A Quick Walk Through The New Hot Stove Rules

With the World Series behind us and free agency officially kicking off on Saturday, the Hot Stove season is now upon us. While it’s unlikely that you’ll see anyone change teams immediately, there are always some free agents that sign pretty quickly, setting the market for others to follow. Before we get too far into evaluating the moves and the contracts of the winter, though, I thought it would be useful to walk through some of the changes that the new CBA has brought on that have a direct impact on free agency and will likely have a trickle down effect on trade evaluations.

Obviously, the biggest change is the overhaul of the free agent compensation system. Gone are the ridiculous Elias ratings that separated players into Type A or B free agents, taking with it the necessary component of offering arbitration to a pending free agent in order to collect that compensation. Instead of offering arbitration, teams must now submit a qualifying offer equal to the average salary of the 125 highest paid players in the game – this year, that works out to $13.3 million. In essence, a team that wants to be compensated for losing a free agent has to be willing to bring that player back for $13 million in 2013, which will greatly reduce the amount of players who get tagged with a compensation requirement.

Jeff’s going to have a full write-up on who should expect a qualifying offer later this afternoon, but it won’t be anywhere near the 37 players who received an arbitration offer last winter. After all, that list included guys like Rod Barajas, Jose Molina, Frank Francisco, Jon Rauch, Freddy Garcia, and Dan Wheeler. This puts an end to the manipulation of the system to gain draft picks (I’m looking at you, Tampa and Toronto) but also takes away a payroll floor for lower tier free agents. Last year, David Ortiz, Francisco Rodriguez, and Kelly Johnson all accepted arbitration offers after finding their markets less than robust, but Johnson never would have received a qualifying offer and it’s unlikely that Rodriguez would have as well.

The compensation tag has always had the effect of pushing back the free agent timetable, as teams would wait to see whether a player was going to be offered arbitration before agreeing to a deal in order to gauge whether or not it would cost them a draft pick to do so. Now, qualifying offers are due on Friday, so every team will know which players will cost them a draft pick before free agency begins.

Not only has the pool of players requiring compensation changed, so too have the specifics relating to the draft picks and where they go. Previously, the top 15 picks were protected, so any team finishing in the lower half of the standings could sign a free agent and only have to surrender their second round choice. That protection has been altered to only cover the top 10 selections. Additionally, because the Pirates get the ninth pick in next year’s draft for failing to sign Mark Appel, only the teams with the nine worst records in 2012 have draft pick protection – the Astros, Cubs, Rockies, Twins, Indians, Marlins, Red Sox, Royals, and Blue Jays will get to keep their first round selection even if they sign a player who received a qualifying offer. Everyone else would have to forfeit their first round pick.

And now, forfeit really does mean forfeit. Under the old system, a team’s first round pick was essentially transferred from one organization to the other as compensation for signing a Type A free agent, but now, that pick simply disappears. If, for instance, the Mets sign a player who received a qualifying offer, their 11th overall choice would simply be eliminated, with every team moving up one position in the first round. The only compensation awarded to a team for losing a free agent with a qualifying offer is a pick in the compensatory round between the 1st and 2nd rounds of the draft – essentially, a pick somewhere between #31 and #40 or so.

Previously, a team could collect two draft picks for letting a free agent leave, including one as high as #16, which incentivized teams to not sign their own free agents in some cases. Now, that incentive has been significantly reduced. The compensation cost of signing a player has only gone up a marginal amount for a small window of players, but the value of losing a player with compensation attached has gone down significantly. While we’re dealing with a small number of free agents, it will be interesting to see if fewer high end players switch teams, as there is no longer as large of a benefit from letting that kind of player walk.

Relief pitchers are the other area where we’ll likely see significant change in strategy due to the new compensation rules. Because the Elias rating drastically overvalued relievers, they made up a disproportionate number of Type A and B free agents who received arbitration offers, as teams could essentially treat their bullpens as revolving doors and get numerous additional prospects as a result. The qualifying offer is going to remove compensation from every middle reliever in the sport, which may drive salaries up for some of the guys who have previously come with the loss of a draft pick for their new teams. It might be hard to believe now, but in 2010, the Tigers gave the Astros the 19th pick in the draft for the right to sign Jose Valverde. How much more would he have gotten had that loss of a pick not been a factor? We may find out this winter.

Finally, there’s one other possible alteration that could develop over the course of the winter due to the new CBA. This one’s speculative and unlikely to happen, but there is some chance that a team could see the new rules as an invitation to bring the NBA’s sign-and-trade deal to Major League Baseball.

In the NBA, it’s common for free agents to technically re-sign with their own teams, then immediately get traded to the franchise they’re actually agreeing to join, because it’s a salary cap loophole. Players can receive larger paychecks from their original organizations than they can by signing outright with a new team, and obviously, the former team gets players or assets back in the trade that compensate them for letting that player go. In MLB, there is no salary cap, so there’s never been any reason for teams or players to engage in this kind of transaction.

There’s still no salary cap on Major League payroll, of course, but the new CBA did enact limits on spending in both the draft and international free agency. And that’s where a team could decide that free agency gives them an opportunity to spend on prospect acquisition.

Let’s just say make up an example to show how this might work. The Houston Astros have a massive amount of budget space this year, but they’re unlikely to sign a multitude of impact free agents to improve the team’s talent base from 65 wins to 75 wins, since they’re in full scale rebuilding mode. The CBA won’t allow them to simply shift that money to the draft or international free agency, so their only real choice is to spend it on Major League players. But there’s no rule that says they have to keep those Major League players.

Say — and again, I’m making all of this up for illustration purposes only — the Astros hear through the grapevine that Shaun Marcum is asking for $8 million on a one year deal in order to build back up his value and hit the market again next winter, and that the Royals are interested in bringing him in, but aren’t sure they can afford to sign him and still have money to afford Anibal Sanchez, who is their primary pitching target. The Astros could then approach both Marcum and the Royals and suggest that a sign-and-trade is in everyone’s best interests. The Astros would sign Marcum for $8.5 million — enough of an incentive to get him to go along with the plan — and then immediately trade him to Kansas City in exchange for, say, Lorenzo Cain, while picking up the tab for the entirety of the contract Marcum just signed. (Royals fans, don’t freak out. The actual names don’t matter. This is just an illustration.)

The Royals would essentially get the Major League free agent they wanted without increasing their payroll, allowing them to pursue everyone else on their target list, while the Astros would spend their Major League surplus acquiring guys with more long term value than the veterans who populate free agency. And Marcum would get $500,000 for the trouble of agreeing to waive the provision that says a player can’t be traded without his consent until June 15th after signing a free agent contract. He’d get a little more money, the Astros would put their budget surplus to better use, and the Royals could essentially trade for a free agent in order to keep their payroll flexibility.

Previously, there just wasn’t an incentive to pull off these kinds of moves, since Major League payroll could be reallocated to the budgets for the draft or international free agency, but the new limitations cut off that avenue for increased spending while rebuilding. While I don’t expect any teams to pursue this course, it is possible that a team like the Astros or Cubs could take some of their Major League payroll and use it to essentially establish sign-and-trades in MLB. Whether the commissioner’s office would go along with such transactions is an open question, but from my reading of the CBA, there’s nothing prohibiting a team from trying.