The Value of Draft Picks: Bringing it All Together

Nelson Cruz didn't sign the contract that he expected to this winter (via Keith Allison).

Nelson Cruz didn’t sign the contract that he expected to this winter (via Keith Allison).

Today is part three of our series on how much draft picks are worth. If you missed the first two posts, read them here and here.

So how much is each draft pick really worth?

The following table combines all the factors discussed in the two previous posts to estimate draft pick value in both wins and 2014 dollars. The left side of the graph shows values for the model shown above, with net value calculated directly from the 1991-2005 draftees who stuck around the major leagues.

On the right side, I included values for a hybrid model which uses the same model on the left, but scales it to Sky Andrecheck’s original model. For example, since Sky’s model projects 80 percent of the team-controlled WAR for the fifth overall pick as the 1991-2005 model, the net WAR is also scaled to 80 percent. This is, of course, oversimplified, but for the most part, net value correlates very highly to total WAR.

For both data sets, a 10 percent annual discount was applied to future WAR on a year-to-year basis.

Insert Title Here
1991-2005 Modified Sky Model
Draft Pick Team Net WAR 2014 $ Net WAR 2014 $
1 Houston Astros 5.5 42.1 4.7 36.0
2 Miami Marlins 3.8 28.9 3.2 24.0
3 Chicago White Sox 3.1 23.6 2.5 19.3
4 Chicago Cubs 2.7 20.8 2.2 16.9
5 Minnesota Twins 2.5 19.0 2.0 15.3
6 Seattle Mariners 2.3 17.3 1.8 13.8
7 Philadelphia Phillies 2.1 16.1 1.7 12.8
8 Colorado Rockies 2.0 15.0 1.6 11.8
9 Toronto Blue Jays 1.9 14.1 1.5 11.1
10 New York Mets 1.8 13.3 1.4 10.4
11 Toronto Blue Jays 1.7 12.7 1.3 9.9
12 Milwaukee Brewers 1.6 12.1 1.2 9.4
13 San Diego Padres 1.5 11.6 1.2 9.0
14 San Francisco Giants 1.5 11.2 1.1 8.7
15 Los Angeles Angels 1.4 10.9 1.1 8.4
16 Arizona Diamondbacks 1.4 10.6 1.1 8.2
17 Kansas City Royals 1.4 10.4 1.0 8.0
18 Washington Nationals 1.3 10.1 1.0 7.7
19 Cincinnati Reds 1.3 9.8 1.0 7.5
20 Tampa Bay Rays 1.3 9.6 1.0 7.3
21 Cleveland Indians 1.2 9.3 0.9 7.1
22 Los Angeles Dodgers 1.2 9.1 0.9 6.9
23 Detroit Tigers 1.2 8.9 0.9 6.7
24 Pittsburgh Pirates 1.1 8.7 0.9 6.6
25 Oakland Athletics 1.1 8.5 0.8 6.4
26 Boston Red Sox 1.1 8.4 0.8 6.3
27 St. Louis Cardinals 1.1 8.2 0.8 6.2
28 Kansas City Royals 1.1 8.1 0.8 6.1
29 Cincinnati Reds 1.0 7.9 0.8 5.9
30 Texas Rangers 1.0 7.8 0.8 5.8
31 Cleveland Indians 1.0 7.7 0.8 5.7
32 Atlanta Braves 1.0 7.5 0.7 5.6
33 Boston Red Sox 1.0 7.4 0.7 5.5
34 St. Louis Cardinals 1.0 7.3 0.7 5.5
35 Colorado Rockies 1.0 7.2 0.7 5.4
36 Miami Marlins 0.9 7.2 0.7 5.3
37 Houston Astros* 0.9 7.1 0.7 5.3
38 Cleveland Indians 0.9 7.0 0.7 5.2
39 Miami Marlins 0.9 6.9 0.7 5.1
40 Kansas City Royals 0.9 6.9 0.7 5.1
41 Milwaukee Brewers 0.9 6.8 0.7 5.0
42-50   0.9 6.5 0.6 4.8
51-60   0.8 6.1 0.6 4.5
61-70   0.7 5.7 0.5 4.1
71-80   0.7 5.4 0.5 3.9
81-90   0.7 5.1 0.5 3.7
91-105   0.6 4.8 0.5 3.5

Do these numbers look right?

Let’s look back at the 30th pick, which is roughly around the average pick forfeited for signing a player who turned down a qualifying offer. Matt Swartz projected this pick to be worth around $6.7 million. If we’re basing our valuation on more recent draft classes, it looks like the draft pick is a bit more valuable at $7.5 million. This accounts for the increase in player production, but this benefit is partially mitigated by the fact that I discounted future value, but accounted for the immediate cost of the signing bonus.

However, if we scale to Sky’s model and account for the immediate cost of the signing bonus, the pick actually appears slightly less valuable. If you believe that teams are getting better at identifying talented players earlier in the draft, stick to the left side of the chart. If a team is rebuilding, then you might even increase this value by 10-20 percent.

Since production is measured relative to the entire talent pool, there can’t be an increase in value for the entire draft, so if you’re looking at a pick in the 30s or later, I would tend toward the right half of the chart, based on Sky’s original research.

How Are Teams Valuing These Draft Picks?

Luckily, there was one draft-pick trade in the offseason that can help us see whether this model reflects the views of a pair of front offices.

At the end of July of 2013, the Orioles acquired Bud Norris from the Astros, hoping that he would help them compete for a playoff spot down the stretch. In return, the Astros received prospects L.J. Hoes (an outfielder) and Josh Hader (a left-handed pitcher). Neither was considered a top-100 prospect by Baseball America or FanGraphs’ Marc Hulet, although Hoes was rated as one of the Orioles’ top-10 minor leaguers.

While a player like Hoes has some value in the farm system, the fact that Steamer projected him for just 0.3 WAR in 441 plate appearances in 2014, along with the fact that he has produced negative WAR in just over 60 games for the Astros, hints that his value was minimal. Hader ranked just 19th in the Orioles’ system to start 2013, so while the Astros may have seen something special in him, his perceived value from the Orioles’ side was not likely high.

So, the Astros were trading Norris and $213,000 in international spending money for two fringe prospects and the 37th pick in the draft. Based on a few trades during the 2013 season, Jeff Sullivan estimated that teams are willing to spend about two dollars for the right to spend one dollar of international spending money. To keep things simple, we’ll value the international spending money at $500,000.

Before the trade, Norris had produced an average of 1.7 WAR in 170 inning pitched per season. He was having an excellent year before his trade, and given some age-related decline would have been expected to produce about four WAR in his time under contract in Baltimore. Plugging his expected production into our arbitration model, and applying a future discount, we get a net value of $14 million for Norris at the time of his trade.

When we take out the value of the international spending money, we see that Houston gave up about $13.5 million in assets to acquire Hoes, Hader and the competitive balance pick. Our model shows that that pick is worth about $7.1 million.

This tells us that the Astros felt that the two prospects were worth about the same amount as the draft pick they were receiving. On the other hand, they might not value the prospects as highly, but might not discount future wins as much, since they clearly won’t be competing for the next couple years.

That the Astros received two minor league players in the deal tells us that the draft pick was probably worth less than $13.5 million, but the fact that neither player looks like a difference-maker tells us that the pick was one of the primary pieces that was moved. It looks like $7 million is at least in the ballpark.

Are Free Agents Paying the Price for Draft Pick Compensation?

On average, teams are giving up an asset worth around $5-8 million to sign a free agent who turned down a qualifying offer. Therefore, if teams are acting rationally, their offers to these players should reflect this loss.

In 2013, free agents who turned down qualifying offers didn’t seem to suffer on the open market, perhaps with the exception of Kyle Lohse. Things have been much different this year, as Nelson Cruz and Ervin Santana ended up signing one-year deals before the season started. With Stephen Drew returning to the Red Sox, Kendrys Morales is the lone player who appears to be holding out until after the draft to avoid the penalty.

However, the players who did sign multi-year deals did pretty well for themselves. When Dave Cameron looked at the cost of a win in the 2014 offseason, he projected these seven players to earn an average of $6.0 million per WAR. Meanwhile, the 10 players who signed  deals for three-plus years but had no draft pick attached were projected for just $4.8 million per WAR.

Let’s look at the teams that gave up draft picks to sign free agents. The Yankees (who gave up three picks) won 85 games in 2013 but failed to make the playoffs. The Yankees may have the greatest financial incentive of any team to make the postseason, which is why they spent nearly half a billion dollars in the offseason.

Like the Yankees, the Orioles and Rangers both finished with winning records in 2013 but failed to make the playoffs. The Braves made the playoffs in 2013, but after losing multiple starters to injury for the 2014 season felt they needed to improve to remain in contention.

The Mariners had a rough season in 2013, but projected to be close to .500 in 2014. More importantly, their roster was loaded with young talent and they had few significant payroll commitments in the near future, and their first-round pick was protected. The Mets? Good luck figuring that one out, although in their defense, their first-round pick was protected as well.

All the teams that gave up first-round draft picks were at a high leverage point in the win curve and would therefore be placing a premium on acquiring wins in the immediate future. While this could explain why these types of teams would be more willing to give up a draft pick, it doesn’t explain why they are paying an additional premium to sign these free agents.

For the Rangers, you could make a case that they had a fairly deep roster and could benefit by upgrading at a single position. However, the Yankees and Orioles both have several weak spots on their roster, and may have been better off spreading out their money elsewhere.

This is admittedly a very small sample, but it is worth monitoring how these players fare in free agency in future years and whether teams are indeed paying a premium (on top of the draft pick) for high-end talent, or if this is simply a one-year phenomenon.

Closing Thoughts

What have we learned from this exercise?

First, it appears that teams are getting better at scouting and drafting amateur players, especially in the first 25 or so picks. Therefore, these picks might be more valuable than thought based on previous models.

As we already knew, the first few draft picks are extremely valuable. The gap in value between the first overall pick and the fifth pick is roughly $23 million. In 2013, only four games separated the Marlins and Twins, but the Marlins’ second pick is projected to be worth $29 million, as opposed to $19 million for the Twins’ fifth overall pick.

If you’re going to tank for a draft pick, make sure you tank big and get a pick near the top of the draft. Outside of the first five to seven picks, the difference in pick value is significantly diminished, and any financial incentive of losing to increase draft pick value is likely offset by attendance and other revenue factors.

Also, we probably won’t be seeing many teams give up picks in the low teens to sign free agents. The average value of the first five unprotected picks (usually 11-15) is around $12 million. This is much higher than the projected $6-8 million value of a pick near the end of the first round or the $4-6 million value for a second-rounder that many other teams would forfeit. Therefore, the team giving up the higher draft pick would need to value a free agent much higher than the rest of the market for it to make sense to pursue him.

Lastly, while these projected values may be slightly higher than previous ones, they may in fact be a bit conservative. As mentioned earlier, I didn’t factor in long-term extensions, which can represent significant extra value to the drafting team.

Also, the new collective bargaining agreement makes the draft slots more valuable than the pick themselves. Previously, if a team lost a draft pick it could try to make up for it by spending extra money in the later rounds. Now, penalties placed on spending in excess of the allocated draft day budget prevent this, while teams that stockpile draft picks have additional flexibility.

When it comes down to it, this is the real reason why Morales hasn’t signed and Drew didn’t sign until this week, and why Cruz and Santana settled for one-year deals. The draft pick penalty is nothing new, but how teams are valuing these same draft picks under the new CBA is.

Combined with the fact that teams are spending more money locking up their young players and fewer stars are hitting free agency, it’s easy to see how the increased emphasis on developing homegrown, cost-controlled talent is inflating draft pick values.

You can argue about the specific value of an individual draft pick, but one thing is certain: These factors have combined to make draft picks more valuable today than at any other time in baseball history. Unless the framework of the draft is reworked in the new CBA (the current one expires at the end of 2016), this trend is likely to only increase in future years.

References & Resources

  • WAR figures for draft picks from 1991-2005 are from Baseball-Reference’s draft tool.
  • WAR figures for recent arbitration-eligible players are from FanGraphs.
  • Arbitration salaries are from Baseball-Reference and Cot’s Baseball Contracts.
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Comments

  1. Don Von Handburger said...

    Excellent series. I think a great companion piece would be information from sources within MLB front offices about how teams are valuing their picks. It would seem likely that teams preparing to make an offer for a free agent with a draft pick attached would try to quantify the value of the pick they were losing. It may be possible for a reporter to get on- or off-the-record quotes about these internal valuations.

    • Matthew Murphy said...

      I would be very interested in learning about how the teams themselves are valuing their picks. Given the wide range of factors influencing value, you’d probably get a lot of variability, but it would be fun to see. However, I doubt any teams would comment on the dollar value they place on their draft pick (at least not on the record).
      I was hoping that the Bud Norris trade would be a bit more informative, but it’s difficult to get a good sense of the value of the draft pick without knowing the value placed on the other prospects in the trade.

  2. Shankbone said...

    Very nice series, I enjoyed reading. With the new CBA, teams are adjusting to the new rules. So are the FAs, who are generally not the A-listers that get locked up long before the threat of FA looms for teams. Next year there might be a QO acceptance, which in turn might make teams dreaming on draft picks reluctant to shell out. But most of the QOs have been extended by teams that can always afford it, the Red Sox and the Yankees account for 10 of the 22 QOs so far, Cards and Rangers have 1 each year. 4 teams for 14 of 22). One thing to consider with valuing those supplemental picks after the first round (small market) is the flex it gives you in the draft. The Royals were able to hedge their bet against a big name arm with Scott Boras representation in Sean Manaea by taking Hunter Dozier at 8 for underslot, then Manaea at 34 for overslot. Dozier was a big riser, its doubtful he would have been there at 34, that 2nd level of talent generally reaches into the 30s.

    I think your general conclusions are spot on: tank at the top for the 1-5 give or take; value of picks in teens much larger than 20s; and teams are locking up their talent much earlier and often, so the emphasis on being home grown is much bigger. I’d say that the FAs left without a chair at the table were looking for bigger contracts then teams were willing to give, because they are the B-list. Sounds harsh, but there have only been about a half dozen guys so far, and while it might be slightly wrong for Lohse or Bourn to take “reduced” salaries, they still got multi year security.

    There are two teams that have consistently re-stocked by letting FAs go in the past 5 years, under the old rules and the new CBA. Its worth noting that Boston and St. Louis are generally currently considered the gold standard of farm systems with a lot of highly rated prospects. It might be one part of the key to their strategy to go snag that extra pick to improve their odds. The Sox have let the following guys walk: Ellsbury, (Drew), (Ortiz), Papelbon, Martinez, Beltre, Wagner, Bay. The Cards have let the following guys walk: DeRosa, Pineiro, Pujols, Dotel, Jackson, Lohse, Beltran. Of all the teams, those are the two FO’s I’d be asking how much they value that pick. Those weren’t easy decisions, some looked like genuine negotiations and others looked like draft pick trolling.

    Finally, I’m not sure I agree with your statement “it appears that teams are getting better at scouting and drafting amateur players, especially in the first 25 or so picks”. There is a ton of failure all over the place as always. And that might be an issue for a team looking to lay down a late 20s pick for a proven vet FA.

    • Matthew Murphy said...

      It’ll be very interesting to see how the qualifying offers play out next year. Teams this year pretty much knew that the players would turn them down, since everyone did well for themselves last year. Given how many players got stung by the draft pick penalty, teams will have to seriously consider the possibility that the “B-list” free agents, who are closer league-average than being an all star, will simply accept the offer.
      As far as whether teams are getting better at drafting, it’s certainly possible that it’s just noise, given the variability in the draft. However, given the improvements in technology/scouting, and improved rankings of minor league players, I wouldn’t be surprised if it’s real. We’ll have to revisit this five or ten years down the road to see if it’s a real trend.
      Lastly, thanks for all the comments, it’s been great having a thoughtful discussion on the draft and different methods of pick valuation with everyone on here. This is why writing/reading about baseball is so much fun!

  3. Randy Hill said...

    The analysis keep mentioning 6 years of team control, yet a Mike Trout, Justin Upton, & Evan Longoria are under their teams control at under market value for more than 6 years, much longer in Longoria’s case. And this has become the norm, not an exception, for first round picks. I think the estimates are missing a substantial amount of value if not including the value of extending players before team control.

    Economic utility tells you that players are heavily incentivized to sign team friendly extensions early in their MLB careers, a lot can happen in 2-6 years, and the utility of locking down tens of millions in guaranteed money is worth far more than maximizing annual salaries, even if going year to year paid far more.

    • Don Von Handburger said...

      That’s a good point. However, it is worth nothing that not all of those early extensions work out for the team.

    • Matthew Murphy said...

      This is a great point, and is one of the big reasons why my estimates might be a bit low. As I mentioned yesterday, I didn’t want to include any value in the draftees beyond the guaranteed team control.
      It is true that a lot more young players are signing contract extensions, but it’s also true that there has been some market correction with regard to the value of these deals. If this offseason is any indication, teams are starting to pay a bit closer to market value with the long term extensions, as Dave Cameron has discussed on several occasions over at Fangraphs.
      Leverage in contract negotiations before free agency is certainly valuable, but I wasn’t sure how to place a value on it unless I went back and looked at every individual contract extension given to the 750 draft picks I looked, which to be honest, I didn’t have the time to do. Also, since there are players from as far back as the 1999 draft still playing under contract extensions they signed before reaching free agency, it would have been challenging to incorporate them into the analysis and likely would have forced me to push back the window of draft picks I was looking at.

    • Nathaniel Dawson said...

      Would that additional leverage change the calculations a significant amount? You’d have to spread out that additional leverage over all draft picks, diluting the increase. There’s somewhere around a few dozen pre-free agency extensions signed each year, while there are about 1200 draft picks. Obviously, those extensions come predominantly from the high end draft picks, but there are always some lower round picks that become good big league players and may end up signing an extension. Would the amount applied to any one draft pick really make a big difference in valuation?

  4. Brent said...

    Excellent series, thank you.

    It’s interesting to consider the trade market for draft picks (ah…only if). Toronto could theoretically trade up to number 3 but it’d take both the 9 and 11. I imagine there wouldn’t have been too many GMs in the early 2000s holding the 9 and 11 who would have thought that was a square deal.

    On another topic the slotting system should (theoretically) better order the picks in descending WAR order without signability considerations. I’m guessing the value of the top pick will only go up because of it.

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