13 July 2012

2012 Draft Coverage: Analysis of Gausman negotiations

Just some quick thoughts on the status of the Kevin Gausman negotiations. First, my take on draft negotiations in general; second, some misconceptions I have seen floated by readers via email and on Twitter (as a reminder, you can email Jon and I both here and I can be contacted directly here; Twitter @CamdenDepot and @NickJFaleris).

Closing the deal on draftees; finding the negotiating sweetspot
I have officially completed my duties for my MLB org as relates to the 2012 draft class.  We signed some kids from my area, I had one last look-in on a "draft and follow" along with the area scout with whom I'm working, and the two remaining players drafted out of my region appear to be set in their course -- in each case likely honoring their commitment to large four-year programs.

Having completed this process, primarily as an observer, for the second year with an MLB org my views on these negotiations has evolved, to be sure.  Too often these negotiations are painted as black-and-white propositions where a failure for the parties involved to reach a speedy accord is a result of either "the player having no leverage and getting bad advice from his advisor" or "the organization being cheap or not doing their homework before drafting the player."

The reality is that, depending on the situation, there is a varying degree of information an organization might have before electing to draft a player -- particularly at the top of the draft.  Likewise, even when both sides are completely clear as to what they expect a signing to look like, it sometimes takes work to iron out the final details.  Often times, working out those final details comes down to two things: 1) the team properly conveying to the draftee the reasoning for their suggested signing amount, and 2) the draftee (and particularly the dratee's family and advisor) having reasonable expectations for their signing amount (particularly taking their draft slot into consideration).

The player and his family need to understand that, while this is one negotiation for a player, the team is negotiating with this player while setting a data point to be used in future negotiations.  That means the "it's a small amount of money for a team in the grand scheme" argument is ultimately faulty.  It is a supporting argument to help argue for exceptions, but as a guiding principal it is naive.

A detailed discussion of setting draft value for a signing could fill a book, but the issues to keep in mind are:

  1. The team is tied to past and future drafts, so decisions that have been made are fair game for negotiating leverage, as is the fact that the team will have to operate in the future with this negotiation as a data point;
  2. Except in rare instances, the player will almost always have diminished leverage in future drafts, meaning he will likely have to exceed his current draft slot by a fair amount in order to see improvements in signing offers.

Using those simplified guidelines provides for a fairly accurate lens through which to view a negotiation.  The Gausman negotiation is no exception.

Gausman details
Baltimore has an important data point for Gausman negotiations -- the Brian Matusz drafting and signing in 2008.  To refresh your memory, Matusz was selected fourth overall by Baltimore, and was the first college pitcher picked (behind two high schoolers and a collegiate position player, as well).  His signing bonus was $3.2 million, with a Major League deal bringing the full value up to just under $3.5 million.

Here is a comparison of Matusz and Gausman in their drafting year of college ball:

Matusz (Gausman)
Draft Age:  21y4m (21y6m)
Ht/Wt:      6-4/190 (6-4/185)
IP:           105 (123.2)
SO/9:      12.1 (9.8)
BB/9:      1.9 (2.0)
H/9:        7.1 (7.7)
HR/9:     0.3 (0.2)

Teams building a signing bonus profile for a playerwould obviously go deeper than this level of comparison, but it is instructive nonetheless.  Gausman is generally comparable to Matusz on the surface.  His status as a sophomore (Matusz was a junior) ends-up irrelevant to the discussion due to the fact that Gausman is older than was Matusz on the day of drafting. 

The soft slotting system in place makes going overslot problematic, and certainly not a reasonable ask by a player in Gausman's position.  In order to add money to Gausman's slot, Baltimore would need to take large percentages off of picks signed later in the draft (for example, signing a player with an assigned slot allotment of $500,000 for $300,000 represents a player signing for 40% under allotment, and adds just under a 5% increase to a player sharing Gausman's slot allotment).  In order to push for over-allotment this high in a draft, the player needs special leverage -- Gausman does not have it.

The ceiling, and it should absolutely be a ceiling, for Gausman negotiations should be $4.2 million.  A reasonable floor should be Matusz's total package of $3.5 million (with Matusz's handedness and slighlty better collegiate performance essentially cancelling out the fact that we are four years removed from the signing).  $3.7 to 4.0 million is the reasonable negotiating sweetspot.

Baltimore has reason to fight hard at $3.7 million.  The only two potentially significant players unsigned at this point are Colin Poche (5th Round, $262,000 allotment) and Derick Velasquez (15th Round, $100,000 allotment). There is currently $120,000 in allotment available to add to the $362,000 currently available for Poche/Velsaquez (around $480,000 total for the two).  A reasonable target for those bonuses to finish-up would be around $325,000 for Poche and $650,000 for Velasquez (that is setting aside whether I personally feel those players are worth those bonuses -- those are estimates for what they can reasonably fight for).

$975,000 to sign those two, $100,000 of Velasquez's bonus would not count against the cap (as a post-10th Round selection), so $875,000 needed in allotment.  $382,000 currently available between Poche's allotment and the current "leftovers".  Baltimore would need to save an estimated $490,000 on Gausman (or, a signing of about $3.71 million) to make those numbers work.

As detailed earlier on this site, Baltimore has wiggle room whereby they can spend up to around $340,000 above their aggregate alloted amount without being penalized a draft pick next year.  If they were to spend that money, it would be taxed at a rate of 75%, bringing the total team cost to just under $600,000.

Assuming my estimates are close on the asking prices for Poche and Velasquez, every $100,000 Baltimore goes past the $3.7 million to sign Gausman, will cost them $175,000 (with $100,000 going to players and $75,000 paid in taxes).  Baltimore could go up to the top of the reasonable negotiating sweetspot and give Gausman $4.0 million and still have the money to sign Poche/Velasquez for a combined $975,000, but it will cost the team over $1.5 million when taxes are included.  That is the equivalent of Baltimore signing a supplemental-1st Round pick and an early-3rd Round pick (which Poche/Velasquez certainly are not).

Keep in mind this all assumes the estimated bonus requests for Poche/Velasquez.  If they are higher or lower than that, it obviously affects the analysis.  But this is the sort of planning a team needs to run through. It looks like Baltimore did a solid job potentially lining up the signing of all three players. 

Even if Baltimore decides not to pursue Poche/Velasquez, it is important to try and stay within the negotiating sweetspot as it sets a data point for future negotiations (broken record alert).  Giving Gausman $4.2 million means the next time Baltimore drafts a Gausman-esque talent fourth overall, the Matusz negotiations become essentially irrelevant, and the starting point is much closer to the full allotment.  This means less flexibility in use of the aggregate draft allotment, and more importantly a higher investment than should be required based on the talent level and slot of selection for the amateur player.

Misconceptions -- quick hits
A couple of bad misconceptions have been presented to me over the past seven days or so -- here are my rebuts:

1. It can be argued that there is perceived leverage on Gausman's side because he has two more years of draft eligibility as a collegian if he decides to go back to school.
No.  His age is a more important factor in determining leverage than is his year in school and he is the draft age of a typical junior. After all, you could make a similar argument that a senior could just go play in an independent league and re-enter the draft next year.  A 22.5-year old Gausman is less valueable than a 21.5-year old Gausman, and there are only three slots higher than the position he was drafted this year. Going back to school means you better stay healthy and go first or second next year, and that is a tall order for someone of any talent level.

2.  Baltimore would be better off not signing Gausman because next year's class is much better.
This is borderline silly talk, but I understand there are a lot of "draft experts" that like to make sweeping statements like this as page grabs.  The class, as a whole, is still forming, and evaluators actually watching these kids are still forming opinions and gathering info to make the determination if players are worth keeping tabs on next spring.  A loose estimation is that the 2013 class, up top, will be about what the 2012 class was.  A reasonable statement is that the top of the class is expected not to be significantly better, or significantly worse, than 2012, and there are no players currently seperating themselves as likely top 5 picks.

3.  Gausman isn't an elite talent, so Baltimore fans shouldn't get too hung up on whether he signs or not.
I don't understand where this idea originally sprouted.  Show professional evaluators a projectable 6-foot-4, 185-pound body that throws mid-90s into the late innigns on a hard downward plane and with an easy motion, a current off-speed that can be plus and two separate breaking balls that have, at different times, shown plus potential, and tell them it's not an elite talent.  The industry would be grateful for your contribution.

4.  Baltimore should be spending right up to the 5% overage in slot allotment their are permitted to spend without losing a draft pick.
No.  Determining the utility of outspending aggregate slot allotment pools is important for organizations, and it ties directly to the players requiring the overspend.  Houston makes perfect sense as a team that should be willing to take a tax hit.  Applying that hit to Lance McCullers' bonus of $2.5 million (on a slot alloted $1.2 millioin) would be the equivalent of making signing a late-1st rounder for fring top 10 money.  Put another way, and probably a more useful framing for analysis,  McCullers would be receiving about a 30-slot bump between slot of selection and bonus received.  Poche and Velasquez, using the analysis above, would be receiving around a 60-slot and a 390-slot bump between slot of selection and bonus received.  It may be "just money", but that would indicate that the money was probably not utilized as best it could be.

The Depot is looking forward to seeing how the rest of these negotiations play out.  For our Shadow Draft we still have Gausman and Avery Romero (Marlins 3rd Rounder) unsigned.  The Marlins just signed their 1st-Rouner Andrew Heaney (lhp, Oklahoma State) at a savings of $200,000 below slot allotment.  They have up to just under $1 million to give to Romero without losing a draft pick next year, and up to around $750,000 to give to him without incurring taxes.  From speaking with those familiar with Miami's stance this year, they are not willing to incur taxes on their signings, so the key figure is the latter.

After signing day has concluded (about four hours from now) we'll have quick thoughts on where the O's ended-up.  Monday will be a release of a mid-season top prospect list for Baltimore, and we will start rolling out our full draft recap, including scouting reports and some video.


Dave said...

Great breakdown of the considerations a team has to factor in. Wonderful stuff and glad to see it after so many fans naively just telling the o's to dole out the cash.

Nick J Faleris said...

Thanks; glad you enjoyed it. I'll be posting a draft recap with thoughts on the signings/non-signings -- most likely on Monday.

The Oriole Way said...

Nice analysis of how the system works; of course, it is still a shame that this is the system. How nice of MLB to limit the negotiating leverage of players that, for most, will never see a paycheck anywhere near this large ever again.

Nick J Faleris said...

That's one way to look at it. Another is to ask whether the old system, which valued 2nd Rounder Josh Bell at $5,000,000 and 8th overall pick Francisco Lindor at $2,900,000 is better.

Bell is entitled to over $3 million more than a top 10 pick simply because he comes from a well off family and can walk away from a bonus to go play at the University of Texas?

Take the Royals and Pirates front office personnel and put them in New York and Los Angeles, with those assets at their disposal. I bet more people would have trouble with the "free market" approach if that happened.

The only reason the old system looks like it worked is the organizations strongest financially generally didn't go crazy spending over slot. If every team acted as Kansas City, Pittsburgh, Boston, etc. has in the past, the result would be to drive up the cost point for every draft pick.

Eventually that leads to the big market clubs using their financial advantage to grab the most talent every year (just like MLB free agency).