February 23, 2009

Prospectus Today

First-Round Picks!

by Joe Sheehan

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In the discussion of Type-A free agents this winter, the term "first-round pick" is used about as often as "the" or "of." The perceived relative values of major league talent and first-round draft picks have been moving in opposite directions for a long time, and it appears that this winter, the two have crossed. Teams are less willing than ever to sign players and sacrifice that selection in the upcoming draft, and they're becoming more aware of how important good young baseball players who can be paid well below market value are to a baseball team.

We hear about the importance of these picks during the season as well, when teams are often faced with the decision of whether to trade an impending free agent, or keep him for a run at the postseason. The latter choice is often labeled as coming with "two first-round picks," short hand for compensation for a Type A free agent. In actuality, a Type-A free agent returns the signing team's first-round pick if and only if that team was one of the 15 best in baseball the previous season. In other cases, the team losing the free agent gets the signing team's second-round pick. This is designed to allow lesser teams to sign free agents without giving up such a high selection, one that would be a near-total disincentive to the signing of Type-A free agents.

As Rany Jazayerli's work has shown, the value of draft picks drops off linearly throughout the first round, so our shorthand of "two first-round picks," with its image of Evan Longoria or David Price sauntering to the compensated team, has always been in error. The correct compensation description for a Type A is "two picks in the first two rounds of the draft, one in the compensation round, and the other usually in the last half of the first round or first half of the second round." Not so sexy. The use of the term "first-round pick" to refer to compensation picks has always puzzled me as well, given that the list of those start at 31 (later now that teams get picks for not signing their previous year's draftees) and can run for nearly an entire round in itself, as it did in 2006. In 2009, there are 13 supplemental picks, with seven remaining free agents who would generate one if signed by a new team. There's no way that a pick in the forties should be deemed a "first-round pick," and if you care to use the term, you have to qualify it.

Let's see how this works in action. The Dodgers got four good years from Derek Lowe, and when they couldn't reach agreement on a contract for his services for 2009 and beyond, their fans no doubt consoled themselves with the idea that they would get "two first-round picks" when he left. In actuality, though, the Dodgers received the 36^th and 53^rd picks in the upcoming draft-neither in the first round-because Lowe signed with the Braves, whose poor 2008 season left them with the seventh overall selection, a pick that cannot be forfeited. Throw in some compensation picks for failing to sign 2008 first-rounders and teams who had worse records than the Dodgers, and the compensation for Lowe is not nearly that impressive.

Consider the plight of the Brewers, who saw CC Sabathia, their mid-season trade acquisition, signed by the Yankees... but because the Yankees signed Mark Teixeira as well, the Brewers will get just the 38^th and 70^th picks in the draft. Those numbers could go lower if Juan Cruz, Manny Ramirez, and Orlando Cabrera sign, creating even more compensation picks. The Blue Jays were the big losers of the winter; in addition to watching their second starter, A.J. Burnett, opt out of his contract and go to a division rival, they got just the 37^th and 101^st picks in the upcoming draft-their compensation reduced to a supplemental pick and a third-rounder because of the Yankees' shopping spree.

The Brewers and Blue Jays' situations were something of a fluke, but they do illustrate the risk in assuming that you'll get good compensation for the loss of a free agent. The best you'll ever do are the 16^th and 31^st picks (if you're the worst team in baseball and you sign a free-agent from the 16^th-best team in baseball and there are no failure-to-sign compensation slots in the draft), which isn't all that impressive. The value of first-round picks drops off so substantially even after half a round that the compensation we've been so worked up about is actually not that great. We've overcorrected, as analysts and fans, caught up in the image of a "First-Round Pick!" that doesn't match the real compensation received. The reality is the Rockies getting the 32^nd and 34^th for Brian Fuentes, or the Diamondbacks getting the 17^th and 35^th for Orlando Hudson.

(All of the pick numbers in here are subject to change as more free agents, or the few remaining unsigned 2008 draft picks, sign. I'm working off of Baseball America's list and adjusting for the Joshua Fields and Orlando Hudson signings, I think correctly.)

If you're a team on the brink of losing a star player to free agency, it's not enough to think "two first-round picks." The reality is that you're getting two second-round picks in most cases, with some chance at a low first-rounder, and some chance that you won't even do that well. Those picks have value, but not so much that they can be relied upon to have more value than the prospects available at the trade deadline. Matt LaPorta in the summer of 2008 may not be worth more than a First-Round Pick!, but he is almost certainly worth more than what the compensation will realistically be for your free agent-to-be.

The other effect of this is that teams in the first half of the draft should not be thinking about the pick that they'll lose at all. The second round of the 2009 draft will begin with the 46^th pick, and has begun as high as 65^th in recent years. If you're the A's, with Bobby Crosby at shortstop, Orlando Cabrera on the market, the money from the Rafael Furcal offer lying around, and a chance to steal the AL West, you can sign Cabrera without worrying at all about the draft pick. It's not going to be high enough to be any kind of disincentive. If you're the Tigers or the Rangers, piecing together a bullpen in support of what should be a good offense and acceptable rotation, go out and sign Juan Cruz at a cost of money and around a 60^th pick. These players are incredible bargains at this point, and they can be a minimum of a two-win upgrade in situations where two wins could be worth close to $10 million. There's no excuse for not picking them up.

For all of the hue and cry about the compensation system this winter, the scheme for Type-A free agents isn't all that restrictive. The clause that prevents picks in the top 15 from being forfeited dramatically reduces the value they can return, and separates the image of a First-Round Pick! from the reality. Furthermore, the supplemental picks serve to lower the real cost of signing Type-A free agents for teams in the top 15 of the draft, knocking their second-round selections deep into the player pool. If anything, it appears that the teams in that part of the draft are being far too conservative in a market where players are cheap; the associated costs are so small that compensation can be ignored, leaving just your team's needs, the projected value of the player, and his salary.

That's also why the recent talk of the MLBPA encouraging some players to waive their no-trade rights in advance of signing with their old team in order to facilitate a "sign-and-trade" scenario is silly. Half of the teams in baseball can sign Type-A free agents without sacrificing much in compensation, so the idea that designation as a Type A is crippling the market for these guys is mistaken.

Joe Sheehan is an author of Baseball Prospectus. 
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