So, what’s a Qualifying Offer? It’s a one-year contract offer teams can make to their players who have filed for free agency. This year, a qualifying offer is $15.8 million for the 2016 season.

Why would teams offer that much money for one year? Two reasons. First, the best free agents are worth at least that much. Second, and more importantly, if the player rejects the qualifying offer by signing with another team, the team offering it gets compensation, and the team signing the player gets a penalty.

What’s the compensation? If a team offers a player a qualifying offer and the player rejects it, the team gets an extra draft pick between the first round and second rounds of the amateur draft in June. The extra picks (called “sandwich picks”) are allocated in reverse order of standing during the prior season.

What’s the penalty? A team signing a player who rejects a qualifying offer forfeits its first draft choice in the June amateur draft. One exception: The first ten picks in the draft are “protected” and don’t get forfeited. The teams with the worst ten records last season–the Phillies, Reds, Braves, A’s, Rockies, Brewers, Marlins, Padres, Tigers and Mariners–won’t lose their first round draft choice if they sign a player who received a qualifying offer. Instead, they’ll give up their second-highest round draft pick instead. If a team signs more than one player who received a qualifying offer, it’ll give up its next-highest draft picks in addition to the first one it forfeits. So, for example, if the Cubs sign two players who received qualifying offers, they’ll lose their first- and second-round picks. If the Tigers sign two, they’ll lose their second- and third-round picks.

How onerous is that penalty? It depends on the player. The Nationals didn’t think about the penalty when they signed Max Scherzer, arguably the best player in last year’s free agent class. Losing a draft pick won’t stop a team from pursuing a big star like Dodgers pitcher Zack Greinke or Cardinals outfielder Jason Heyward. At the lower end of players receiving qualifying offers, though, relinquishing a draft pick can result in teams being unwilling to sign a player. After the 2013 season, former Mariners DH Kendrys Morales and former Red Sox shortstop Stephen Drew received and rejected qualifying offers and couldn’t find anyone to take them. Drew eventually re-signed with the Red Sox in May (there are not penalties or compensation when a free agent re-signs with his original team), and Morales signed with the Twins on June 8 (after the amateur draft, so there was no penalty). Both those players were pretty obviously screwed out of money by the draft pick penalty.

Why is there a penalty? In part it’s because baseball wants to compensate teams that lose star players to free agency. Prior to the most recent collective bargaining agreement between the owners and the players, which went into effect in 2012, free agents were assigned a letter grade of A, B, or none, and teams losing free agents received draft pick compensation based on the grade. The calculation of the grades was pretty flawed, though, and the owners and the union arrived at the qualifying offer system. But let’s be clear: The sandwich pick that the teams receive for losing a player to whom they made a qualifying offer is their compensation. The loss of a draft pick only hurts the signing team. It isn’t compensation. It doesn’t help the team losing the player. By penalizing the signing team, it hurts the player, because it reduces his value. It ultimately serves to reduce free agent compensation.

How did they come up with the $15.8 million figure? It’s the average salary of the 125 highest-paid players in baseball. It gets recalculated every year. Last year it was $15.3 million, the year before $14.1 million.

Are there problems with the system? CJ Nitkowski wrote a nice piece describing them last year. Sam Miller did the same earlier this year, charitably describing qualifying offers as “the worst rule in baseball.” The most glaring problems are how they screw players at the bottom of the spectrum and they fail to help small-market teams. (This year, the small-market Royals could lose three players to free agency and receive, at most, one sandwich pick, while the high-rolling Dodgers could receive as many as three extra picks.) There’s also a huge loophole: Players who are traded during the last year of their contract aren’t subject to qualifying offers or compensation. This year, they include Blue Jays pitcher David Price, Mets outfielder Yoenis Cespedes, Royals pitcher Johnny Cueto and infielder-outfielder Ben Zobrist, Giants pitcher Mike Leake, and Astros pitcher Scott Kazmir. The two top pitchers in this year’s free agent class are Price and Greinke. By virtue of his being traded in the middle of the season from Detroit to Toronto, the team signing Price avoids a draft pick penalty that the team signing Greinke will have to pay.

How often do players accept qualifying offers? Every player who received a qualifying offer rejected it since the system was implemented in 2012. That has changed this year, as there were a record 20 players who received qualifying offers compared to twelve last year and thirteen the year before. Astros outfielder Colby Rasmus has become the first player to accept a qualifying offer. It would appear that Padres pitcher Ian Kennedy, who was 9-15 with a 4.28 ERA last year and 29-38 with a 4.25 ERA over the past three years, is a candidate to accept as well. (Sam and Ben discussed this in Effectively Wild Episode 761 last week.) A lot of analysts expected nobody to accept a qualifying offer, given players’ preference for multi-year contracts rather than a one-year deal, even for $15.8 million.

Who’s received qualifying offers? The twenty players are, by team:

Updated Friday, November 13, 6:00 PM: In addition to Rasmus, Wieters and Anderson accepted their qualifying offers. Estrada signed a two-year, $26 million contract with Toronto. The other 16 players are free agents, subject to the compensation and penalties outlined above.

When do the players have to let the team know? The players who received qualifying offers were notified last Friday and they have a week to respond. So by the end of business on Friday, November 13, they have to make a decision.

What happens if they reject the offer? They become free agents, able to sign with any team (subject to the compensation for their former team and penalty for their signing team) described above.

Are the parties happy with the system? Players understandably don’t like any system that reduces their value, and attaching a penalty to signing a player reduces their value. Owners like getting compensated for losing players. So that’s the impasse, and the qualifying offer system is the latest attempt to bridge it. It’s reasonable to expect the qualifying offer system to be modified the next time the players and owners negotiate their collective bargaining agreement. The current CBA runs through December 1, 2016.

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