What MLB can learn from Kyle Lohse and the NFL

As I am writing this, Kyle Lohse remains unsigned, a pioneer of the unintended consequences of the new collective bargaining agreement. Prior to the new agreement, the better free agent players were classified as Type A or Type B based on their previous production levels. If another team signed a Type B player from your team, you were awarded a compensatory pick. If another team signed a Type A player from your team, you were awarded both a compensatory pick and the signing team’s best remaining draft pick.

Once teams realized just how much value over cost successful draft picks could provide on their rookie contracts, they changed their behavior. Based on the recent history of some of the savvier teams, it was unclear whether the true prizes of each offseason were the star players or the compensation for the teams that lost them.

Of course, the players were not so thrilled by the disincentives to free agent signings that were pushing down star player contracts. In fact, the new free agent compensation model seems to target preventing situations like the one facing Lohse. It simply missed the mark.

With the old model, players were designated as Type A and Type B free agents based on their statistics, some of which were less reflective of their actual value than others.

The easy example is with closers. A reliever’s ability to earn saves is at the discretion of his manager, and so it would not be unreasonable for a team to ignore saves when deciding among the free agent relievers, some of whom had closed and some of whom had not. However, since saves were an input of the type classification, previous closers were far likelier to be designated Type A and, therefore, be more expensive because of the loss of a draft pick.

If Lohse had been where he is now a couple of years ago, he would likely face a similar situation. Traditional statistics show that Lohse has been an elite pitcher. Last year, he went 16-3 with a 2.86 ERA, the eighth-lowest of qualified starters. He would have been a Type A free agent.

However, Lohse has dramatically outperformed his peripherals. Over the previous two seasons, Lohse has had an ERA well below his FIP—by nearly a full run in 2012—and, even last year, his strikeout rate was a pedestrian 16.6 percent. If a team expected Lohse to see his results match his peripherals going forward, he may not be worth the loss of the draft pick required to sign him, especially if he demands a salary comparable to that of other pitchers of his skill level.

The introduction of qualifying offers was meant to eliminate the problem. Assessing the value of players is no longer as simple as it was 20 years ago, and the gap between public and private understanding will only increase as salaries do and teams invest more heavily in research and scouting. Qualifying offers shift the responsibility of valuing players back to the teams, and so those choices will always mirror the most sophisticated opinions on their value.

Had the new free agent compensation system been the only change to the new collective bargaining agreement, it might have accomplished what it intended. However, many of the other changes in the agreement took away from the ability of teams to build their farm systems, and that had a spillover effect on free agency.

Before the new agreement, teams had several ways to acquire players with a value proposition equal or similar to that of a first-round selection. They could use their own picks. They could use the draft picks of teams that signed their Type A free agents and the between-round compensation picks for Type A and B free agents. They could pay over slot on their later round selections to entice the hard-to-sign players with first-round talent. They could invest heavily in international signings.

Now, many of those options are gone. Teams are subject to severe penalties that prevent them from consistently going over slot and spending heavily on international players. Even for players extended a qualifying offer, the first-round pick that the signing team loses is lost to the ether, leaving the original team with only a compensatory pick. A team’s annual performance-based first-round selection is practically its only option to acquire a first-round talent. Of course, they are reluctant to part with one to acquire a free agent like Lohse who will demand a salary in line with his skill.

As a result, Lohse is in the worst kind of limbo. He is good enough that a team like St. Louis has no qualms about extending him a qualifying offer that would guarantee him around $13.3 million, but only for one year. But he is not good enough that another team will want to lose a first-round pick unless it can sign him for several years at what he would perceive to be a major discount because of his production level.

Lohse is stuck with limited options. He can probably find a multi-year contract at a steep discount compared to his expectations, or he can sign a one-year deal with some kind of clause that prevents his new team from extending him a qualifying offer. Either way, Lohse will be underpaid, and the players are back where they were two years ago, stuck with a collective bargaining agreement with disincentives that reduce free agent contracts.

So what can the players do about it? Owners are happy because the new agreement put in place mechanisms to cap spending in both player development and in free agency. If the players want to push for limitations or escalators on qualifying offers, similar to the franchise tag in the NFL, owners will want concessions. I think their best bet is another approach.

With both the previous and the current free agent compensation models, teams benefit from clumping their signings. The Yankees provided the blueprint in 2008. That offseason, they signed three Type A free agents in CC Sabathia, Mark Teixeira and A.J. Burnett.

If you have a first-round pick and you sign a Type A or qualifying offered free agent, you lose that first-round pick. Then, your best pick is a second-round pick, and so if you sign another Type A or qualifying offered free agent, you lose only that second-round pick. With each additional signing, the draft pick lost becomes less severe. That is why the Indians seem like the best fit for Lohse, since they already expended their top two picks when they signed Nick Swisher and Michael Bourn.

However, it is not a coincidence that the Yankees were the team with the blueprint. Not many organizations can afford to sign several of the most expensive free agents in a single offseason. Even though the Indians can acquire Lohse for a smaller cost than any other team, if he pushed them over budget, that lesser cost still would be prohibitive.

To me, the potential solution that everyone should agree on is the ability to trade draft picks. Then, the Indians could sign Lohse for a contract more in line with his expectations and then trade him to another team for a draft pick in between the first-round pick that other team would have had to forfeit if it had signed him and the lower-round pick the Indians will lose because of their earlier signings of Swisher and Bourn.

Hypothetically, the Indians could sign and trade Lohse now—assuming Lohse would agree to be traded—for a package of prospects that approximate that middle ground. But allowing teams to trade actual draft picks would greatly increase the chances the Indians could find a match in a team that wants Lohse and could provide that fair return.

Players would win with better contracts. Teams—even small market ones—would have an incentive to sign free agents. Front offices would gain a new tool to help them stockpile draft picks. And owners would win because trading picks would create interest in the draft, which the NFL has proven can be a powerful marketing and revenue-generating event.

With the current agreement, the first step to trading draft picks is already in place. One of the penalties for going over slot is a loss of draft picks that then are awarded to small-market teams, and those picks—and only those picks—are tradable. For the five-year period of the current agreement, that could act as a trial run, and the next step could be incremental. To potentially counteract the free agent disincentive, tradable picks in the first three rounds would be sufficient. If that is effective and entertaining, then it can expand from there.

References & Resources
All statistics are from FanGraphs.