Assessing The Qualifying Offer System & Its Purposes

In a recent post, I set forth some context for understanding the overall impact of the qualifying offer system. Now, I would like to try to connect those effects to the actual or potential purposes of the qualifying system, to assess its function and fairness.

While a ready response to the fairness of the system is that it was subject to the collective bargaining process, that does not insulate it from critique. If nothing else, representation of all MLB players does not always ensure that the resulting system will be fair for all player subclasses. The same holds true on the other side of the ledger, as the qualifying offer system has important implications for competitive parity among teams. Putting aside the overall balance between league and union, how does the system function within each of those two entities?

And there is more to consider than just the suppression of salaries (however minimal) and elements of fairness. Just as in setting the rules for the game itself, the rules of the market should aim for consistency of results, a smoothly functioning process, and minimization of situations in which the rules interfere with play (the game being, in this case, a contest of roster construction).

It is fair to ask: what are the reasons to have a system of this kind, and how well does the current iteration serve them while minimizing collateral effects?

A. Taxing Free Agency

One rather obvious purpose of the QO system is that presented already in the first post: it functions as a tax on free agency that allow clubs to allocate money to other purposes. 

1. Resource Reallocation 

As discussed at length already, the system undeniably serves this purpose by directly limiting the new contracts of players that have declined qualifying offers and transferring leverage to teams that are negotiating extensions. Though its overall impact on a league-wide basis is relatively limited — I estimated that the total value of draft pick compensation transferred annually has been only about 2% to 2.5% of the overall dollars committed through free agency — the system certainly weighs heavily for particular teams assessing a particular player. Taking that as a valid aim of MLB and its member teams, however, questions remain.

2. Disproportionate Burden

Accepting that current MLB players as a whole take on some limitation of overall earning capacity through free agency, that says little about where the burden should fall. It is apparent that, under the current system, the overall benefit to teams is extracted from a limited subset of the market.

The impact is especially severe, in relative terms, for an even smaller group: the relatively marginal QO recipients. While I will not restate the entire point here — see my first post on the topic — suffice it to say that mid-level free agents (and free agents to-be) face potentially wide-ranging impact. Not only is the value of a lost draft pick greater relative to those players' own open-market values, but it can have huge effects on how their market develops and plays out.

It has been suggested that players and teams will do an increasingly accurate job of evaluating the market; a player like Nelson Cruz, for example, might accept the QO, or his former team might not even extend it in the first place. That would lower the relative impact of the system as against overall spending, and would reduce the instances of specific players bearing a severely disproportionate cost.

But the overall benefit-burden ratio would remain largely intact. And, because of the offer's single rate, those players who are just good enough to draw a QO would carry a relatively much larger burden. Surely, there are better ways to take some of the money off of the top of free agency and reserve it for the teams. Were that the only purpose, it is doubtful the qualifying offer system would have been arrived at.

3. Slowing Spending Growth

Could it be that, more than just functioning as a straight tax, the system was intended in part to dampen the growth of spending? By forcing teams to sacrifice non-monetary value, perhaps, would reduce the incidence of unrestrained bidding wars.

One ready response, of course, is that the QO system has seemingly done little to stem record free agent spending, which at last check was up nearly 40% over last year. If the league hoped that stemming the tide of spending growth would result in some part, it seemingly has not. Moreover, as discussed below, the system contains several massive holes that — among other things — severely limit its potential for impacting overall market spending. 

B. Distributive And Competitive Purpose 

Another oft-noted reason for employing mechanisms that grant rights to teams with respect to players reaching free agency is to compensate them for potentially losing their current MLB talent, or perhaps to help them instead retain it. Likewise, teams signing impact free agents arguably should be forced to sacrifice some future value to do so. Underlying these possible goals are purposes both distributive (roughly, high-revenue to low-revenue) and competitive (i.e., maintaining general parity for the league's overall benefit) in nature.

1. Limitations On The Use Of The Qualifying Offer

At present, a player must start the year with the same club he finishes with in order to be eligible for a qualifying offer. Thus, Matt Garza and Zack Greinke hit the market without compensation attached, while Ubaldo Jimenez and Ervin Santana entered free agency with the burden of a pick.

This potentially serves some functions: First, it prevents contenders from replacing sacrificed future value (through a mid-season trade) with a pick reaped through a qualifying offer. This could be thought to have the effect of preventing the system from passing on too great a benefit to large-market teams, as a general matter. Of course, it also hypothetically limits the return that selling clubs can reap through mid-season trades to a corresponding degree, so the overall balance may not be impacted.  

Likewise, the limitations could provide some speculative incentive for teams to retain their own players at mid-season, which also carries competitive implications. Because a mid-season acquisition cannot bring his new team a draft pick, clubs that are out of contention are slightly more likely to hold onto their established players and either extend them or make them a qualifying offer of their own. Were acquiring clubs able to recoup future value after the rental period was over, they would be willing to give up more at the point of acquisition. Of course, it could be that no players really fall in the sweet spot: good enough to hypothetically command a QO from a non-contender at the end of the year, but not so good that they can still bring back greater value through prospect return and/or cost savings in a mid-season swap.

On the whole, the rule that a player cannot receive a qualifying offer from a team he was not with on Opening Day appears to have quite limited benefits.

2. Market-Skewing Results

Once more, however, there is a cost. When Jimenez requires a pick, and Garza does not, it not only leaves the former to bear the burden, but also impacts the resulting player-acquisition market. While the actual results are impossible to pin down, they are far-reaching. Most obviously, there is an effect on where certain players end up in a given free agent period.

Remember, much of the impulse for shedding the old Type A/B system, which was heavily dependent upon the unreliable the Elias Bureau rankings, was to avoid illogical results. Market-driven decisions play a role in the current QO system, but the limitations inherent in its current form lead to drastically skewed results.

Nothing illustrates this better, perhaps, than the fact that compensation free agents Stephen Drew and Kendrys Morales have had to consider waiting until after Opening Day, or even the June amateur draft, to sign. By waiting until the season starts, the player can ensure he will not receive a qualifying offer in the ensuing offseason; by waiting until after the draft, the player can shed the compensation altogether.

These strategies (or, at least, the threat thereof) are available to players as ways to push back against the system and gain some leverage. The alternative is to accept a one-year deal (as did Cruz and Santana) and face another qualifying offer in the next year — if they even play well enough and stay healthy. But the possibility of players waiting out the market into (let alone halfway through) a season is hardly representative of a smoothly functioning market, even if it does not come to fruition. While a multitude of factors played into the situations that these players ended up in, the result is clearly not a ringing endorsement of the current arrangement.

3. Sacrificing Future Value

Less obviously, but perhaps more importantly, the rule prohibiting qualifying offers to mid-season acquisitions means that it is often possible to obtain current production without sacrificing future value. If one purpose of the system is to force teams to give up expected future production to add impact talent to their current roster — thus serving general competitive and even distributional imperatives — then the qualifying offer process is at best highly inconsistent.

While, on the one hand, teams that acquire players mid-season cannot cash them in for picks, the clubs that subsequently sign such players need not give up a future choice. The Dodgers were able to sign Greinke without giving up a draft slot. Certainly, the club could have simply priced a pick into its offer had Greinke been eligible for and received a qualifying offer; or, it could have ignored the draft choice and made the same offer. Either way, Los Angeles would be without its fifth overall prospect (Chris Anderson, as rated by Baseball America), who it used its first choice to select last year.

4. One Size Does Not Fit All

Equally important, another aspect of the current arrangement — the level at which the qualifying offer is set — serves largely to undermine any distributive purpose. As many have noted, larger-market clubs have made many of the qualifying offers, and thus gained many of the resulting compensatory picks. This has been somewhat overstated, however.

The more notable observation, I would suggest, is that every team to have gained a supplemental choice has done so coming off of a winning season. (In 2012-13: Cardinals, Rays, Rangers, Braves, Yankees. In 2013-14: Yankees, Royals, Reds, Rangers, Indians, Braves, Red Sox, Cardinals.) In part, this resulted because players like Greinke and Garza were traded during the season by non-contending clubs, which were able to recoup greater value through trade. On the other hand, of course, those players likely drew less of a return than they would have had the rule allowed their new teams to make them a qualifying offer at the end of the year.

The issue, perhaps, is more that the high-floor, one-size-fits-all approach tends to harm smaller-market clubs on the margins. Indeed, the Pirates allowed A.J. Burnett to hit the market without an offer. As GM Neal Huntington explained, the price was too high for the club to commit in the event that Burnett accepted the offer. He argued that the system "didn't really do what it was intended to do" in that regard. Supporting Huntington's position is the fact that the Yankees — a higher-payroll, but not necessarily more immediately competitive club — made two consecuive qualifying offers to Hiroki veteran starter coming off of an excellent year but looking for a short-term deal).

Had Burnett remained in New York, might he, too, have received a QO? Did the system fail the low-payroll Pirates, who ultimately lost Burnett without compensation? Whatever one thinks of the validity of the decisions and public reasoning of Huntington (and others who have expressed similar sentiment), it makes intuitive sense that smaller-market teams bear a larger risk in extending qualifying offers, which could prevent them from recouping future value for losing impact players. (Somewhat perversely, in the case of the Pirates, their excellent season also played a role; the club's post-season run removed the possibility of a mid-season trade of Burnett.)

5. Talent Retention And The Buyer's Market

Moreover, the current arrangement has not noticeably helped small-market clubs retain talent when the offer has been extended. This is likely because, as I noted previously, those teams still stand to lose a valuable draft choice (the compensation pick) if they re-sign a player, which they must factor into any offer like any other team. 

If anything, the system on its whole may make it less likely, at least in some cases, that such players will return to their former clubs. Teams acquiring multiple compensation free agents (like the Yankees and Orioles this year) are able to decrease the overall future sacrifice that they make by doing so.

Take the case of the just-signed Santana: as things stood before the sudden entry of the injury-riddled Braves into his market, his former club (the Royals) would have lost the top overall supplemental choice (29th overall) if they had re-signed him, while teams like the Yankees (55th), Mariners (74th), and Orioles (90th) would have given up far less valuable slots to ink him, having already forfeited earlier picks. Kansas City GM Dayton Moore made clear that the club was happy that Santana decided to sign rather than waiting out the June draft (which would have prevented the Royals from getting compensation): "I think Erv's going to do very well, and we're going to get the pick. And it all worked out."

As the latest point would imply, there is a plain advantage to making commitments to multiple qualifying offer-declining free agents, since it significantly decreases the per-player cost in terms of sacrificed draft picks. As Orioles GM Dan Duquette put it"if you do one, I think that makes the second one easier, frankly." 

Of course, many teams do not have the resources to pull off that feat. Even the Orioles, whose spending capacity may be greater than their usual recent payroll, only pulled off the feat when it was left with cash and a market still full of quality players late in the spring. "This is the first full year of the [qualifying offer] implementation, and I'm not sure people understood how the market was going to play out. I can't tell you we envisioned that the market would get to this point," Duquette said.

Wise big-budget teams can take advantage of this situation much more than can low-revenue clubs. Just as low-revenue teams may find it harder to operate in the system to obtain draft compensation, they may be put at an even greater disadvantage in the buyer's market.

C. Conclusion

In the final analysis, the QO system performs its asset-shifting function, but achieves that at the cost of arguably unbalanced results. Likewise, it appears that the distributive and pro-competitive impacts of the system carry some significant side-effects (in terms of skewing the market), and that the effects are quite limited (if not self-undermining) in operation.

As explained in my prior piece, the direct financial shift effected by the qualifying offer mechanism is both relatively well-defined and relatively limited. Though the leverage-transferring effects of pre-free agent extension negotiations are difficult to pin down, they, too, can at least be understood. Might it be possible to re-cast the system in a way that matches its current market impact, retains and improves upon its purposes, and minimizes its negative effects? I think so.

The key step, perhaps, lies in de-coupling the compensation and the forfeiture aspects of the system. At present, a player's original team decides whether to make itself eligible for compensation by making the qualifying offer; that decision, in turn, dictates both whether the player's new team will forfeit a draft choice to sign him and whether the player will have to bear that cost. A better system would not make the loss of a pick by a new team depend upon the unilateral action of the original team.

Likewise, instituting other changes — such as mechanisms to enhance participation by smaller-payroll clubs and to more closely tie compensation/forfeiture to a player's actual market value – could vastly improve the system's function going forward by more evenly spreading its benefits and burdens. There are, of course, many ways to approach this and many details to be worked out; I will save an attempt at that undertaking for another day.


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43 Comments on "Assessing The Qualifying Offer System & Its Purposes"


ztoa
1 year 5 months ago

The current compensation attachment limits the ability to get better for teams that fall between 11 and 20 in the draft. The B- free agent was the best route to go. Sandwich picks for a FA that finishes in the top 10 in their respective position statistically. This might be where WAR actually comes into play in the real world of baseball. Of course you have rWAR and fWAR and their cheerleaders respectively.

nepp
1 year 5 months ago

Nah, they should use more accurate descriptors like # of AS game appearances and # of Gold Gloves….oh and RBIs.

Ferrariman
1 year 5 months ago

WAR isn’t perfect either.

Aaron Johnson
1 year 5 months ago

Great work Jeff. Just great work. I too thoroughly enjoy the debate and appreciate your take on the system. I look forward to hearing some of your suggestions to amend/improve the system.

Tim Knobloch
1 year 5 months ago

Unlike agent’s opinion, I actually like the qualification system In place. The premium free agents like cano still get paid. The average free agents like Drew get actual market value. Drew Is worth approx 14m per year. Average bat, good defence. He declined, so he has to live with the consequences.if he wants a multi-year deal, he has the right to pursue it. Boras just hasn’t adjusted to the new system and is hurting his clients. In the end, the qualification system encourages owners not to overpay for players. As has been the trend lately. Please debate.

ztoa
1 year 5 months ago

Drew is somewhere between Rollins and Escobar Value. His glove is good, UZR/150 12th among SS w/ 750 Innings and 8th in Def stat. Escobar is 3rd in each, and Rollins is in the teens. Offensively they’re very similar except Rollins nabs more bases. I don’t see Drew as a 14.1MM player in any light.

Tim Knobloch
1 year 5 months ago

I agree. Sabremetrics aside, he is a product of being on a champ team and wanting all-star money. He is a good defensive SS and an average lefty bat. If any team has a need for this specific skill set, he would have been signed already.

Tim Knobloch
1 year 5 months ago

No doubt that the current qualification system does have an affect on a FA value. But drew thinking that he can get a 5yr/75ml is a reach especially after Peralta was signed for 4/yr 53mil deal with the cards with no draft pick forfeited. Boras needs to adapt his FA philosophy or he will keep losing money for his clients

GameMusic3
1 year 5 months ago

There is no way to critique the qualifying offer system without at least one person ignoring everything about parity or cheating small market teams to celebrate Boras’ embarrassment.

Is there not more to evaluating a rule instead of embarrassing Boras?

While a team has to minimize risk in contracts, fans I see tend to think from the team’s perspective. A player is a whole lot more threatened by a bad deal compared to a team run by billionaires. Boras is right. Players prefer security. If you have a choice of multi-year or a single year at a bigger bracket, and are not independently wealthy, which would you take, especially if the qualifying offer requires you to accept constant uncertainty about where you would live and a constantly nomadic family?

discollama
1 year 5 months ago

Really? The players are hurt? League average guys can easily make $20m over their careers. I could live off of that for the rest of my days and leave my children in a position to not want the rest of theirs. I’ll not shed any tears for a guy who makes millions playing a game for a living because they can’t judge a market or overvalue themselves and decline a $14m contract for one year of work.

discollama
1 year 5 months ago

Using Drew as an example again, and quoting myself from a post t I just made, Drew averaged a 1.8 fWAR per year since his MLB debut. How on Earth could he realistically expect with his injury history and a lack of need on the SS market that he would get a bigger contract than 3/36? At that point, you should risk the one year deal, take that higher AAV and run with it. In his specific situation, the Red Sox have a few reasons to not extend him another QO at the end of 2014, one is price, the other is the fact that they have Middlebrooks and Boegarts able to handle the left side of the diamond.

If the players want the system to change, then all that needs to happen is the marginal guys like Santana, Drew, Morales, and Cruz just need to start taking their QO’s and letting clubs overpay for them on a one year deal. The way that much of the QO System commentary reads is that it’s a massive case of collusion against the players, and that’s just not the case.

discollama
1 year 5 months ago

The only change that I think should really be made, is that traded players SHOULD be eligible for QO’s, perhaps for a lesser amount than non-traded players, but something should give there.

walkoffblast
1 year 5 months ago

I tend to find this security notion laughable. 14 mil makes you independently wealthy, especially when it is not your first contract. If players only preferred security (in the context of stability) then they could simply take less and get a longer term deal. However, whenever Boras finds an issue it isn’t about such things. It is when they have refused to sacrifice yearly earning for longer term stability. I think a system that only effects the market of players by “dooming” them to earn 30 mil in two years if they play well this season a much better improvement over what the prior system did to players. It does not perfectly benefit all the players but is anything that was collectively bargained supposed to entirely favor the players over management? Choosing a deal to take for a player should be about balancing all these factors, more money now vs more guaranteed, family location, relevant market restrictions on value etc.

C. McCarthy
1 year 5 months ago

Yes, they should all be balanced, but this is a new system and there are obvious flaws that need to be addressed. If we’re talking about an attempt to help small and mid-market clubs retain players or benefit from losing them, this is a huge failure. The Royals were able to recoup Santana, but only because the market for him bottomed out. Next year they might not take that risk (as the Pirates did this season with Brunett). Meanwhile, the Yankees landed a comp pick while Baltimore basically wrote off this draft. Who needs to develop via draft more?

It’s also not just about players wanting security, a lot of teams would probably be willing to give Cruz or Drew a 2-year deal at their market rate, but they are teams on the cusp with limited budgets that cannot afford to lose out on draft picks. The system isn’t working in terms of preventing big teams from buying up all the free agents or helping smaller teams retain/restock talent. It needs to be reevaluated so that a guy like Drew could get signed on a reasonable 2-3 year deal in KC without holding them hostage to a juggernaut like the Red Sox over a draft pick.

walkoffblast
1 year 5 months ago

I am interested to see the discussion once you propose an actual solution. One of the aspects you allude to at the end of this post (forfeiture not tied to prior action) would seem to actually be worse for players as it would create more of these situations and be completely unavoidable.

One of the reasons I insist on looking at this issue in the scope of the larger CBA picture is that if you do not then it is a little too convenient to be able to blame this concept for other issues that if fixed might make this system better without changing it. Revenue disparity is an issue on its own that merely has a possible effect here. I also believe that a purpose of this rule is being overlooked, allow teams some way to counter the market distortion of guaranteed contracts. Teams for the most part have to take on all the risk of projected performance, the players clearly prefer “stability” but this is practically the only situation where the team has any recourse to pay more for short-term. I just have a hard time looking at the leverage MLB players have and thinking it isn’t already more than what anyone else has in American Sports. This current system doesn’t explicitly restrict those few players ability to get more $tability in the future.

Tim Knobloch
1 year 5 months ago

Interesting. Small market teams have the same option of extending QO’s. However, most have preferred to sell off their assets if they do not think they can resign players. As the Rays have.
This isn’t about embarrassing Boras, it’s about him needing to change his philosophy of always testing free agency for his mid-tier players.
And I do not understand how accepting a QO with the same team you played the previous year translates into having a nomadic family. If players are worried about not having to move their family, they need to find a new profession as they can also be traded at any time.

Mike1L
1 year 5 months ago

Nice work. To make a short point, optimally, the goal of the compensation and penalty process should be something akin to a trade of a premier player. The old team gets something for a top tier player, and the signing team pays a premium above the contract price. But I feel strongly that some objective criteria should come into play, beyond the willingness to spend money, or the fickleness of a mid-season trade. A certain number of MVP/Cy Young votes in the previous 2-3 years might be a fair trigger.

GameMusic3
1 year 5 months ago

I would trust the Elias rankings over the votes of a bunch of sports press who routinely are wrong.

It should still let a free market determine value, but eliminate binariness.

BlueSkyLA
BlueSkyLA
1 year 5 months ago

I’m not sure I understand the assumption that the QO system was created to encourage competitive balance. If MLB really cared about competitive balance, they could solve that problem in a flash by simply deciding to share more revenue. The fact that MLB has studiously avoided doing so tells me that competitive balance is not a priority.

GameMusic3
1 year 5 months ago

Great summary of how qualifying offers fail to accomplish anything, on net consideration.

It was not a smart system.

I would try a not so binary offer structure to accomplish the things you suggested.

Compensation could be a budget increase in the draft. For example if you sign expensive players a tax built on the amount of the contact could be transferred to the originating organization. Say if you sign a player to Y dollars, a draft pick of Y/Z value transfers across organizations’ drafts.

BCleveland3381
1 year 5 months ago

I think the QO system will begin to work itself out.

Next off season non-star players are going to remember what happened to Drew and Morales this offseason and start taking the QO knowing teams aren’t going to want to give up a draft pick to be able to sign them.

The year after that, teams will realize they don’t want to pay guys like Drew and Morales 14+ mil so they’ll stop offering it to anyone except for the star players it was intended to be offered to.

The year after that, only star players are getting the QO and any average players that are offered it will accept it, and the system works itself out. The QO offer was never meant to be for guys like Drew and Morales. It was meant to compensate smaller market teams for losing star players. No player has ever taken a qualifying offer, which I think will change.

Garett JJ
1 year 5 months ago

This phillies fan agrees 100 percent with what this mets fan is saying. It’s rare haha

GoRav114
1 year 5 months ago

This has been great stuff on the QO. I think it will work itself out as teams better understand the implications. While we have seen some impact I think overall it is working as intended. Jimenez still got Garza money like he should have. Drew should not have been extended the QO and who knows if he would have struck a deal by now had he not been tied to draft pick compensation when he appears to over value what he is.

The most interesting thing to me is how it will affect mid season trades. Why trade a guy you know you can’t sign for a prospect when u may be able to either retain him with a QO or receive a mid first round pick. Then again u gamble because the pick could be in the 50’s which seems would hold less value then the prospect you could have received. Was that player worth any revenue for his last couple of months? Lots of variables.

discollama
1 year 5 months ago

What I don’t get, even with a player like Drew, is why not take the QO? If you take the QO, you’ll make a higher AAV than you would on a 2-3 year deal, and if you play well enough, maybe you get another QO allowing you to make more over 2 years than you might if you had never received one. Or, maybe you play well enough, but the team decides to cut bait because they don’t think that you’re worth the raise that you’d get through the QO system. Now you’re free and unhindered during free agency. Perhaps you’ll sign for a lower AAV on that 2-3 year deal that you were looking for the first time around, but odds are that the $14.1m you made through the QO off sets that by quite a bit.

dirtyjay
1 year 5 months ago

What if compensation pick was attached to aav. There would be no offer, simply if a player signed a contract with an aav above the 14 mil (or another set average), there is automatically a draft pick comp. This would be including all possible years, options, and incentives and such. This would fix the problem with fringe players, as the could negotiate without worrying about a comp pick unless they really thought they were worth the money. Likewise the players that are truely worth 8 digits a year will still get their money. Also get ride of that a traded player means no comp.

hiflyer000
1 year 5 months ago

I think the system works fine for the most part, but it is a bit unbalanced and needs to be tweeked. The first thing that needs to be addressed is that the player and signing team both have to give something up, but the team making the QO gives up nothing (beyond a 1 year probably market value deal).

I think that signing teams should not lose any picks, and teams losing the player should still get the compensation pick, maybe even a second later in the draft. This will still reward the teams losing the players while not excessively hurting the players by killing leverage, and the signing teams by not taking away picks and slot money.

I also think that they should make it so players cannot be given a QO in consecutive years, or perhaps attach something like a 35% penalty for each successive QO (ie 14.1 this year, raises to 18 million next year).

westcoastwhitesox
1 year 5 months ago

Excellent writing.

Mike1L
1 year 5 months ago

If you peg compensation to the AAV of the contract, you run a risk on thresholds and may end up distorting the market for that type of player. For argument’s sake, let’s peg AAV at $15M. You might get a cluster of contracts just below $15M, and a cluster of contracts considerably above it. But no one is going to be willing to pay $15M+ the pick. Nor, likely, $16-17M+ the pick. I’m not sure how that impacts the salary structure–most likely it’s a depressive.

Mike1L
1 year 5 months ago

I don’t have a problem compensating a team who loses a high end player, but I’m still concerned about a forfeiture system that severely punishes the signing team. The more draft picks and slot money you take from them, the less likely it is that they can develop their own (cheaper) players and not have to go into the free agent market and bid up prices.