Tagged: CBA

One Reason to Love the New CBA

The amateur draft has been around since 1965, when the Oakland Athletics drafted Rick Monday as the first overall pick. The draft debuted before free agency, so its initial purpose was simple: funnel exclusive negotiating rights for the best amateur talent to the worst performing teams to prevent the Yankees and other teams that had significant resources, from grabbing all the talented young amateurs. Once free agency emerged and player salaries began to escalate, the draft served an additional purpose—it provided a source of low cost talent to teams during the six years of control. Teams could draft and develop talent and benefit from their services for 2 or 3 years at a price near the major league minimum salary, followed by the player’s arbitration years at some level of discount to their free agent market value. But as free agency grew and players’ salaries escalated the draft morphed. Instead of delivering the top talent to teams with the worst record, it favored teams that allowed players to leave via free agency, through compensation picks.

If we take a close look at the draft slots of teams at opposite ends of the MLB food chain—the Pirates and Royals (low revenue/poor performing teams) versus the Red Sox (high revenue/high performing team)—we may be surprised at what we learn. Over the last decade, the Pirates and Royals averaged about 68 and 67 wins per year, respectively, placing them among the worst performing teams in MLB. As one might expect, the Pirates and Royals 1st pick each year came early in the June amateur draft (averaging #6 and #5, respectively). But because of the glut of compensation picks that infiltrated the draft, the Pirates and Royals did not pick again until the 53rd overall pick in the draft, on average. The first 5 picks for the Pirates averaged #6, 53, 80, 112, and 142. The Royals top 5 choices averaged #5, 53, 78, 108, and 137. These teams shared two common characteristics over the last decade—they had consistently poor records and they did not engage in the free agent market for high-priced/high-quality players that would earn draft pick compensation, once they departed.

Conversely, the Boston Red Sox averaged 93 wins over the last decade and frequently shopped in the free agent and trade markets for Type A free agents, allowing many of them to walk after their contracts ended. Not surprisingly the Red Sox 1st pick in the annual draft averaged to be the 31st overall pick—resulting from a combination of the best/near-best win-loss record and forfeiting some first round picks due to signing free agents. However, after their first pick the patterns of draft selections gets interesting. The Red Sox second through fifth pick in the amateur draft was (on average) better than that of the Pirates or Royals. After choosing #31, the average Red Sox selections were #46, 64, 82, and 112. In each instance, picks two through five were better than those of the downtrodden Pirates and Royals. (See table below) In fact, over the last ten years, the Red Sox had a top 100 draft selection 41 times—meaning they averaged 4.1 per year from the top 100 overall picks. The Pirates had 31 (3.1 average) and the Royals had 33 (3.3), over the same 10-year period. Simply put, the draft pecking order had devolved into a reward mechanism for teams losing their free agents, rather than being driven  by a team’s prior year performance.

Perhaps the best example of what the draft had become is the 2005 Red Sox. Fresh off a World Championship, Boston had selections #23, 26, 42, 45, 47, and 57. The Pirates, coming off a 72-win, 5th place finish had picks #11, 59 and 91. The Royals, whose 58-win season was 2nd worst in baseball, had picks, #2, 50, and 82. Before the second round of the 2005 draft, which began with the 49th overall pick, the Red Sox selected the following players:

  • #23—Jacoby Ellsbury (pick was acquired from the Angels as compensation for Orlando Cabrera’s departure via free agency)
  • #26—Craig Hansen (pick was acquired from the Dodgers as compensation for Derek Lowe’s departure via free agency)
  • #42—Clay Buchholz (Supplemental pick for loss of Pedro Martinez)
  • #45—Jed Lowrie (Supplemental pick for loss of Orlando Cabrera)
  • #47—Michael Bowden (Supplemental pick for loss of Derek Lowe)

(They also received the Mets second round pick (#57) as compensation for Pedro Martinez. Ironically, the Red Sox lost their own 1st round pick that year, #28 overall, to the Cardinals for signing Edgar Renteria.)

The new CBA better aligns on-field performance with draft order and restores the draft to its original purpose—a tool to improve competitive balance across the league, and even goes one step further. First, it nearly eliminates compensation picks. These compensation picks served to delay the second round, pushing the picks of the lowest performing teams deeper into the draft. (On average, the second round of the draft began at pick #51, over the last ten years.) Secondly, the new CBA adds Competitive Balance Lottery picks—picks allocated to teams with either low revenues or a low winning percentage. There are 12 Competitive Balance picks in total—6 following the first round and 6 slotted in after the second round. The Royals currently have the 3rd worst record in baseball. Should they finish the season in that position, they are likely to have picks #3, 31, 39 and 75 in the 2013 draft, while the Red Sox current status will likely leave them with #14, 50 and 86.

Could the new CBA have gone further? Absolutely. It stopped short of reordering all draft picks based on a team’s revenues. Such a redesign might have allowed small market teams to sustain their competitiveness for a longer window of time by allowing them to infuse elite amateur talent into their organization, even while they are competitive. Another positive aspect of the new draft rules is allowing for trading of competitive balance picks, although only during certain time windows, not to include the winter meetings. Draft picks are the rights to acquire amateur talent—and are assets with a tangible value. Giving teams the right to assign these assets as part of player transactions is one more small step towards a more efficient trade market for players. Overall, the draft implications of the new CBA are clearly a big step in the right direction, perhaps paving the way for even greater reform in 2017.

Important Takeaways from the Cole Hamels Contract Extension

Here’s my key takeaways from the Cole Hamels contract extension with the Phillies:

  • Signing Cole Hamels is an important step in helping the Phillies remain competitive for the next several years , but will necessarily set in motion a number of other moves to restructure their payroll
  • The elimination of draft pick compensation for traded players in the new CBA is having a profound impact on the mid-season trade market for players like Hamels.
  • It’s too early to tell if the new CBA’s onerous penalties for exceeding the Competitive Balance Tax threshold will put a damper on free agent salaries, but the early returns point in that direction

Signing Hamels was a necessary move by the Phillies, but will present other challenges to the organization. Prior to the Hamels signing, the Phillies had about $110m in salary obligations for the 2013 season committed to six players—Lee, Halladay, Papelbon, Howard, Utley, and Rollins. That commitment would rise to the low $120’s if Hunter Pence is retained. The Hamels extension places the Phillies’ obligations at more than $145 million for eight players. Without any major trades from that group, the Phillies would need to fill about 17 roster spots at an average salary of about $2 million, in order to not exceed  the Competitive Balance Tax threshold for 2013. We’re very likely to see either Halladay or Lee dealt, either in the next few days, or at the end of the season. Not only do the Phillies need to reduce the concentration of their payroll that is clustered in a handful of players, but they also need to restock with younger, low cost players who can ultimately make an impact on their major league roster.

By signing Hamels, the Phillies retain the youngest of their three aces, who also happens to have the lowest value in the mid-season trade market. An unsigned Hamels had limited trade value as a pure summer rental, when compared to Halladay or Lee, who are signed through 2014 and 2016, respectively (including their option years). Hamels would have provided an acquiring team about 12 or 13 starts over the balance of the regular season, while Halladay provides about 80 starts over the next 2½ years, at a below market salary, given his talent level.

The elimination of draft pick compensation significantly changes the value equation for mid-season trades by devaluing pure rental players with expiring contracts. For example, when CC Sabathia was traded from Cleveland to Milwaukee in July of 2008, the package included Matt LaPorta, a number 7 overall pick and the top rated prospect in the Brewers system, plus Michael Brantley, and pitchers Rob Bryson and Zach Jackson. That impressive haul was supported by the draft pick compensation the Brewers could count on when Sabathia walked away in November. When Sabathia left Milwaukee for the Yankees, the Brewers received the 39th and 73rd overall picks as compensation. Under the new rules, Hamels was likely to yield no more than a couple of mid-level prospects. The way to circumvent the elimination of draft pick compensation is to deal players before the last year of their contract. This diminishes its importance, as draft pick compensation becomes a lower percentage of the total value the player provides to his acquiring team. While dealing Hamels might have gotten the Phillies a couple of mid- to low-level prospects, dealing Halladay or Lee puts them in the mix to secure a prospect package that includes a top talent like the Rangers 19-year old shortstop sensation Jurickson Profar.

The value of Hamels’ contract may be a foreshadowing of what to expect in the upcoming free agent market. In a world where Sabathia gets $161 million (3½  years ago) and Pujols and Fielder sign $200+ million deals, it would be reasonable to expect that one of baseball’s top pitchers, entering his age 29 season would get a $170+ million deal. My statistical models of the behavior of the free agent market support that valuation, at least under the rules of the old CBA. (While the deal was reported as 6-year, $144 million, it is said to contain a seventh year option that could take its value as high as $162 million.) Maybe Hamels gave the Phillies a hometown discount, or perhaps we are not living in the Sabathia, Pujols, Fielder world anymore. The Competitive Balance Tax threshold, which will rise to $189 million by 2014, may put a damper on the high-end free agent salaries, as teams will be reluctant to commit too many dollars to any one player. We’ll know more in the coming months.

The re-signing of Hamels is an important move in the Phillies quest to extend their competitive window. The reality is the Phillies have too many high-priced players and will be challenged to surround them with enough talent to stay competitive under the new Collective Bargaining Agreement. They need to acquire high potential minor league talent to provide a low cost source of future wins and provide better balance to their payroll. Halladay or Lee become the perfect trade chips to accomplish both objectives.