28 August 2011

What is the Value of a Compensation Draft Pick?

This past season Tyler Beede decided not to take a signing bonus north of 2MM with the Blue Jays and instead committed himself to college.  He was the 21st selection in the first round.  As compensation, the Jays will receive an unprotected pick in next year's draft, which is the 22nd selection in the first round.  A question quite a few asked was: what, if anything, have the Blue Jays lost in terms of value?  There are several considerations.

A pick being delayed a year.

A team often relies on waves of highly talented, cost-controlled players graduating to the Majors each year.  If these players are not available, the team has to utilize the free agent market where costs are significantly higher.  For instance, if a team loses it's 21st round pick it will have to supplement it's lineup roughly the cost of what that pick would have provided.  The 21st round pick is worth about 10MM on average over the course of his career.  If that first year needs to be covered, then it will cost the team arguably 1.7 MM.  This value is not uniform for all selections, of course.  The higher up in the draft a player is selected, the greater the expected value of a player as players with greater value are typically chosen earlier.  If it was a first round pick being lost, the expected loss of one year of value would be around 13.3 MM.  The graph below shows the relationship between cost-controlled (first six years) WAR and draft pick selection.  The drafts used for this graph are from 1991-2000.

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It may be argued that in the grand scheme, a one year delay on receiving value is largely inconsequential.  This is likely to be a rather accurate assessment.  The difficulty in projecting players into the future and when they may be able to help the Major League team means that teams largely are not relying on these players to develop.  In a general sense, they need these draftees to develop and contribute, but few teams will set their watches to players producing except at the front end of the draft.  Only there do you find truly remarkable talents that teams will expect to advance quickly and be productive members of the organization at the highest level.

Draft Budget and the Unprotected Nature of Draft Pick Compensation

In practice, the greater concern in practice is how having multiple draft picks in the first round affects the quality of talent being selected.  Additionally, compensation picks are unprotected, which has tended to cause teams to select players more conservatively and reach a little bit.  In 2009, the Nationals selected Drew Storen for 200k less than slot.  Storen has been incredibly successful in the Majors as a reliever.  However, one wonders how important it was for the Nationals, a team in need of impact players, to select a pitcher who throws an inning every few days.  This, however, is not a uniform strategy as this year the Diamondbacks drafted and signed top ten pitchers Trevor Bauer and Archie Bradley.  Both required significant investment and the Diamondbacks accomplished that.

So, how much more useful is one approach than the other?  In the graph below, picks are grouped in fives over the course of the first thirty picks in the draft from 1991-2000.  Those players' control year WAR is compared to players selected the following year a selection behind them or a more conservative ten places later.

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The graph shows that there is a negligible difference between the value of the initial selection vs a selection a year later and a pick later.  However, there appears to be a sizable difference if a team with a compensation pick in the first 20 selections decides to be conservative and draft a signable player (defined in this study as a player taken 10 slots later).  A conservative approach for a top 5 pick would result in a loss of about 4 WAR (~20 MM) while picks 6-20 result in a loss of about 2 WAR (~10 MM).  It appears to be a rather large misfire if a team does not fully utilize their picks.  A simple investment of an extra 1-3 MM results in a several fold return.  Even if an unprotected draftee recognizes his signing team is in a position where they need to sign him, it is highly unlikely the pick would ever receive more money than what the average pick would give back to the team.

Differences in Talent Between Draft Classes

However, this brings us back to the Blue Jays.  Are they worse off for not signing Tyler Beede?  According to this quick study, no they are not worse off.  In an average year, players available at pick 21 are typically equally available the following year at pick 22.  The assumption is though that this year is an average year and next year will also be an average year.  The following graph shows differences in total six year WAR for the first 30 picks in each first round from 1991-2000.

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This past year's draft was considered one that was quite full with talent.  The majority opinion would find that this year's draft is likely to be similar, in total value, to those in 1992, 1993, 1995, 1997, and 1998.  The early opinion for next year is that it will be an average class which would be similar to 1991, 1994, 1996, 1998, or 1999.  The difference between this and next year is about 30% if these opinions are accurate.  That assumed difference in draft classes between this year and next is illustrated on the following graph which takes the values in the second figure and adjusts them according to general draft worth.

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In general, if the talent level in the current draft appears to be significantly greater than the following draft then it makes sense to aggressively sign those players.  However, if the following draft appears to be more talented then it might make sense to be not so giving during negotiations and to feel free to utilize a compensatory pick the following draft. 

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