Compensation system hurts competitive balance in baseball

The fiasco that is the Jason Varitek situation has brought new scrutiny on baseball's free-agent compensation system. The players' association, realizing that draft-pick compensation hurts the market value of free agents, might have no choice but to get involved and try to rework the system.

Going back five years, I tried to measure the positive and negative benefit of the draft-pick compensation system on each team. In theory, after all, compensation should hurt the top-end teams that are signing big-ticket free agents and help the teams that are losing those free agents. That, in turn, should help the teams that are losing their best players to get back on their feet quickly -- and keep the teams that already are successful from loading up with the best available players (through free agency and the draft) year after year after year.

To make it a little simple, I awarded points for each shift in draft pick: First-round picks are worth five points -- a team gets five points for a draft pick award to it and loses five points for a draft pick awarded to another team. Supplemental first-round picks are worth three points. Second-round picks are worth two points. Everything else is worth one point.

Teams benefiting most from compensation (2004-08)
* San Diego, 32 points
* Minnesota, 32 points
* St. Louis, 27 points
* Boston, 24 points
* Oakland, 21 points
* Florida, 21 points
* Washington, 18 points
* Texas, 17 points
* Los Angeles Dodgers, 16 points
* Toronto, 15 points
* Kansas City, 13 points
* Atlanta, 13 points
* Arizona, 11 points
* New York Yankees, 10 points

Teams hurt the most by compensation (2004-08)
* Los Angeles Angels, -14 points
* Seattle, -7 points
* Houston, -5 points
* Chicago Cubs, -4 points
* Baltimore, -2 points

Teams seeing little to no effect
* Pittsburgh, 0 points
* Tampa Bay, 0 points
* Detroit, 1 point
* New York Mets, 4 points
* San Francisco, 4 points
* Cincinnati, 5 points
* Colorado, 5 points
* Chicago White Sox, 6 points
* Milwaukee, 6 points
* Philadelphia, 7 points

Some observations:

* The point of the system is to make sure teams like the Red Sox and Yankees, who are in on almost every major free agent, have to give up something in return for their ability to outbid other teams. Instead, the two most free-spending teams in baseball -- as well as the Cardinals, Dodgers and Braves, who all had payrolls north of $99 million last season (and who all have had legitimate championship aspirations in the last five years) -- are seeing a net benefit from their activities in free agency as it relates to draft-pick compensation. That seems like exactly the opposite of what the system is trying to accomplish.

* Baltimore hasn't had a good team in the last decade and had just the 21st-highest payroll in the game last season. On top of that, the Orioles lost Miguel Tejada to free agency in the time period we're examining -- and they're still seeing a net loss when it comes to draft-pick compensation and free agency.

The draft-pick compensation system is designed to promote competitive balance in a sport in which payrolls can be dramatically different. In some cases, it's working -- the Padres, Twins, Athletics and Marlins all are teams with sub-$75 million payrolls who have received at least some benefit from the free agents they've lost in the last five years.

But when the Red Sox and Yankees see more of a benefit than the Reds and the Rockies, there seems to be a problem. Among those problems:

* Big-market teams can take the risk that comes with offering arbitration when small-market teams can't -- and that means the small-market teams don't get compensation.

Jason Varitek is in a bind because the Red Sox offered him arbitration and thus are entitled to the first-round draft pick of any team that signs him. Varitek, no matter how little money he demands, has almost no choice but to go back to the Red Sox.

Adam Dunn hasn't signed a contract yet, either -- but his options are wide open. The Arizona Diamondbacks declined to offer the slugger arbitration despite that they'd traded two young players for him and would have received two draft picks had he declined the offer and signed elsewhere. The Diamondbacks, a team that has laid off employees this offseason, couldn't take the risk that Dunn would be awarded anything in the ballpark of last season's $13 million salary.

The Red Sox didn't mind taking the risk that Varitek would accept arbitration and thus earn somewhere between $10 million and $12 million -- indications are, in fact, that they were surprised when he declined the offer.

That's because the Red Sox can afford to risk overpaying a player for the payoff of a draft pick or two. The Diamondbacks, a team with a payroll less than half of that of the Red Sox last season, couldn't take that risk. If Dunn had been awarded $13 million by an arbitrator -- and odds are he would have been awarded more than that -- he would have been pulling in almost 20 percent of the Diamondbacks' payroll by himself.

Because of that, the Red Sox will retain Varitek's services this offseason and the Diamondbacks will lose Dunn with no compensation whatsoever. That's not competitive balance.

Here's another one: The San Francisco Giants signed closer Armando Benitez, catcher Mike Matheny and shortstop Omar Vizquel before the 2005 season. One wouldn't necessarily characterize that as some kind of incredible free-agent haul, but, still, those three signings cost the Giants their first-, second- and third-round picks in one of the more top-heavy drafts in recent memory.

The result? The Giants didn't pick until 131 selections already had been made. Fourth-round pick Ben Copeland hit .341 in 85 at-bats at Triple-A last season, but that's a small sample size -- he hit .275, .280 and .261 and showed little power in two seasons of Single-A and one season of Double-A before that. Nick Pereira, the Giants' 10th-round pick, had a 5.70 ERA in Triple-A last season. That's it. That's their entire draft.

In a related story, the Giants just spent $8 million on Randy Johnson, $18.5 million on Edgar Renteria, $8 million on Jeremy Affeldt and $2.75 million on Bobby Howry -- and still reportedly are tinkering with the idea of signing Manny Ramirez. All that to improve a team that hasn't won 80 games since 2004.

The Giants have a big payroll. They recovered. They might even contend in the weak National League West this season. But there are plenty of teams in baseball who wouldn't recover if they lost an entire draft -- and thus can't afford to jump in on free agents they'd otherwise try to fit into their payroll.

* The system diminishes the value of a second-round pick.

The Rays and Pirates each received zero points in this study because they've sat out big-ticket free agency almost entirely. They haven't signed any Type A or Type B free agents; they haven't lost any for which they've received compensation, either. (The Pirates have a habit of declining to offer arbitration to their pending free agents -- in 2005, they opted not to take that risk with Jose Mesa and Brian Meadows. Both would have netted Type B compensation, but both would have cost upwards of $1.5 or $2 million in an arbitration hearing.)

But, in one big way, it's still had a negative effect. With every supplemental draft pick that's awarded, the value of second-round picks diminishes.

The Rays drafted fourth and the Pirates drafted 11th in the 2004 draft, for example. Thanks to the compensation round -- a round in which extra picks were awarded to, among others, the Yankees (twice), Dodgers and White Sox -- the Rays saw their second-round pick slip from No. 34 to No. 45; the Pirates saw their second-round pick slip from No. 41 to No. 52. Among the casualties? Fireballing closer Huston Street went No. 40 overall; left-handed pitcher Gio Gonzalez, now one of the A's top prospects, went No. 38 overall to the White Sox.

A year later, the same thing happened. The Rays had the eighth overall pick; the Pirates had the 11th overall pick. Thanks to the supplemental round -- a round in which the defending World Series champion Red Sox made three selections -- the Rays saw their second-round pick slide from No. 38 to No. 56 and the Pirates saw their second-round pick slide from No. 41 to No. 59. Among the players who still would have been on the board had those two teams kept their original picks: Luke Hochevar, Clay Buchholz, Jed Lowrie, Michael Bowden and Garrett Olson.

First-round picks, obviously, are important. But when you don't get to make your second pick until 55 or 60 other players are off the board, your first-round pick almost becomes a make-or-break proposition.

* The system doesn't always deliver compensation that's even close to fair.

Some notable free-agent defections in recent years -- and the pitiful compensation that went along with them:

2005: Because the Mets drafted inside the top 15 and also signed Pedro Martinez that same offseason, the Astros got a supplemental pick (No. 38 overall) and a third-round pick for losing Carlos Beltran.

2006: Because the Blue Jays drafted inside the top 15 and also signed B.J. Ryan that same offseason, the Florida Marlins got a supplemental pick (No. 36 overall) and a third-round pick for losing A.J. Burnett.

2009: Because the Yankees also signed Mark Teixeira and C.C. Sabathia, the Blue Jays will get just a third-round pick for losing Burnett. Maybe that's fitting, in a way, but it still goes against what the system is trying to do.

Meanwhile, in 2007: Because the Rangers won just enough games to stay out of the top 15 and didn't sign any other free agents, the Blue Jays got the 16th overall pick and a supplemental pick (No. 45 overall) for signing Frank Catalanotto.

* The league's top teams have the most success in the draft, anyway.

To make those extra draft picks pay off, of course, teams have to select the right players. And a look back at a couple of recent drafts shows that the teams with the best resources tend to make the best selections.

Take 2005, the draft in which the Marlins accumulated 17 of their 21 points from the above exercise thanks mostly to two extra first-round picks and two supplemental-round picks. Contrast that with the defending champion Red Sox, who had two extra first-round picks (but lost their own for signing Edgar Renteria) and three supplemental-round picks.

The haul for the two teams from the first and supplemental rounds:
Florida: Chris Volstad, Aaron Thompson, Jacob Marceaux, Ryan Tucker, Sean West.
Volstad is projected to be part of the Marlins' starting rotation this season; he was 6-4 with a 2.88 ERA in 15 appearances (14 starts) last season. Thompson has stagnated at the lower levels of the minor leagues; he was 2-5 with a 5.62 ERA after a promotion to Double-A last season. Marceaux has a 5.19 career ERA in the minor leagues, though things started to turn around once the Marlins made him a reliever at Double-A. Tucker was 5-3 with a 1.58 ERA last season, though the Marlins haven't yet decided if he's a starter or a reliever. West had a 2.41 ERA as a starting pitcher in Single-A last season.

Boston: Jacoby Ellsbury, Craig Hansen, Clay Buchholz, Jed Lowrie, Michael Bowden.
Readers of this blog know all about these five: Ellsbury and Lowrie will start at center field and shortstop, respectively, for the Red Sox on Opening Day. Buchholz and Bowden are so highly thought of by the organization that the Red Sox won't trade them even for one of the best young catchers in baseball. They might both be in the rotation already if not for stars like Josh Beckett and Daisuke Matsuzaka. Hansen was a key piece in the trade to get Jason Bay. All five have reached the major leagues; only Bowden doesn't have extensive experience there.

The Red Sox spend quite a bit on their big-league payroll, but they devote a lot of resources to amateur scouting and player evaluation, too. Drafts are full of busts, and no team is immune -- but teams like the Red Sox seem to find gems in the supplemental round and second round than teams that can't spend as much as they do.

Oh, and then there's the Lars Anderson Principle. Teams with vast resources like the Red Sox can afford to draft high school stars with strong college commitments in the late rounds and throw close to $1 million at them to get them to sign. Anderson, had he gone to Cal, would have been a candidate to be taken in the top half of next year's draft. Instead, he signed out of the 18th round for $825,000 in 2006 and has become one of the top prospects in baseball.

The Red Sox can do that. Most teams can't.

* Here's one last piece of twisted logic for you: When a top team loses a free agent and signs another, it not only adds a supplemental first-round pick, it also often moves up in the first round. Take the Yankees, who make the playoffs almost every year and thus tend to be assigned a draft position in the lower third of the first round. When the Yankees "lose" a Type A free agent -- usually a player they don't particularly care to sign anyway -- and bring on board a Type A replacement, they move up in the draft.

2004: Signed Paul Quantrill and lost Andy Pettitte; moved up from No. 28 to No. 23 in the first round. Signed Tom Gordon and lost David Wells; moved up from No. 69 to No. 42 in the second round.

2005: Signed Carl Pavano and lost Jon Lieber; moved up from No. 29 to No. 17 in the first round. Signed Jaret Wright and lost Orlando Hernandez; moved up from No. 77 to No. 63 in the second round.

2006: Signed Johnny Damon and lost Tom Gordon; moved up from No. 28 to No. 21 in the first round.