Does MLB’s Qualifying Offer System Suppress Free Agent Salaries?

Given all the talk about qualifying offers and projected contracts, I got a wild hair to do a little research into the current system and whether it’s “good” for the players or not. There were some ideas floating around out there, many of which have come from people who have a great deal more experience in this realm than do I. But I wanted to look at it myself, for much the same reasons that I often prefer driving to flying. I want to feel ownership of a topic, and I hope I can share at least a small bit of that sense with you.

So, armed with a spreadsheet and access to MLB Trade Rumors, I went through the last three years of the current system to see what became of the players to whom QO’s were extended. But before I get ahead of myself, let me put forth this description of the way this system works, as I realize not all of you may be intimately familiar with it.

• The value of the qualifying offer, which is determined annually by averaging the top 125 player salaries from the previous year, will be worth $15.8MM this offseason. All qualifying offers are for the same duration (one year) and the same amount (i.e., $15.8MM for 2015-16).
• Teams have until five days after the World Series to make qualifying offers. At that point the players have seven days to accept.
• Once a team makes a qualifying offer, the player has two choices: he can accept the one-year deal or decline in search of other offers. If he declines the offer and signs elsewhere, his new team will have to surrender a top draft pick (see more on this below).
• No player has ever taken a qualifying offer, but if one does, he cannot be traded (absent consent) until June 15 of the following season (i.e., 2016), as Steve Kinsella of Sports Talk Florida recently noted and MLBTR has confirmed. Even if a player grants such consent, only $50K in cash can be exchanged as part of the trade.
• Teams that sign free agents who turned down qualifying offers will surrender their first unprotected draft pick in the following year’s draft. The first ten selections in the draft are protected. This year, the Phillies, Reds, Braves, Rockies, Brewers, Athletics, Marlins, Padres, Tigers, and White Sox have protected choices. Those clubs would surrender their second-highest selections if they reach terms with a QO-declining free agent.

I suppose I should also note that none of the 34 players who received a QO from 2012-14 accepted it. That number currently stands at 54 now that 20 more offers were extended as of this past Friday. The reasons for rejecting the offer are varied, but it figures that most players — particularly those getting up in age or who are pretty middling talents — would generally opt for greater security in terms of overall time and money. The top guys are going to paid regardless.

It’s kind of a weird setup though, right? I mean, most people can’t fathom a guy turning down a windfall of cash for a single season of playing a child’s game. If someone offered me $15.8 million, Joe Everyman’s lament goes, I wouldn’t think twice about taking it. Well, yeah, that’s great for those of us who don’t/won’t/can’t earn that much. But let’s look at it another way.

Say you are one of 750 employees of company X and you’re coming up on the end of another solid year of employment. Because of timing, only a portion of the workforce is eligible for a raise each year. You’re making only $10/hour now, which is a lot better than the noobs in the mailroom, but nowhere near the shift leaders. But you know you’re one of the top employees, know you’re worth a lot more than what you’re making.

Your company offers you $15.80/hour — an average of the top 125 employees in your workplace, most of whom you feel you’re better than — but only for a single year of employment for a job that requires you to be in peak physical condition but that also taxes your body to a great degree. Do you think you might be willing to turn down that one-year offer in favor of a deal that provides greater security to you and your family?

I understand how that last part can ring a little hollow, as most of us could take $15.8 million and make it last for a long, long time. But let’s forget about the sheer magnitude of the salary figures for a moment and focus on the idea that MLB’ers want simply to earn a fare wage for the work they do relative to what the market will bear. And it’s through that lens that I’d like to view the concept of qualifying offers and whether or not they actually suppress the market value of those players who receive them.

Before I get into my findings, a word of caution. Because the current system has only been in place for 3 years, we don’t really have much of a foundation upon which to build really solid conclusions. And even within the framework of the small sample size in terms of time, we’re talking about just over 10 players per season. So I don’t think this should be taken as some definitive declaration on the state of baseball free agency, but I don’t want to dismiss the results out of hand either.

That said, my intent was to look at the contracts signed by the players who rejected offers and then compare those against the average annual value of the contracts held by non-QO players. Make sense? Okay, well, let me try to explain it a little further. Since the QO players from one year will become a part of the group that determines the figure the following year, I had to get into a little bit of math. This is the point where I may have started to veer off course, but I think I’m solid here nonetheless (critiques welcomed, just in case).

My first step was to list out the players from each of the past three seasons* who rejected an offer, determining the AAV of the contract they took instead. I then averaged those salaries to arrive at a total. Since those deals all applied to the following year, I used that next season’s QO and multiplied by 125 (total number of players upon whose salaries it’s based), then subtracted the value of the previous year’s QO contract totals and divided the remaining figure by the number of non-QO salaries.

Thus, I was able to look at what QO-eligible players were paid in a given season vs. what their non-QO brethren earned. Since the current system is indeed so fresh, I couldn’t really justify comparing pre-2012 salary figures for the first line of the simple chart below. Keep in mind that the years represent the salary of the QO players in that season, and not the year they signed the contract (so 2013 is the players who rejected 2012’s QO).

As you can see, there appears to be a trend emerging in which an initial suppression has actually turned into an area of growth in terms of player salaries. In 2013, non-QO players earned nearly 5% more than those peers who had turned down the offer the prior season. By 2014, the difference was basically non-existent, though the non-QO players earned the equivalent of a fully-equipped sedan ($45,000) more than their pals. But this past season, the guys who had rejected the previous year’s $15.3 million offer earned over 6% more than the non-QO players.

So why the big jump? Well, some of you may already be ahead of me here, but the numbers for this past season are somewhat inflated by the monster $30 million AAV deal Max Scherzer signed with the Nats. With that in mind, I took his salary out to see what we’d find.

Without the megadeal in the figures, we’re back to the trend of qualifying-offer guys earning a bit less. And that makes sense, doesn’t it? After all, the team that signs one of these guys is also forfeiting a draft pick, the value of which is basically added to the new player’s contract as sort of a tax that he’ll never see. It’s basically a penalty imposed upon the signing team, which is a factor that has to weigh pretty heavily when considering what to offer a guy.

But there’s reason to believe that may change a bit more this season, as the number of qualifying offers has increased so drastically. With 20 offers out there, a team that extended a qualifying offer to a player might not be as reluctant to sign a guy to whom another team extended a qualifying offer of their own. Confused? Don’t be. Take the Cubs, who extended an offer to Dexter Fowler. They would have to give up the 28th pick in the upcoming draft if they sign a QO player, but would receive a pick from the team that signs Fowler.

Since only the top 10 picks in the draft (Phillies, Reds, Braves, Rockies, Brewers, Athletics, Marlins, Padres, Tigers, and White Sox) are protected, the Cubs could really benefit from a team with a pick between 11 and 27 agreeing to terms with Dex. Hey, Mariners, wouldn’t a switch-hitting CF who proved that he can play some pretty decent defense fit well out there? Huh? You know you don’t want that 11th pick anyway. Okay, back to the topic at hand.

In conclusion, it would appear as though the current qualifying-offer system does suppress the overall AAV of those players who receive the offers. However, digging into the numbers a little more reveals that the top guys are still going to get top dollars and the middling/older/riskier guys are going to get middling dollars. Players like Scherzer or Robinson Cano are going to break the bank either way, but someone like Francisco Liriano or Michael Cuddyer is more likely to take less AAV for a little more security.

Despite what the numbers tell us, I think it’s still too early to render a definitive verdict in the case of The People vs. Qualifying Offers, though logic tells us that teams would naturally want to pay less for a guy with that extra cost baked in. Then again, as Ken Rosenthal pointed out, the increasing number of QO’s could result in a leveling of the playing field, so to speak. So what do you think: did my calculations and assumptions make sense?

Either way, I actually had a good deal of fun searching through this information and gaining a little better understanding of the system and how it works. I hope you did too.

*If you’d like to check out lists of QO players for youself: 2012, 2013, 2014