Monday, November 28th, 2011...3:48 pm

MLB Labor Deal Struck

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By Sam Mann

In case you didn’t notice, and you may not have because of the quiet manner in which the two sides went about negotiating, Major League Baseball and its Players Association came to an agreement on a new five-year labor deal. The deal guarantees labor peace will last at least 21 years, which is quite an accomplishment for Major League Baseball. Prior to the 2002 CBA, every labor negotiation since the union was formed in 1965 had resulted in a lockout or a strike. Considering that, as well as the labor troubles that the other major professional sports leagues have went through, the expediency of this deal should be commended. (The previous CBA was not set to expire until December 11). Some have said that MLB has set the new standard for labor negotiations, and that part of the motivation for the NBA to settle its lockout was seeing baseball negotiate a new deal with ease (courtesy of ESPN’s Ric Bucher).

Yet as big a “win” as this deal is on one hand, it is also a “loss” for the industry as whole going forward and competitive balance. Labor peace should be commended, of course, but the “system” of baseball regressed last week. The reason: the new deal extensively limits what individual organizations can do in the draft and amateur free agency, the lifeblood of all teams, but specifically small-market franchises. Before we get into that though, let’s tackle a few of the other issues that were resolved:

  • MLB will add a new wild card team to each league, meaning that there will now be 10 playoff teams, rather than 8. I personally don’t like it because one of the great parts about baseball is that its playoffs are not watered down and the regular season matters more because so few teams make the playoffs. At the same time, I can understand why the parties agreed to it. There are significant economic reasons: more teams in playoff race late in year should mean better attendance in more cities; adding extra playoff games increases the value of the national television contract, which is distributed evenly to all teams; more home playoff games means more revenue, etc. For the players, 25 more guys in each league get to play in the playoffs.
  • Re-worked draft compensation scheme for signing free agents. The process is much simpler now than it was, and the without the binding effects of losing draft picks, free agency should be more profitable for many of the middle-tier free agents. The previous system was tied into Type A and Type B compensation, determined by a complex statistical formula; the team who signed one of these free agents forfeited a high draft pick to the player’s former team. Under the current system, compensation is tied to a large qualifying offer (about $12 million). Much simpler and will apply to many fewer players.
  • Signing deadline for amateur draftees will be accelerated. This is good because it will force amateurs to decide whether or not to sign earlier, because all the big-time draftees sign minutes before the deadline.
  • Instant replay will be expanded. Seems reasonable.
  • There will be HGH testing and more stringent testing for amateur players.
  • The “Derek Jeter” rule was passed, mandating attendance at the All-Star Game for any players selected. Big deal. Let’s focus on more important things.

Where this deal goes off the rails, and thereby upsets nearly every club executive and general manager in the league, is that it completely ties the hands of franchises in the amateur draft and international free agent markets. I’ll spare you the boring details, but basically, MLB has instituted a series of “slot recommendations” for draft picks over the last several years. Before this deal, there was no penalty for exceeding slot, meaning that there were no caps on salary bonuses. Smart teams would spend “over-slot” to pick highly talented players who were considered “tough signs.” A lot of these tough signs turn out to be really good players, and everyone in the industry seems to agree that the best way to build a successful team, especially for small-market teams, is to spend like this in the draft.

Well, this deal has basically eliminated significant “over-slot” signings. The new system calls for a Signing Bonus Pool, calculated based on the recommended slotting for the first 10 rounds. Players drafted after the 10th round are not counted unless their bonus exceeds $100,000. Penalties for exceeding this bonus pool cap are extremely punitive. They are as follows:

B. Clubs that exceed their Signing Bonus Pools will be subject to penalties as follows:
Excess of Pool Penalty (Tax on Overage/Draft Picks)
• 0-5 percent; 75 percent tax on overage
• 5-10 percent; 75 percent tax on overage and loss of 1st round pick
• 10-15 percent; 100 percent tax on overage and loss of 1st and 2nd round picks
• 15-plus percent; 100 percent tax on overage and loss of 1st round picks in next two drafts

This is bad for a number of reasons: first, it is a clear attempt by owners to artificially limit the amount given to amateur players in the draft, with absolutely no indication that the money saved will be reinvested elsewhere in the organization. In other words, it’s a function of greed and an attempt to pocket a few million bucks at the expense of amateur players yet to be named who have just had their rights curtailed in an agreement in which they have absolutely zero representation.

Second, this will limit the talent pool going forward. Many of the best players and/or prospects in the game were two or three-sport stars in high school, who could have played another sport but chose baseball. Many of these individuals chose baseball because of the large signing bonuses they received. This was necessary to “buy off” the other sport. A great example is last year’s #5 overall pick Bubba Starling, who was committed to play quarterback at Nebraska, or Zach Lee, a Dodgers prospect who might be playing in the BCS National Title Game for LSU if not for his $5 million signing bonus a few years ago. More examples include Joe Mauer, Carl Crawford, and Matt Kemp, and going back a few years, Dave Winfield and Kenny Lofton. Do we want these players to choose football or basketball instead? In other words, you have to look at incentives. It’s cynical, yes, but elite athletes are likely to choose the sport with the greatest financial benefit to them and their families. Add in baseball’s nature, where it takes 3-4 years for even the best prospects to make the big leagues, and the number of prospects who ultimately fail to ever make the big leagues, and all of a sudden, the incentives to choose baseball have largely disappeared.

Along with this, we have a similar cap on international signings. International players are free agents and can get higher bonuses because multiple teams can bid on the player, or at least could. MLB has now chosen to cap international signings at $2.7 million, a paltry number considering 5 teams spent over $10 million internationally last year alone. Here, it’s no so much that those athletes internationally will choose other sports, though they might, it is more that baseball has now stripped some of the incentives of its teams to develop overseas academies and invest scouting resources there. Instead of investigating a resource that was near limited, teams are now incentivized to sign a very small number of international players, limiting the number who are able to come to the United States and join affiliated organizations. That means less foreign players, at least initially.

Finally, the third consequence, and most importantly,  this rule will help destroy competitive balance. Small-market teams that can’t afford to spend big dollars in free agency could afford to spend big dollars in the draft and acquire premium talent, because the total value was lower. The Pittsburgh Pirates, for instance, spent $17 million in the draft last year, and from most expert’s opinion, did very well in bringing talent to their organization. In other words, the only way the Pirates, Royals or Rays can compete with the Yankees, Red Sox and Phillies, is to spend in the draft, get premium talent, develop it and then try to win in the first 4-6 years of the player before he gets too expensive to keep. That job just got a lot harder, because now every team plays by the same rules in the draft. (Prior to this deal, some teams elected to spend in the draft while others generally stuck to slot. Also, teams willing to spend took the opportunity to draft player’s unlikely to sing late in the draft and offer 1st, 2nd or 3rd round money in the hopes the player would reverse course. Based on those rules, that is no longer possible.)

These are relatively subtle differences, which is why many are calling this deal a big win for baseball. But industry insiders and those who follow them have indicated that the changes will have a negative effect on the competitive balance and the health of the sport going forward. And to me, there was no real need to drastically change either the draft or the international signing system, because both made it possible for low-revenue teams to compete with large market teams. Without the previous system, the Tampa Bay Rays never would have made the playoffs 3 out of 4 years. Those teams were largely comprised of home-grown players drafted by the team and paid big bonuses that under this system, might not be possible.

For a more thorough analysis of all these issues, read Keith Law’s and Buster Olney’s analysis here and here. Like them, I am worried about the ramifications of this system, both for how it stands to dilute the talent pool and for how it affects competitive balance.

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