The Financial Side of the MLB Draft: A Case Study

DraftBlueNewest 300x208 The Financial Side of the MLB Draft: A Case StudyI had an unusual draft experience this past week: As Major League Baseball’s 2014 Draft rounded the corner from Round one to Competitive Balance Round A last Thursday, I received a call from one of my dad’s co-workers, Jack. His nephew was eligible for the draft, and after posting a strong junior season, he expected to be selected in the first ten or eleven rounds. Jack called to ask a few questions about the draft.

From the very outset of our talk, it was apparent that neither Jack’s nephew — let’s call him Ross — nor his family was prepared for the mechanics of the draft. Ross had just posted an excellent season statistically and had had a fair number of conversations with scouts about where he could expect to be taken, but a quick chat with his uncle revealed that, beyond the baseball, Ross wasn’t ready for draft day. Our talk went a little like this:

Jack: “He’s talked to a couple of teams, and some of them have been telling him where they expect to take him.”

Me: “Where’s that?”

Jack: “He’s heard everywhere from maybe the third round to the eleventh round.”

Me: “Who’s saying that?

Jack: “A few teams. He’s mentioned that Texas seems to like him a lot.”

Me: “That’s really cool.”

Jack: “Yeah, he’s excited. But teams keep asking what his bottom line is, and we just don’t know.”

Me: “Don’t know what his bottom line is?

Jack: “Don’t know what a bottom line is, or what it should be.”

Me: “Oh. They’re asking what he’ll sign for.”

Jack: “Why are they asking him?”

Me: “Each team gets a certain amount of money they can use for draft picks. They’re asking him to see if he’s in their budget, based on how much money he wants and how much they like him as a player.

Jack: “Is that allowed?”

Me: “It’s very common. Teams negotiate with players in advance all of the time. I’m a little surprised your nephew hasn’t given anybody a number yet.”

Jack: “He has no idea what number to go with. Or what he should ask for.”

Me: “Well, it’s sort of whatever he wants.”

Jack: “Is $25,000 good?”

Me: “Not really, not if he’s really a potential third round pick.”

Jack: “So maybe $200,000?”

Me: “Has he talked to an agent or an advisor?”

Jack: “Isn’t that illegal?”

Me: “Technically agents are, but advisors aren’t. Has he talked with one of those?”

Jack: “No.”

The rest of my night was a whirlwind. Between explaining the logistics of the draft to Jack, offering advice to the player and his family, and scrambling to try and find him an advisor who could help him out much more than I, I was able to get a brief glimpse of the draft process from the player’s perspective. It was frantic and, I must admit, fun.

More pertinently though, this was about the point in the conversation where two overarching points, separate and apart from Ross’s particular situation, became apparent. One, there is enormous information asymmetry between teams and players pertaining to the process and logistics of the MLB draft. Two, the NCAA’s rules that prevent players from hiring an agent while they’re enrolled are reprehensible.

Let’s start with the first point. Ross was in a reasonably good position to know how to dance with MLB teams before the draft. Ross plays in a major college program. Two of his best friends were Day 2 draftees, and one of his former teammates was a first round pick just last year. His father also spent roughly a decade in the major leagues as a trainer. Given his father’s contacts, his college coaches, and his teammates, he seemingly had plenty of resources that could have prepared him for the financial side of draft day. That he hadn’t come up with a number — or even floated scouts a vague range of what it would take to sign him — speaks to the hidden complexities behind the process.

Think about all that a player like Ross has to know and do prior to the draft: In addition to focusing on baseball — where performance is vital, especially in the weeks leading up to the big day — the player has to weigh the relative value of staying in school versus turning professional. Should he lean towards pro ball, he needs to come up with a dollar amount that would push him out of school. He then has to share this information with club officials from teams that want his services, even though such discussions are technically forbidden. Oh, and he’s supposed to navigate this process — which can lead to a suspension if big league teams decide not to play nice — without formally hiring representation.

It’s the last part that really stacks the deck against players. If a player like Ross, one who seemingly has as much access to information about the draft process as any eligible college junior, doesn’t know that he can have an advisor, how prepared can a pop up junior college pick or an average high school draftee be for the draft? Plenty of players and parents of players don’t know that each team has a spending limit, much less the ramifications these seemingly arbitrary figures have on the bottom line they ultimately feed scouts and front office personnel. It’s classic information asymmetry, and it’s all made worse by the NCAA’s rules that prevent college athletes from hiring an agent.

I don’t really want to spend too much time harping on the NCAA for this rule. Everybody knows it’s ridiculous for an organization claiming to have the best interests of athletes at heart to prevent them from hiring an agent in advance of one of the most important financial moments of their lives. Hopefully the collegiate landscape will change soon.

I do think it is instructive, however, to point out that players are suffering from the NCAA’s archaic rule. Take Ross as a case study. Unclear on the rules governing the relationship athletes can have with advisors or agents — and perhaps worried that contact with an agent might jeopardize his collegiate eligibility regardless of whether he did anything wrong or not — he shied away from consulting outside help until literally the day of the draft. As a consequence, players like Ross are ill-prepared to negotiate with major league teams, potentially costing themselves money that will be funneled elsewhere in the draft.

Ultimately, Ross was drafted just after the tenth round, traditionally the tipping point from when players sign for bonuses north of $100,000 to contracts worth much, much less than that. Every year, a number of late picks sign for big dollars as teams take advantage of rules that allow them to circumvent some amount of the draft’s prescribed bonus cap, and with luck, Ross may be one of those players. Regardless though, it’s clear that the system hurt him here. A lack of transparency led to a situation where he was inadequately represented in advance of one of the most important days of his life, and it may have cost him tens of thousands of dollars. It’s a shame and a sham, and having a front row seat this year made it clear just how backwards this process is.

Written by Brendan Gawlowski

Author, Prospect Insider
Brendan Gawlowski has been writing about the Mariners since 2010.

website The Financial Side of the MLB Draft: A Case Studytwitter The Financial Side of the MLB Draft: A Case Study

19 comments on “The Financial Side of the MLB Draft: A Case Study

  1. Margarita says:

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  2. Edman says:

    Further, agents like Scott Boras have insured that those he represents get paid, before they ever reach an MLB ballpark. Baseball is the only major sport that has tto train the players they draft for sometimes several years. It’s not like football, where the better college players go right to a pro roster. So, if a team gives a $10+ million bonus to a player, and they can’t transition, they lose that money. I prefer a system where you prove your worth, until you get trained and produce.

    If the NFL draft isn’t illegal, then the MLB draft certainly isn’t.

    It would be like a kid coming out of college, especting to get paid for their services, before they prove they can do the work.

    It’s not a great system, but it’s better than it was. I mean really, it’s not like they are working for slave wages.

  3. Jerry says:

    “Yes, but the reason isn’t competitive balance. It’s to suppress the leverage of athletes coming into the league. By limiting what each team can spend–and by virtue of the fact that stacked teams can’t offer a clear path to playing time–competitive balance won’t be sacrificed. There’s no better way to suppress incoming player’s salaries than by limiting them to a market of one potential buyer of their services.”

    Of course it reduces leverage. But that concern is based on maintaining competitive balance, not on screwing young players out of money. If teams could pay elite players whatever they wanted, those players would end up on the richest teams. That’s why the draft exists: to give worse teams a better shot at getting the best players. The problem with the draft now isn’t that slots exist, it’s that signability is too much of a factor. Hard slots make the draft entirely about talent. In this way, the NFL and NBA are WAAAY ahead of MLB. The draft shouldn’t be about money. It should function to distribute talent. Period.

    Limiting bonuses and salaries wasn’t the intent for creating the draft. It was to distribute talent evenly, with worse teams getting preference. It was very explicit when each of those systems was created. Look at the history.

    Simply limiting what each team can spend wouldn’t change much, but introduces tons of ways for teams to manipulate the system. Look at all the nefarious bullshit that goes on in te DR and Venezuela, which have exactly the type of system you describe. Underhanded agents, ‘package deals’, players being hidden, etc. That system is incredibly corrupt. I don’t think any rational person would argue that that system is better for the players or the teams.

    The “clear track to playing time” argument is also BS. You think teams are worried about having too much depth at any position in their farm systems? That is a problem any team would love to have. With draftable prospects taking years to get to the majors, and teams able to trade them, this is a non issue. Teams hoard talent, because talent is a tradable commodity.

    Free market economics don’t work in sports. They aren’t free markets. And they shouldn’t be.

  4. Zackr says:

    I’m happy draft picks can’t be traded. Bavasi would have traded all those away along with all of our talent.

  5. Youngorst says:

    Drafts are 100% legal and courts have backed them. Usually due to them being part of a CBA but also because MLB is an anti-trust exemption. They are unfair to the players for sure but they are 100% legal and challenging them in court won’t get you anywhere.

  6. bookbook says:

    +There is a reason that every major sport has a draft.+

    Yes, but the reason isn’t competitive balance. It’s to suppress the leverage of athletes coming into the league. By limiting what each team can spend–and by virtue of the fact that stacked teams can’t offer a clear path to playing time–competitive balance won’t be sacrificed. There’s no better way to suppress incoming player’s salaries than by limiting them to a market of one potential buyer of their services.

  7. Jerry says:

    To borrow a line from Winston Churchill:

    The only thing worse than the draft for distributing talent is all those other systems that have been tried from time to time.

  8. Jerry says:

    Isn’t it about time to start talking about the trade deadline?

    Looking like the M’s might be buyers for once.

    Who’s on the wish list?

    I like Brandon McCarthy, Brett Anderson, Josh Willingham, and Billy Butler. Matt Kemp could also make sense on the right deal (not much in return, LAD eating a lot of his salary). Worth a risk.

    I’d talk to the Braves about Jason Heyward, just to see if that might be a possibility. He’s having another pretty bad year offensively, and perhaps the Braves might listen.

    One other ballsy idea: Tim Lincecum. The Giants would probably love to move him. He’s signed for a lot of cash next year, but his peripheral numbers are still good. Could flourish with a change of scenery.

    The Mets and M’s are a good match as well. They need position players (like Nick Franklin) and have a boatload of pitching.

    Jack Z will be ringing up quite a phone bill in the next two months.

    Should be an interesting trade deadline this year.

  9. Edman says:

    I agree with Jerry. All that would happen is the team with the deepest wallets, would go buy what they need, much like free agency. The draft helps even that playing field so that it takes more than money.

  10. hailcom says:

    Excellent and thoughtful piece. You are absolutely right that the NCAA’s rule creates vastly differing information power between the clubs and the amateur players. It is not an even playing field, even with the greater access to information the internet provides. There is no reason every player has to become an expert in how to negotiate with a team. An agent can make the investment of time and experience necessary and be worth what they are paid. Maybe they could/should be regulated so they actually are able to demonstrate the requisite knowledge, but something needs to change.

  11. Jerry says:

    Brendan,

    There is a reason that every major sport has a draft.

    Getting rid of it would absolutely destroy competitive balance in the league.

  12. Jerry says:

    Here is how I’d change things:

    1. Hard slots for draft picks, just like the NFL.

    2. Draft eligibility through players signing up for the draft. This would work just like Youngorst said: after HS, after 2 years of juco, or after junior or senior year.

    3. No penalties for having agents. Why should student athletes be unable to get professional advice and representation? Its a silly rule.

    4. Draft picks are tradeable. All of them.

    5. Draft pick compensation based on players lost/added in free agency. Players eligible for comp picks would be based on a qualifying offer, just like now. However, teams don’t lose picks. Instead, they are added at the end of the first round. Teams get picks if they lose more QO players than they sign. For instance, if a team offers arbitration to two free agents and loses them both, but adds one from another team, they pick up a single pick.

    6. Salary cap set at 175 million now, set to escalate accordingly so that it mainly impacts upper 5-7 teams in league. Mandatory minimum payroll of $80, also set to escalate, with revenue sharing tweaked to make this feasible for very small markets.

    7. Players become eligible for salary arbitration after their second year of service. No more super-2 cutoff. Arbitration clock starts ticking after a half season (no more waiting till May for guys who are clearly ML ready).

    8. International amateurs cannot sign till after their 18th birthday. How can you scout someone who is barely 16? No other sport allows this. Its creepy and doesn’t benefit anyone.

    What teams get from this:
    -ability to trade picks and use them as commodities
    -check on draft bonuses
    -elimination of extreme penalties for signing free agents
    -salary cap to increase competitive balance

    Why players would like this:
    -established ML players would make legit money earlier in career
    -removal of free agent penalties would help established players
    -only players hurt aren’t members of union yet

    The biggest and smallest market teams would probably nuke it. Teams like the Marlins wouldn’t be able to fleece the system (or their home cities) as easily. And teams like the Dodgers and Yankees would lose the ability to outspend other teams. But this system is much more fair and reasonable.

  13. Brendan Gawlowski says:

    The fairest thing would be to get rid of the draft entirely. It’s ridiculous that the players union can sell draft concessions from future members and I can’t imagine that the process would stand up in court if anyone felt compelled to take the case that far.

  14. bookbook says:

    The draft is fun for us, and all. But honestly it’s a system designed from point A to point Z in order to screw prospects out of their leverage.

    Why the NCAA is on MLB’s side instead of their own players? Monopolists stick together, I guess.

    My solution… align the incentives differently. Encourage players to have advisors (pre-agents) who register with the NCAA and pay appropriate–substantial not nominal–fees to NCAA to do so. The licensing process enforces what conduct is acceptable and what is not by these advisors.

    If the fees are high enough (3% of contracts?), maybe NCAA will formulate itself into a proper advocate for the amateurs.

    Alternatively, form an amateurs’ & minor leaguers union that will push back against the MLB, NCAA, and MLBPA.

  15. Youngorst says:

    I actually think there is a perfect solution and its quite simple…Players enter draft voluntarily (instead of automatically) and have 5 windows to do so:
    1) Out of high school
    2) After 2 years at a JUCO college
    3) After 3 years at a 4 year college
    4) After 4 years at a 4 year college (if they still have eligibility due to redshirt year)
    5) Automatically entered after college eligibility runs out.
    Once they enter the team that drafts them owns their rights till 1 year past when their eligibility would run out (5 years), if they go undrafted (say out of high school) and enroll in college they are automatically back in the system, if they don’t go to college they are free agents. All players sign for their slot money and we move on. No more screwing over guys that are out of eligibility, no more holding teams hostage for more money with a threat of going to college, etc…
    Basically, do what every other league does. Pretty simple really.

  16. Ripperlv says:

    Nice story. You know this whole thing is a set up, the NCAA is not for the student. There should be allowed some sort of representation, by a professional, even if it’s only for a short period, like from pre-draft to the signing period.

  17. Edman says:

    I think it’s broken, but i think the premise is correct. It needs to be tweaked. The competative balance picks are totally screwed up. Why should Detroit get a pick, or any high payroll team?

    With Seattle’s loss of a pick for Morales, I think that needs to be fixed as well. I like the qualifying offer concept, but it needs to change. One thought is set an expiration date before the draft. If the player doesn’t sign, give the team losing the player extra extra pool money, to help the team select and sign better picks.

    There is no perfect solution, but it clearly needs to be changed.

  18. I was shocked. Undoubtedly though, the rules are written in such a way that cautious or conservative families, particularly those without much knowledge of MLB or the draft, are at a serious disadvantage. For no good reason.

  19. Youngorst says:

    While I agree that the system is broken I still question how this kid could be so uninformed. Use google and baseball america’s draft database to get an idea of what you should get. Having no clue is a lack of preparation. I am floored that anyone who has even talked to a scout would be this uninformed.
    Do agree they should be allowed to get agents though. Also think the draft should be dramatically changed in general though.

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