The New CBA: What it Means for Free Agent Compensation

Berkman: A Type B Free Agent in 2010

No strikes, no lockouts, and no antitrust lawsuits. Yes, labor relations in baseball appear to be at their zenith with respect to recent memory. Now, with the ratification of the new CBA, it appears we will have at least five more years of union-owner peace. But MLB’s new deal did more than just extend this period of tranquility. The new CBA addresses major issues in the free agent compensation system, offering a fierce overhaul whose more nuanced effects will greatly facilitate competitive balance.

I have written previously on the absurdly arbitrary nature of the old compensation system. Under this framework, players could be designated Type A, B, or neither. A team losing a Type A free agent received two compensatory draft picks, one from the signing team and one “sandwich pick;” a team losing a Type B free agent was granted one sandwich pick; and a team losing an undesignated player was awarded nothing. These compensatory picks were only awarded provided the team first offer salary arbitration to its free agent player. Sounds fair enough, right? Well, according to the ranking gurus at Elias, Yuniesky Beatencourt > Carlos Beltran. Enough said.

Instead of these enigmatic Type A and Type B designations, MLB will institute something similar to the NFL’s franchise player system, whereby teams can offer their to-be free agents a contract worth the average value of that of the top 125 players in the league. If rejected, then the team will earn compensation. This is a brilliant idea for multiple reasons:

For one, we can expect a decline in the game of chicken that MLB dubs the salary arbitration system. Presumably, the intention of including an arbitration offer as requisite for compensation was that this action would indicate the team highly valued this player. However, the process has simply become an exercise in game theory, with teams offering arbitration to players they do not wish to retain, praying they decline, and shamelessly walking away with an extra draft pick.

What is most problematic in this regard is that teams win a statistically significantly larger portion of arbitration cases than do players, rendering arbitration acceptance (instead of free agency) generally unappealing and rare. Thus, teams are really taking little risk when offering arbitration to their subpar Type B players, and frequently earning unjustified compensation. Now, teams will be required to offer a one-year contract of roughly $12 million (in 2012), an amount of money that will not be taken so lightly. Teams will only be compensated if they lose a player they value at least $12 million dollars.

Moreover, we should observe a fall in another one of general managers’ favorite schemes: the bizarre midseason trade. Why, on the eve of thee 2010 trade deadline, did the heavy hitting Yankees, with Mark Teixiera manning first base, trade for the rapidly declining (or so it seemed) Lance Berkman? Simple: Berkman was a Type B free agent. The Yankees, able to eat a large portion of his contract, acquired Berkman for the stretch run not because they needed his bat, but rather because offering him arbitration at the end of the season would invariably yield a draft pick for the team. Again, this activity was never the purpose of draft pick compensation, and, accordingly, we should expect a decline in deadline deals that feature rich teams racking up veteran players with the sole intention of letting them go.

In short, changes to the free agent compensation system were both necessary and shrewd. MLB is cracking down on loopholes that serve to undermine and threaten competitive balance, and, accordingly, should be commended.