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. 

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-.....75%
B+.....55%
B.......42%
B-.....29%
C+.....15%
C.......7%
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.