17 August 2008

Compensation Article

During the past two months there has been a considerable amount of trade talk. Often, the conversation turns toward a pending free agent (i.e. Adam Dunn) who will definitely qualify as a type A free agent. This turn of the conversation brings up an issue of value. In this situation, the Reds' strict value of Dunn was that he would reward them with a sandwich round pick in addition to a low 1st round or high 2nd round selection. To receive fair compensation, this is the bare minimum value the Reds should receive in return. For the purpose of this article, we will assume that his remaining six to seven weeks of performance cancels out his remaining salary for team who traded for him (Diamondbacks). In the end, it has been reported that the Reds accepted the Diamondbacks offer of Micah Owings, Wilkin Castillo, and Dallas Buck. Owings had an above average season last year pitching with the bonus of a little pop coming off his bat. This year he has been dreadful. Wilkin Castillo has little to no upside and was most likely sought as a potential backup catcher. He is not regarded as a prospect (think Eli Whiteside). Dallas Buck was once considered a prospect, but an arm injury has removed that label form him. Basically, the Reds received a down on his luck young pitcher who is not really as good as he was last season and not as bad as he is this year. Right now, he is a number 4 level pitcher. He probably has the stuff to inch up to three status. He offensive numbers probably help shade him a little upward as you can expect about 50% more production out of him at the plate than you would for a typical NL pitcher.

Of course, this is just being descriptive and not saying much of use. Questions still remain:
1. What is the value of these draft picks?
2. What is the value of prospects?

What is the value of the draft picks?

For those who may be unclear on free agency compensation, when Dunn reaches free agency the Diamondbacks now may offer arbitration. He may choose to accept this or he can refuse it and seek a contract elsewhere as a multiyear deal most likely would result in being paid more over the course of his career. If he does sign elsewhere, his status results in compensatory draft picks for the Diamondbacks. Dunn is a type A free agent (top 20% at his position based on an archaic and somewhat pointless secret formula), the Diamondbacks receives two draft picks: a sandwich pick placed between the first and second rounds and a second pick which is taken from the team that signed the free agent. This second pick has restrictions placed on it. If the signing team is picking in the top half of the first round (1-15; i.e. Washington Nationals), their first round pick is protected and the parent club receives the new club's second round pick instead of their first. If the signing team is in the lower portion of the first round (i.e. Tampa Bay Rays), the pick is not protected and is transferred to the parent club. If the free agent is a type B free agent, then the parent club only receives the sandwich pick.

I decided to determine worth by calculating the probability of a drafted player spending an entire season in the majors. This is a low bar of success, but I think it suits our purposes as it will overvalue the draft pick slightly. I researched players selected in 1997 through 2003 drafts and grouped them as late first round (16-30), sandwich (31-45), or early first round (46-60) picks. It should be noted that the sandwich designation is artificial as the size of this group changes each year as it is dependent on the activity in the free agent market.

What we find is that a late first round pick has a 46% chance of making it to the major leagues. A sandwich pick has a 29% chance of playing MLB baseball. An early second round pick has, surprisingly, a 32% chance. Using these numbers, you can determine what the probability is to receive a MLB level player via compensatory picks. I decided to keep the baseline low and include scenarios where one pick or both picks wound up reaching that threshold. For a type A free agent, you have a 63% chance of getting a MLB player if you are able to receive a late first round pick. That drops to 51% chance if the late first round pick is replaced with an early second round pick. In addition, a type B free agent is associated with a drafted player who has a 29% chance of reaching the bigs.

What is the value of prospects?

Several established prospect guides are available. For this study, I used John Sickell's 2005 prospect handbook. He assigns letter grades with pluses and minuses to each prospect. I took these values and determined likelihood of reaching the majors. Below the grades are listed along with their probability of reaching the Bigs:
A type B free agent fits nicely with a B- prospect. A B- guy would be similar to Garrett Olson or Nolan Reimold, according to John Sickels' preseason grades for 2008. Type A free agents require multiple players to find equal value.

Using this, we can suggest the following prospects grades as fair value for a type A free agent with a first round pick (63%):
B+ (Ian Kennedy) and C+ (Brett Gardner) (62%)
B+ (Lars Anderson), C (Bubba Bell), and C (Ryan Dent) (61%)
B (Jeff Niemann) and B- (Nick Barnese) (59%)

If the transferred pick is a second round pick (51%), then these trades would be applicable:
B+ (Chris Tillman) (55%)
B- (Chorye Spoone) and B- (Pedro Beato) (50%)
B (Billy Rowell) and C+ (Brandon Snyder) (51%)

Did the Reds exceed the base minimum return for Adam Dunn?

The answer is quite easily a yes. Of the two scenarios: Owings and junk vs. two draft picks; Owings and junk has a 100% chance of having a MLB player in the mix as opposed to the draft picks which have a 63% chance at best. Of course, limitations are involved with the trade route. The Reds may place a higher value on their own picks because they would be able to address needs that may not be able to be addressed given the Diamondbacks tradeable players. For instance, the Reds may have wanted more middle infield and catching prospects. The Diamondbacks do not have these pieces. Regardless, the Reds also have a need for pitching, so it worked out for them. They got more in return than you could expect from compensatory picks.

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