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Defusing the Bomb: A Comprehensive Proposal to Fix Free Agency

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That sound you hear? It's a timebomb; it's been ticking for awhile, although people did not realize it until fairly recently. This winter, in fact.

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This free agency period has been noted for its inactivity, to say the least; teams just have not been willing to hand out larger contracts, especially when those larger contracts require draft pick and international pool compensation.

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To say that this is a one-year issue is to ignore history. This article from USA Today sounds like it was written on February 23, 2018, yet it was more than a year ago.

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Before we get to this year, let's discuss the economics of the situation. Back in 2011, economist Michael Hauber wrote, after tracking major baseball salary milestones, that he expected a $50M/year contract to be relatively soon. Similarly, since the first CBA in 1967, both minimum and average salary have skyrocketed, from $6000 minimum/$19000 average at the time to $507,500 minimum/$4.47M average in 2017. But things have been trending the wrong way for the players' union in the last few seasons. While the number of $20M+ contracts has increased dramatically in the last few years, the highest salaries have remained largely the same since Alex Rodriguez signed his 10 year/$252M contract with the Rangers in 2001 (his $25.2M annual contract would still rank 6th today).

Although average salary is up, the market's ceiling has not been rising, and there are a large number of contracts near the ceiling that artificially raise the average salary. Granted, 36 contracts will not shift the needle all that much, but with the fact that average salary is increasing at a minimal rate (only 1.6%), it remains clear that salary depreciation has been a trend the last few years.

So why did I just spout a bunch of financial information at you? Because everybody is going to simplify this problem to either the most recent CBA or next year's free agent class, and that's a mistake. While those two facts definitively increase the problem - I too would rather not spend $25M/year on Neil Walker when I might be able to get Manny Machado next year, nor would I want to give up draft picks and international money for a league-average player - the problems run deeper.

Major League Baseball needs to approach the free agent market from a brand new direction. When the CBA expires in 2021, it should join the Articles of Confederation in the trash heap. Otherwise, the bomb will keep ticking.

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In order for a plan to succeed, everybody needs to be happy, and that will require a lot of work; unfortunately, a problem of this magnitude has no easy fixes.

At the negotiating table, we have three sides: the owners, the players, and MLB. The players be further subdivided into MLB players (who are part of the union), minor league players, and potential players (draft-eligible, international amateurs, international professionals). We also have a series of issues that could affect salary:

Qualifying Offers

Draft Pick Compensation

Years of Team Control

Salary Cap (Hard/Soft; the current system is a Soft Cap)

Minimum Salaries

Arbitration

Salary Floors

Rule V Draft

Revenue Sharing

We are going to need to make a lot of changes to increase player salary and make the free agent market more active, but in order to do that, we need to know what the owners want and the players are willing to give up.

The best way to kickstart the free agent market is to drop a year of team control so players hit the market sooner - the younger the player, the more likely a team is going to be willing to spend big bucks on him (hence the anticipated windfall that next year's class will get). Depending on a player's rookie year, players are under contracts that are team-dictated or arbitration-decided for the first half of his prime - or, for late-bloomers like Aaron Judge or Josh Donaldson, the entirety of their prime. Dropping a year off this team control, although unable to completely kick-start the market, is definitely a step in the right direction.

Additionally, add an incentive for teams to nontender arbitration-eligible players by removing independent arbitrators altogether. Instead, a formula is used to select a one-year salary, based off the average of Baseball-Reference's and FanGraph's WAR values, where the player is paid on a sliding scale, using $/WAR, and maxing out at 5/8 the value (the sliding scale is to make sure that, while contracts can still get very expensive, relief pitchers are not screwed in comparison to position players). Such a system would make incentivize teams to lock up players earlier, while also making it possible for a team to have to nontender younger players in their prime, thus allowing them to hit the free agent market at an earlier age.

What would the owners get for such a system? Incorporating international players into the amateur draft. MLB has been pushing for it for years, and while it is a system that artificially suppresses salary for younger players, the players are going to eventually lose this fight; best to give it up to get something big in return.

Because of these salary concessions, small-market owners are going to want more wants to level the playing field against the Yankees, Red Sox, and Dodgers, and the way to do that is to split Draft Pick Compensation from the Qualifying Offer. Baseball can take some inspiration from the NFL in this situation. Create a system where teams get compensation not for losing certain players, but for losing players to other teams in free agency, but not using that money for other free agents.

To put it like this, if the Orioles lose Manny Machado to free agency and he signs a $25M/year salary with the Dodgers, while the Orioles only spend $15M in free agency, then the Orioles will receive a compensation pick equal to the $10M difference in value, while the Dodgers will not lose anything. Rather than punishing teams for signing players, which then in turn hurts the players, we should compensate teams for losing them, which is what this system will do. While dealing with a small market owners' issue, this will actually benefit everybody in baseball.

Last but not least, we should deal with the Luxury Tax limit, which has been acting as a soft cap. Frankly, it needs to go. The system was initially set up in 1997 to level the playing field between large markets and small markets. However, with the advent of TV deals that have been generating immense amounts of revenue for teams, there are no longer nearly as much of a gap between the market sizes, and that can be made up with an increase in the non-tax traditional revenue-sharing systems. Currently, all it does is force a ceiling on payrolls, preventing the players from receiving their fair share of the overall payroll.

In this situation, the players will need to make a concession, as they are the only ones to benefit from a removal of the Luxury Tax. To compensate for this, I would adopt the NFL's transition-tag rules for the Qualifying Offer: if the player does not accept the offer (which will remain available until the first day of spring training) the team that offered the tag has the right to match any contract the player receives from another team before he signs, thus giving the team some control over the player in free agency; however, rather than being able to give the Qualifying Offer to everybody, the team is only able to offer it to one player per year, and is not able to give the offer to the same player in back-to-back years.

When it comes down to it, I do not think anybody would be truly happy if this outcome were to come to pass. Ultimately, however, I think that is the sign of a true compromise. The major salary suppressors would be largely gone and players would be able to hit free agency sooner, while teams would have a way to keep their homegrown stars around and prevent them from jumping ship. In the process, it would hopefully bring some excitement to free agency, so that baseball will never leave the spotlight even during the offseason, much like the NFL and NBA have been able to do in recent years.

This may or may not be the answer. But something better happen soon, because if nothing changes...

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It could take MLB years to recover from the metaphorical explosion.

Sources:

  • https://www.forbes.com/sites/kurtbadenhausen/2016/04/07/average-baseball-salary-up-20700-since-first-cba-in-1968/#156fe6b33e48
  • https://www.usatoday.com/story/sports/mlb/2017/04/02/mlb-salaries-payroll-2017/99960994/
  • https://www.usatoday.com/story/sports/mlb/2017/02/23/veterans-turn-young-players-going-too-far-little-alarming/98308700/
  • http://www.businessinsider.com/mlb-highest-paid-players-2017-6#t8-zack-greinke-240-million-18
  • Baseball-Reference
  • https://www.fangraphs.com/blogs/the-recent-history-of-free-agent-pricing/

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