Breaking down qualifying offer's impact on MLB's free agents

Exactly what impact is the qualifying offer having on MLB free agency? Jay Jaffe takes a look at the numbers to see what the effect has been.

With Ian Desmond signing a one-year deal with the Rangers, the last of the 20 free agents to receive qualifying offers during this off-season has found a home. Even before Desmond signed, however, the volume of complaints about the workings of the system has appeared to increase. Arguably, more players have been adversely affected by the system this past winter than in any of the previous three, and it's quite clear that the players' union will attempt to change it within the negotiations of the upcoming Collective Bargaining Agreement.

To refresh your memory, the qualifying offer (QO) system works like this: Once a player reaches free agency, his team can issue the player a standard one-year deal at a set price, but only if that player was not traded in-season, eliminating the likes of Yoenis Cespedes, Johnny Cueto and David Price. The value of the QO for a given year is determined via the average annual value of the top 125 contracts; in the first year of the system (after the 2012 season), it was $13.3 million, and it's increased slightly each year, up to $15.8 million after this past season. A player receiving such an offer has seven days to decide whether to accept, something no one had done until Colby Rasmus, Matt Wieters and Brett Anderson all did so in November.

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If a player declines the offer and signs elsewhere, the team that issued the offer receives a compensatory pick between the first and second rounds of the June amateur draft; this does not happen if the player eventually re-signs with the team that issued the pick, which was the case for Chris Davis, Marco Estrada, Dexter Fowler, Alex Gordon, Hisashi Iwakuma and Howie Kendrick. A team signing such a player (again, not re-signing) loses its first-round pick, unless it has one of the top 10 picks in the draft, in which case it loses its next-highest pick, either a compensatory pick or a second-rounder. Each additional qualified free-agent signing costs the team its next-highest pick; the Tigers, whose first pick was protected, lost their second-round pick for signing Jordan Zimmermann and then their third-round pick for signing Justin Upton.

The system, which replaced the old and much-despised Elias formula-based Type A and Type B free-agent system, doesn't have much effect at the top of the market; if a team wants to commit upwards of $100 million to a star, it's going to do so, consequences be damned. Nonetheless, the system works against players and teams in a variety of ways. It can deter a team from pursuing such free agents, particularly if its farm system is in need of fortification, or steer a team to comparable non-QO free agents, such as when the Giants signed Denard Span to a three-year deal instead of pursuing Fowler or Gordon. It can make it particularly difficult for some of those mid-tier free agents—good enough to merit a qualifying offer, but not good enough to get a long-term deal—to find homes, since the hidden cost of losing a pick must be factored into the deal. A May 2014 study by The Hardball Times' Matthew Murphy estimated that the yield of pick in the 11–15 range was $24.1 million worth of future value. For the 26–30 range, it was still $16.6 million—above the price of a one-year QO.

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In studying four seasons' worth of free agents under the system, a total of 54 players have received qualifying offers. Including the three who accepted them, 17 of the 54 (31.5%) stayed with the teams issuing the offer, with 12 of them (22.2%) doing so via deals of one or two years; excluding that trio, the figures drop to 27.5% staying, with 17.6% on short-term deals. By comparison, a look at the top 54 non-QO free agents—ranked by AAV and then matched to the number of QOs issued that same winter (nine after 2012, 13 after '13, 12 after '14 and then 20 after '15)—shows that just nine (16.7%) stayed with their previous teams, five of them (9.2%) via one- or two-year deals. Undoubtedly, that count may be depressed by midseason trades that create "short-term rental" situations, but in those cases—Cueto in Cincinnati, Price and Cespedes in Detroit, Jon Lester in Boston and so on—it became fairly clear that those players weren't re-signing, hence the decisions to exchange them for multiple prospects or other talent further along than a single draft pick.

Already, that's evidence to illustrate that the system restricts player movement, though it's a fairly crude way to measure it, as it takes no measure of the relative quality of the two sets of players, their ages or trajectories. It's true that the 54 QO players averaged longer deals than their non-QO brethren (3.6 years to 2.9) with AAVs that were 25% higher ($18.16 million to $14.52 million), but we can only speculate as to how much wider the gap would be if those 54 players weren't tethered to the cost of draft picks.

More likely, what’s driving the dissatisfaction with the system isn't so much the possibility of even higher salaries as it is the number of QO recipients who get squeezed in one way or another. Desmond is just the latest who reportedly turned down a much larger offer at some point prior to biting the bullet and accepting a below-market deal. He's part of a very short list that just doubled: Of the 12 QO players who took one-year deals, six settled for less money than that year's offer.

year of QO	player	old team	new team	salary	qo
2015	Dexter Fowler	Cubs	Cubs	$13.0M	$15.8M
2015	Hisashi Iwakuma	Mariners	Mariners	$12.0M	$15.8M
2013	Stephen Drew	Red Sox	Red Sox	$10.1M	$14.1M
2013	Nelson Cruz	Rangers	Orioles	$8.0M	$14.1M
2015	Ian Desmond	Nationals	Rangers	$8.0M	$15.8M
2013	Kendrys Morales	Mariners	Twins	$7.4M	$14.1M

Some notes: Drew didn't sign until May 20, 2014, and his salary was a prorated portion of a $14.1 million annual salary, but in waiting for another deal beyond the initial offer, he obviously took a financial hit. Morales, who didn't sign until June 8 of that year, received a prorated portion of a $12 million annual salary. Iwakuma failed a physical for a three-year deal with the Dodgers, then settled for a one-year deal with the Mariners that includes vesting club options as well as performance bonuses; Cruz's deal included bonuses as well. Fowler reportedly turned down a three-year deal with the Orioles over the exclusion of an opt-out clause after the first year.

The point remains that all of these players received less compensation—an average of $9.75 million per year—than if they had accepted the QO, whose weighted average in this set is $14.95 million, leading to a discount of almost 35%. Meanwhile, of the nine players who took two-year deals, six did so via deals whose AAV fell short of that year's offer:

year of QO	player	old team	new team	salary	qo
2012	David Ortiz	Red Sox	Red Sox	$13.0M	$13.3M
2012	Adam LaRoche	Nationals	Nationals	$12.0M	$13.3M
2014	Michael Cuddyer	Rockies	Mets	$10.5M	$15.3M
2015	Marco Estrada	Blue Jays	Blue Jays	$13.0M	$15.8M
2015	Yovani Gallardo	Rangers	Orioles	$11.0M	$15.8M
2015	Howie Kendrick	Dodgers	Dodgers	$10.0M	$15.8M

Ortiz, Estrada and Cuddyer all signed in November (shortly after receiving the QOs), sacrificing extra cash in favor of security and peace of mind. LaRoche signed in early January, choosing to remain with the Nationals, so it's probably fairest to count only Gallardo (who lost a guaranteed third year to concerns pertaining to his pre-signing physical) and Kendrick among those who were truly hit hard. Still, as a group, these two-year deals averaged just $11.58 million, a discount of around 22% off the set's weighted QO average of $14.88 million.

Another quartet of QO players wound up accepting three-year offers below the AAV of the QO—namely Kyle Lohse ($11 million per year after 2012), Francisco Liriano ($13 million per year after '14), Melky Cabrera ($14 million per year after '14) and Daniel Murphy ($12.5 million per year after '15). It's more difficult to quibble with their deals, however, because they did receive substantially greater security and, with the exception of Murphy, had recently missed substantial time due to injuries.

Desmond, Fowler, Gallardo, Iwakuma and Kendrick—that five of those 12 below-market players hail from this past winter, compared to a high of three in any of the other previous winter, helps explain why the chorus of complaints has grown louder, though it's probably true that you can't uncouple the fact that they settled for short-term deals from the impending end of the current CBA and the relative weakness of next year's free-agent class. These players are banking on a more favorable system either next winter or the one after that.

Toward that end, MLBPA executive director Tony Clark spoke up about the union's distaste for the qualifying offer system in the wake of the Orioles' Gallardo and Fowler situations. Via the Baltimore Sun's Eduardo A. Encina:

“The qualifying offer is one of the things that we are going to look to have a conversation on in bargaining,” Clark said after the meeting. “Anytime you’re sitting down even with the industry doing well, there are always things that are worth having more dialogue on. I’m certain baseball has their list. We have our list as well. The qualifying offer is one of them.”

…“As it relates to the qualifying offer, I think it’s disappointing when some of the best players in our game and some of the teams who have an interest in those best players, have hurdles to overcome in the effort to secure their services,” Clark said. “As a result, I don’t see how it is necessarily beneficial on either side of the equation, and again it’s what it makes it worthy of more dialogue.”

…“Hindsight is 20/20 in any one particular situation, and a player and his individual representation is going to make whatever decision they want to make against whatever information they have to make it,” Clark said. “The compensation system has been around for a long time. The compensation system had been a topic in bargaining—a very significant topic in bargaining—going back to the ‘70s."

Indeed, the seven-week 1981 players' strike revolved around compensation, and the concept has stuck around even as its mechanism has evolved from drafting unprotected major league players off rosters (famously, the Mets lost Tom Seaver to the White Sox after the '83 season because they failed to protect him) to the loss or gain of draft picks.

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The general baseball-watching public may not have a ton of sympathy for players passing up $15.8 million guarantees for a chance at further riches, without considering that it's a billionaire or a faceless corporation that stands to pocket the savings, or that it's demand that drives their ticket prices upward, not player salaries. The reality is that the game is in excellent financial health, setting new revenue records every year for the past 13 years, including from $8 billion in 2013 to $9 billion in '14 to $9.5 billion in '15. But even while the average major leaguer's salary continues to climb, player payroll as a percentage of that revenue has decreased sharply—from 56% back in 2002 to 38% as of '14—in part because the league's minimum salary has grown at a slower pace. Revenue increased by 650% from 1995 to 2014, but the minimum increased by only 378%. Under the current CBA, which covers the 2012–16 seasons, it's climbed just 5.7% over five seasons, from $480,000 to $507,500.

Despite those numbers (which come via Maury Brown at Forbes and Nathan Grow at FanGraphs), Clark raised some eyebrows in December when he refuted claims of a worsening split, saying, "The quote-unquote player share is as close to 50-50 as it has been in a long time." Nobody has come forward to illustrate how he and the union got to that conclusion, though CBS Sports' Dayn Perry offered one guess, suggesting that MLB Advanced Media revenues were excluded from such calculations. Still, less than a month before Clark's comments, agent Scott Boras claimed the current split has the players receiving only 43% of revenue.

The guess here is that Clark is steering clear of public debate over that topic not only because he can’t disclose actual revenue figures (the aforementioned billions are Forbes’ estimates) but also because proscribed revenue splits between players and owners are mechanisms in determining salary caps in the NBA and NFL. The MLBPA has rejected attempts at implementing a salary cap time and again; indeed, the issue was central to the 1994 strike. Clark and the union aren't making any noise about strikes, and owners aren't pitching such caps, leaving the two sides to negotiate over the nuts and bolts of things such as U.S. and international spending (including the prospect of the international draft), changes to the amateur draft, drug policy, and the qualifying offer system.

As to what kind of changes the union might seek to the QO system, it may be as simple as eliminating the lost draft pick from the signing team, increasing the number of teams with protected picks, removing the deadline for accepting the offer, turning the offer into a two-year one and so on. Whatever emerges will be the byproduct of a larger and more complicated set of negotiations. It will be up to Clark and the union’s rank and file to determine how high a priority this particular issue is.