In most industries, being ranked among the top 20 percent of performers would be an honor, and you would be in line for a raise. Not in Major League Baseball. Earlier this month the Elias Sports Bureau released its free-agent rankings, and those who rate in the top 20 percent of players at their position are rated "Type A" free agents, while those who fall in the next 20 percent are rated "Type B." This year's Type A list includes stars such as Jason Bay, Matt Holliday and John Lackey, but also a slew of middle relievers, setup men and part-time closers such as Rafael Betancourt, Octavio Dotel, Mike Gonzalez, LaTroy Hawkins and Darren Oliver.
As a refresher on one of baseball's most arcane systems, teams signing a Type A free agent who has declined salary arbitration lose a valuable draft pick to the player's former team. The signing team gives up either a late first-round pick or an early second-round pick, depending on its draft position. As additional compensation, the team losing the free agent also gains a "sandwich pick" that comes between the first and second round. Teams signing a Type B free agent don't have to give up anything, but the team losing the free agent gains a sandwich pick.
You don't often hear fans or media talking about these compensation draft picks, but they can have a real effect on the free-agent market, particularly for Type A free agents, effectively penalizing players for being rated at the top of their class.
Overall, the system boils down to a tax on Type A free agents, which teams must pay in the form of draft picks. For a long time, teams seemed to more or less ignore this tax, figuring that most draftees were unlikely to make much of an impact anyway. However, in recent years, teams have started to value their draft picks more highly. The question is, just how much are these late first-round or early second-round draft picks really worth?
Research shows that on average, a late first-round draft choice will contribute about two major league wins to his team during the first six years of his career. Of course, some players will contribute much more than that, while many players never crack the bigs at all, but the pick on average is worth about two wins. Two wins may not sound like much, but on the open free-agent market, teams will pay about $4.5 million per win. This means those two wins are worth about $9 million -- not chump change at all.
Of course, the team isn't getting those two wins from a drafted player for free -- it still has to pay the player a salary plus a signing bonus of around $1 million. However, since the drafted player is under club control during his first six years, teams can pay him roughly half of market value for his services. The result is that, on average, a team will pay about $5.5 million for a player who would be worth $9 million on the open market. The net result is a $3.5 million benefit to the team with the draft pick.
What does this all mean? Due to the free-agent draft pick compensation rules, a team that signs a Type A free agent will have to pay what amounts to a $3.5 million tax for the privilege of signing him. The tax actually varies from team to team, with this year the Cubs having the most to lose (the No. 16 overall pick, valued at about $4 million) and the Brewers having the least to lose (the roughly No. 60 overall pick, valued at about $2.5 million), but in any case, the value of the draft pick is not trivial.
This obviously has an effect on the free-agent market. Knowing that they will have to pay this tax on Type A free agents, teams are going to bid less than they would have otherwise. If the Washington Nationals think that, say, Billy Wagner is worth $10 million, they must consider that if they sign him, they'll have to give up their second-round draft pick, which is worth around $3 million. Therefore, they may only be willing to pay Wagner a salary of $7 million for the entire transaction to be worth their while. This same logic applies to the other teams chasing Wagner, and the result is that the Type A label will knock a few million dollars off of Wagner's final salary if he chooses to enter the free-agent market.
While this isn't such a big deal with the mega-free agents -- what's an extra $3 million on top of Mark Teixeira's $180 million contract? -- the effect is substantial on less valuable players, such as Wagner, for whom $3 million may represent a substantial portion of their pay.
This was a major problem last year for Orlando Hudson and Juan Cruz, both Type A free agents who went unsigned deep into the offseason. Cruz in particular was probably only worth a few million dollars, hence signing him at all was a net negative. For these players, the Type A tag became a sort of scarlet letter that deterred teams from signing them. Eventually the Royals (foolishly) signed Cruz for $6 million over two years, and the Dodgers got a cut-rate deal on Hudson ($3.4 million guaranteed, plus incentives).
Part of the problem with the free-agent compensation system as it stands now is that the rankings it produces aren't really very accurate. For instance, this year John Grabow and Marco Scutaro are Type A free agents, while Vladimir Guerrero is a Type B free agent. Guys like Guerrero could probably withstand a $3 million salary hit, but if Grabow turns down arbitration and becomes a free agent, he will likely suffer the same fate as Cruz did last winter.
The problem is particularly acute among middle relievers, whom Elias rates disproportionately highly. The reason is that players are ranked within various positional groups, and relief pitchers have their own group. The problem with this, of course, is that unlike, say, shortstops or first basemen, most relief pitchers have relatively low value. Of relievers, only a small fraction are high-impact players such as stud closers. Therefore, when Elias rates the top 20 percent of relievers as Type A free agents, it ends up including some very mediocre pitchers. As a result, 10 out of the 23 Type A free agents are relievers, including immortals such as Oliver and Hawkins. Such players have no business being classified in the same category as Holliday or Bay, and the fact that they're overrated by the rankings can really hurt them. Due to the draft picks that must be forfeited to sign these players, many middle relievers see their salary and negotiating power diminished when saddled with the Type A tag. (Some, such as Grabow, may re-sign before the exclusive negotiating window between teams and their own free agents ends at midnight ET on Thursday night.)
While the system is really broken for relief pitchers, it's not so hot for other players, either. For one, center fielders are ranked in the same group as designated hitters, meaning that center fielders get no credit for playing one of the toughest positions on the diamond. Other oddities include using very few statistics to rate each player, and including antiquated stats such as fielding percentage (even for catchers!) and both wins and winning percentage for starting pitchers. All of these oddities add up to provide a very uneven system of ranking players, which is a shame considering that a player's Type A designation can have a substantial impact on his marketability.
In its current form, the system does little to ensure competitive balance, since the effective tax does little to deter teams from signing mega-stars such as Teixeira but does have an effect on the marketability and earning power of journeyman free agents who have the misfortune to be labeled Type A free agents. Whether the system is a fair one in principle is a matter for the owners and the players union to decide. However, if the system is to continue through the next collective bargaining agreement, it should be reformed so that players burdened with the Type A tag are those who can afford the roughly $3 million salary cut that the tag gives them. As it stands now, the burden falls disproportionately on journeyman middle-relievers such as Juan Cruz and John Grabow, and that's not fair to anyone.