luxury tax last year, then it will receive a compensatory draft pick after the fourth round. If the team was neither a luxury tax payee nor a revenue sharing recipient, then it will receive a pick after Competitive Balance Round B.
Let's build a real world example. Say the Dodgers, who will pay the luxury tax as a result of their $242 million payroll, wanted to sign Jake Arrieta, who was extended a qualifying offer from the Cubs but will almost surely decline it. If Los Angeles were to add Arrieta, it would have to forfeit its second- and fifth-round picks. The Cubs, meanwhile, would get a pick after Competitive Balance Round B.
Let's make it a little tougher. In this scenario, the Dodgers want to sign Alex Cobb away from the Rays, who made him a qualifying offer. Again, the Dodgers, as luxury tax payers, would have to give up their second- and fifth-round picks. But let's say that deal was for five years and $75 million. Because that contract is worth more than $50 million, the Rays—who are a revenue sharing recipient—would get a sandwich-round pick. If Los Angeles signed Cobb to a three-year, $48 million deal, though, Tampa would get a pick after Competitive Balance Round B instead.
One more, and let's get weird. For some reason, the Rays are signing Eric Hosmer away from the Royals on a 10-year, $200 million deal (fun fantasy, right?) and also losing Cobb to the Dodgers on that aforementioned five-year, $75 million contract. Signing Cobb costs the Dodgers their second- and fifth-round picks and gifts the Rays a sandwich-round pick. However, signing Hosmer will cost them their third-highest pick—which, thanks to that new sandwich pick, is their third-round choice as opposed to a fourth-round pick. As for Kansas City, which received revenue sharing: It would get a sandwich-round pick since Hosmer's deal is worth more than $50 million.
The truth is that these rules will only impact a small group of teams and players. Only nine men received qualifying offers, and only four clubs—the Dodgers, Yankees, Red Sox and Tigers—paid the luxury tax this year. But it's worth wondering just how we got to the point where understanding MLB's free agency rules now requires LSAT-level reading comprehension, or even a team of specialized lawyers. The simple reality is that free-agent compensation shouldn't be tied to draft pick forfeiture: All that does is serve to depress the market artificially, as teams usually have no inclination to sacrifice picks (and the cheap talent they lead to) in exchange for already expensive veterans, particularly those who are not elite. And while this new system is a clear improvement for the players, who saw their markets badly hurt by the old qualifying offer system in which first rounders were the cost of doing business, this is still far from perfect.
As it is, this is the way things will be until the current CBA expires after the 2021 season, so you better get used to it. Feel free to bookmark this link if you need a refresher during the offseason. And if I've gotten anything in here wrong, please let me know; this stuff, as you can see, ain't easy.
