Compensation system broken

December, 24, 2008
Brewers general manager Doug Melvin is absolutely right with his comments to ESPN's Buster Olney -- the system of awarding draft picks for the loss of free agents is broken.

Melvin's argument, that the Elias formula is inaccurate (it is) and out of date (ditto), is dead on, as the relative rankings of players often defy both common sense and even a superficial bit of sabermetric analysis. But rather than revising the system by monkeying with the Elias formula, why not go one better and scrap the system entirely?

Owners argue that the idea behind taking a draft pick from the team that signs a top free agent and giving it to the team that lost the free agent is just a matter of compensating the latter team, with the presumption that large-market clubs will typically be in the former category while small-market clubs will typically be in the latter.

Not only has this not been the case -- the Red Sox's outstanding 2005 draft was built on compensatory picks -- it's another example of owners taking advantage of the economic ignorance of fans and writers who are yelling and screaming for a salary cap right now. (Salary caps in sports are just wealth transfers from players to owners.)

The real intent of compensatory picks was to try to place a drag on free-agent salaries: A team should be willing to pay less for a free agent if part of the price of signing him is a lost draft pick.

In some cases this year, those attached draft picks aren't just dragging down salaries but are limiting markets entirely. Signing Jason Varitek will cost a team its highest unprotected draft pick; the same goes for Juan Cruz and Orlando Cabrera. All three of these players -- and perhaps others -- are facing reduced interest from clubs because they are not deemed worthy of the loss of a pick. Unless you're the Yankees, where you might only be giving up a fourth-round pick for signing a player because you've signed higher-rated free agents already, you don't want to surrender a first- or second-round pick to sign a catcher with a bat that's below replacement level.

Eliminating draft-pick compensation would also boost the trade market. Right now, a team with a top player headed for free agency may look to trade him a year or half a year before it loses him, but it can always retain him and hope to obtain one or two draft picks when he leaves. Without that alternative, a team that's out of the playoff race in July would have every incentive to trade its potential free agents, because holding on to them until season's end would mean receiving no value at all when they depart.

More trades means more fan interest and more media coverage, and that's good for baseball, while also being good for people who make a living writing and talking about trades.

The draft-pick anachronism will probably be eliminated from free agency only if the owners -- who have no reason to want the picks eliminated -- can convince the union to agree to a hard slotting system in the Rule 4 Draft, something the union, at the behest of player agents, has been unwilling to grant in past negotiations.

This is, from both an economic perspective and a fairness perspective, a good thing, as a slotting system in the draft is yet another wealth transfer, again to the billionaire owners, but this time from amateur players who typically come from modest means and who more than likely will earn the majority of the money they make in baseball in their initial signing bonus.

These players are already somewhat deprived of the opportunity to earn bonuses commensurate with their actual market value because of the existence of a draft; hard slotting would simply exacerbate the problem. As long as the union is willing to fight for amateur players -- who are actually union members at the time they're drafted -- the silly and often counterproductive system of awarding draft picks as compensation for lost free agents will persist.

Keith Law

ESPN Senior Writer


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