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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