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Strategically Navigating the New MLB Draft

By: Ryan Larson
Professional Sports Law
Professor McCurdy
Spring 2013














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INTRODUCTION
Major League Baseballs Rule 4 Draft (commonly known as the MLB Draft) occurs
once a year. Every June, baseball clubs take the opportunity to restock their farm system with
some of the top amateur talent in the country. The goal is to find players who have the tools
necessary to make it to the majors. Some clubs may be lucky enough to find that diamond in the
rough who reaches stardom. Once a player is drafted, it is a very hard road to the majors. A
player must rise through the minor league system (which usually consists of at least five levels).
They must work incredibly hard and continually grow as a baseball player. Given the limited
number of major league spots available, a clubs draft is successful if it yields even two everyday
players.
The draft is difficult. It is a high risk, high reward proposition where success will not be
known until years down the road. A failed draft can set a franchise back considerably. Therefore,
clubs have to be very confident in the scouting and analytical tools they use when choosing a
player. One reason drafting is so difficult is because the talent pool consists of players between
18 and 22 years old, in a sport where they generally peak around 27. The ability to accurately
forecast a players potential ten years down the road can be tricky to say the least.
Statistically speaking, drafting a player out of college is a safer bet than one out of high
school. This makes sense when you consider the additional time theyve had to develop. Only
5.6% of high school baseball players move on to play collegiately, with a paltry 0.5% signed to a
professional club.
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Of the players who play NCAA baseball, 10.5% will go on to play

1
Mike Rosenbaum, Examining the Percentage of MLB Draft Picks Who Reach the Major Leagues, Bleacher Report
(Jun 12, 2012), http://bleacherreport.com/articles/1219356-examining-the-percentage-of-mlb-draft-picks-that-reach-
the-major-leagues [hereinafter Examining the Percentage].
2
Probability Of Playing College and Professional Baseball, High School Baseball Web,
http://www.hsbaseballweb.com/probability.htm.
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professionally.
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This implies that as a player gets older, the ability to predict their future success
gets easier. For this reason, a clubs 40 man roster has a larger percentage of former collegiate
players than those who signed out of high school.
With so much at stake, decision makers juggle a number of important factors when
choosing a player. They need to accurately evaluate players, predict how other clubs will draft,
and know how much they are willing to spend on each player. This places a major focus on
scouting and player development. Only 66% of first round draft picks make it to the Major
Leagues.
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That number drops down to 49% for second round selections.
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An even lower 32% of
those drafted between rounds three and five will make it.
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We round it out with 20% of rounds
six through ten, 11% of rounds eleven through twenty, and 7% of rounds twenty-one through
forty.
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With such a high failure rate, clubs have to find and develop those players with the tools
to succeed.
Another difficulty in drafting is the decision of whether to draft for the clubs needs or
the best player available. Should a club spend a first round draft pick on a position where they
already have an established superstar? Will that superstar be on the club in three years when that
draft pick is Major League ready? Does the draft pick have the skills to change positions? These
are among the many questions that a decision maker must consider when choosing a draft pick.
Recently, the MLB Draft has undergone significant changes which are designed to
increase competitive parity. These changes center on the distribution of signing bonuses to
drafted players. This paper will address the rule changes and look to their impact on a clubs
scouting, trading, and free agency strategy.

3
Id.
4
Examining the Percentage, supra Note 1.
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Id.
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Id.
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Id.
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PRIOR MLB DRAFT RULES
To understand how the new rules will change draft strategy, it is important to understand
how the system previously operated. Specifically, we look to the drafts format, player
eligibility, and signing bonus structure.
Format
Prior to the recent changes, the MLB draft was 50 rounds.
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A clubs position was
determined using the reverse of the prior seasons standings.
There are two ways in which a club may receive a compensatory draft selection. The first
occurs when a team is unable to sign their first round selection from the previous draft. This is
done to help ease the sting of failing to sign a draft selection. The second occurs through free
agent compensation. To determine compensatory draft selections acquired through free agency,
Major League free agents were classified as either Type A or Type B. This ranking was
determined by the Elias Sports Bureau.
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Type A free agents rank in the top 20% of players for
their position.
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Type B free agents rank between 21-40%.
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If one club decided to sign another
clubs Type A free agent, they had to surrender their first round selection and a supplemental
first round selection.
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However, the players prior club must have offered arbitration in order to
receive compensation.
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There was protection built in for some clubs. Those who finished in the
bottom half of the standings, as well as those who received a compensatory pick for failure to
sign a prior years selection were protected from losing their first round selection.
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Clubs who

8
Id.
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Jim Callis, Ask BA, Baseball America (Oct 20, 2008), http://www.baseballamerica.com/today/prospects/ask-
ba/2008/267067.html.
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Id.
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Id.
12
Id.
13
Id.
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Id.
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lost a Type B free agent were compensated with a sandwich (between first and second) round
selection.
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Draft Eligibility
There are requirements that a player must meet to be eligible for the MLB Draft. First,
the player must be a resident of (or student within) the United States, Canada, or the American
territories such as Puerto Rico.
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Next, the player must fall within one of three groups.
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The first group is made up of
recent high school graduates who have not yet begun college. The next group is made up of
collegiate players coming from a four year school, who have completed either their junior or
senior year. The final group is made up of junior college players, regardless of how many years
they have completed.
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Theoretically, this means that if a player goes from high school to junior
college, and then on to a four year school, he can potentially be drafted up to five times.
If a player is eligible but not selected, he may sign as a free agent or return to school.
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For a club to draft a player whom they have selected in a prior year, the player must consent to
re-selection.
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As mentioned previously, a player may be drafted more than once.
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Signing Bonuses
Since 2000, Major League Baseball had set recommended signing bonus values for the
first five rounds of the draft, as well as a maximum value for every choice thereafter.
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The
recommendations were not enforced and as a result, clubs regularly spent more than the slotted

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Id.
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First Year Player Draft: Official Rules, Major League Baseball, http://mlb.mlb.com/mlb/draftday/rules.jsp.
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Id.
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Id.
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Id.
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Id.
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Id.
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Jim Callis, Teams Will Adjust To New Draft Rules, Baseball America (Feb 2, 2012),
http://www.baseballamerica.com/today/draft/early-draft-preview/2012/2612892.html [hereinafter Teams Will
Adjust].
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value for the pick.
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MLBs solution was to coerce clubs into waiting until the August 15th
deadline to sign higher round draft picks.
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Their hope was that clubs would overspend on lower
round picks, forcing them to find cost-effective ways to sign their remaining high round
selections. Ideally, this would have lessened the gap between the players recommended slot
value and their actual signing bonus. This fix was largely unsuccessful. For example, in both
2009 and 2010, the Washington Nationals negotiated right up until the deadline, setting record
signing bonuses in the process. San Diego State ace Stephen Strasburg signed for a record $15.1
million bonus, and College of Southern Nevada phenom Bryce Harper signed for a non-pitcher
record of $9.9 million.
Another technique clubs used was to sign highly touted players to a Major League
contract. Clubs would dangle a position on the 40 man roster as incentive for the player to sign.
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This made it easier for clubs to promote the player later on because they would not have to clear
space on the 40 man roster.
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It also accelerates the players eligibility for arbitration and free
agency.
There were risks associated with the old draft model. The most significant risk was
overspending on draft busts. These are the players who failed to justify the investment put forth
by the club. Clubs would spend large sums of money on high round selections to lure them away
from their college team. The player would grow within the system and contribute to the success
of the big league club. However, what happens to the percentage of those who dont make it? For
example, in 2004 the San Diego Padres selected pitcher/shortstop Matt Bush with the first

23
Alex Speier, Entering the New World Order: A 2012 Red Sox Draft Primer, WEEI (May 31, 2012),
http://www.weei.com/sports/boston/baseball/red-sox/alex-speier/2012/05/31/entering-new-world-order-2012-red-
sox-draft-pr [hereinafter Entering New World].
24
Teams Will Adjust, supra Note 22.
25
Tim Dierkes, Explaining Major League Deals For Draft Picks, MLB Trade Rumors (Aug 15, 2011),
http://www.mlbtraderumors.com/2011/08/explaining-major-league-deals-for-draft-picks.html.
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Id.
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overall pick in the draft.
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Bush was selected before future franchise players such as Justin
Verlander and Jared Weaver. He received a signing bonus of $3.15 million.
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The result was
years of alcohol, legal, and maturity issues that have prevented him from realizing his potential.
Today, Bush is in prison and has never played in a Major League game.
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Couple stories like this
with the success/failure rates listed above and it is obvious that millions of dollars have been
frivolously wasted on players who did not have the physical or mental makeup needed to
succeed.

NEW MLB DRAFT RULES
With an understanding of the prior draft rules, this will give clarity to the new system and
highlight any important changes. Once again, knowing the format and signing bonus structure is
important to understanding the changing nature of the draft. Player eligibility rules have
remained the same.
Format
There have been some important changes to the draft format. First, the draft was reduced
from fifty rounds to forty.
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This reduces the overall number of draft selections each year. Clubs
will save ten rounds worth of draft bonuses (although it might not amount to much) than in
previous years. It also reduces the number of opportunities to find that impact prospect.
Second, the compensatory draft selection structure has changed. Although clubs still
receive compensatory draft selections for failing to sign a draft pick, the compensatory structure

27
Bush Selected by Padres with top pick in baseball draft, USA Today (Jun 7, 2004),
http://usatoday30.usatoday.com/sports/baseball/draft/2004-06-07-picks_x.htm.
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Matt Eddy, Top 10 Prospects: San Diego Padres, Baseball America (Jan 30, 2009),
http://www.baseballamerica.com/today/prospects/rankings/organization-top-10-prospects/2009/267514.html.
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Joe Smith, Former Rays pitcher Matt Bush finalizes plea deal, Tampa Bay Times (Dec 18, 2012),
http://www.tampabay.com/sports/baseball/rays/former-rays-pitcher-matt-bush-finalizes-plea-deal/1266661.
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Entering New World, supra Note 23.
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for free agent signings has been completely overhauled. Major League Baseball has done away
with the Type A and Type B designations.
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Now, a club may only receive a compensatory draft
selection if they have given the player a qualifying offer (a guaranteed one year contract where
the players salary is equal to the average of the 125 highest paid players in baseball).
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However, a new twist was added. Clubs that trade for an upcoming free agent during the season
will not be eligible to receive a compensatory pick when the player signs elsewhere.
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The player
must have been on the club for at least one full season. This will make a club think twice before
trading for an upcoming free agent. They must balance the value of short term production against
the risk of losing the player without compensation. For example, under the new system, the
Milwaukee Brewers would not have received compensation for the loss of C.C. Sabathia. The
Brewers acquired him midseason from the Cleveland Indians, subsequently losing him in free
agency to the New York Yankees. However, under either set of rules, the Texas Rangers were
entitled to receive compensation from the Los Angeles Angels for both C.J. Wilson (2012) and
Josh Hamilton (2013).
Next, there has been an interesting change to the sandwich rounds. These are a small
block of picks that fall in between two regular rounds. Selections in these rounds can now be
traded.
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For the first sandwich round (between the first and second round), there will be a
competitive balance lottery to determine its six selections.
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The lottery is filled by the ten clubs
with the lowest payroll and the ten smallest markets.
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The odds of winning are determined by

31
Jayson Stark, How the new CBA changes baseball, ESPN (Nov 22, 2011),
http://espn.go.com/mlb/story/_/id/7270203/baseball-new-labor-deal-truly-historic-one.
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Id.
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Id.
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Jonathan Mayo, In MLB first, Tigers, Marlins swap Draft picks, MLB.com (July 23, 2012),
http://mlb.mlb.com/news/article.jsp?ymd=20120723&content_id=35452042&vkey=news_mlb&c_id=mlb.
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Bill Brink, MLB draft: Record signing bonuses a thing of the past, Pittsburgh Post-Gazette (Jun 3, 2012),
http://www.post-gazette.com/stories/sports/pirates/mlb-draft-record-signing-bonuses-a-thing-of-the-past-638732.
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Id.
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the previous seasons record.
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Those in the lottery who do not receive a selection, along with the
clubs who receive money through revenue sharing are entered into another lottery. This lottery
determines the six selections in the second sandwich round (between the second and third
round).
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In future years, draft selections forfeited by clubs exceeding their bonus pool (explained
below) will be distributed through a lottery.
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This lottery will be determined by the previous
season record and revenue.
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Clubs exceeding their bonus pool by even $1 will not be eligible to
receive the forfeited picks.
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Signing Bonuses
Perhaps the most noticeable and impactful change in the draft rules deal with the signing
bonuses that clubs give their draft selections. Specifically, the new rules set limits on how much
clubs can spend. There are significant penalties for those who violate these limits. Also, they can
no longer sign their draft selections to major league contracts.
From now on, clubs are limited to their designated bonus pool when signing draft
selections. This change was instituted to improve competitive balance and reduce player
signability concerns. The league sets a slotted value for each selection in the first ten rounds.
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To calculate a clubs draft pool, take the sum of each slot value for the first ten rounds.
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Clubs

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Id.
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Id.
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Id.
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Id.
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Id.
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Adam Kilgore, New rules for MLB draft include a cap on player bonuses, Washington Post (Jun 3, 2012),
http://articles.washingtonpost.com/2012-06-03/sports/35462523_1_draft-order-stephen-strasburg-washington-
nationals.
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Id.
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that spend more than their draft pool will face severe penalties (discussed below).
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For an
example of what this looks like, here is a breakdown of the 2012 Boston Red Soxs draft
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:

Adding these values will reveal that the Red Sox had a total bonus pool of $6,886,000.
To be in compliance, the Red Sox cannot spend more than this number. However, a club cannot
just spend their whole bonus pool on one player. This situation was addressed with a use it or
lose it policy. Reallocation of slotted values in this form is not permitted. If a club fails to sign a
draft pick, they lose the value for that slot.
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Using the example above, if the Red Sox failed to
sign their 24th overall selection, they would forfeit the $1.75 million value, and their bonus pool
would be reduced to $5,136,000. This prevents the Bryce Harper and Stephen Strasburg record
contracts from happening in the future.
Additionally, for any pick beyond the 10th round, there is a $100,000 cap on the signing
bonus.
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If a club exceeds this cap, the overage is taken out of their bonus pool for the first ten
rounds, bringing them closer to penalty.
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44
Id.
45
Entering New World, supra Note 23.
46
Grant Brisbee, 2012 MLB Draft: New Rules Changing Draft Strategies, SB Nation (Jun 4, 2012),
http://www.baseballnation.com/2012/6/4/3063861/2012-mlb-draft-new-rules-changing-draft-strategies.
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Entering New World, supra Note 23.
Selection Value
24 $1.75M
31 $1.575M
37 $1.394M
87 $556k
118 $401k
151 $291k
181 $218k
211 $164k
241 $143k
271 $134k
301 $125k
331 $125k
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While clubs cannot reallocate in the manner discussed above, reallocation of the bonus
pool is permitted under certain situations. If a player is signed (whether over or under slot value),
the clubs overall bonus pool remains the same. However, the club can sign a player and
reallocate the savings (if player is signed below slot value) toward their other draft selections.
The strategy implications of this are huge when you consider that a higher selection will give a
club the greatest opportunity to preserve their bonus pool. For example, signing a first round pick
below slot value will save more money than a seventh round pick would. This will be discussed
in greater detail below.
With a new signing bonus structure being implemented, Major League Baseball had to
enforce the new rules. They created a strict system that penalizes clubs based upon the
percentage in which they exceed their bonus pool. Clubs exceeding their pool by 0 to 5 percent
are required to pay a 75% tax on the overage.
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Clubs exceeding their pool by 5 to 10 percent
are required to pay a 75% tax on the overage and forfeit their first round selection in the next
draft.
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Clubs exceeding their pool by 10 to 15 percent are required to pay a 100% tax on the
overage and forfeit their first and second round selection in the next draft.
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Clubs exceeding
their pool by more than 15 percent are required to pay a 100% tax on the overage and forfeit
their first round draft selection in the next two drafts.
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Without question, these penalties will
hold clubs accountable and ensure that they do not overspend by 5% or greater.
The next restriction ended the practice of using major league contracts as leverage to sign
a draft selection.
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Only players with the greatest leverage could demand such a contract. It was a

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Id.
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Id.
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Teams Will Adjust, supra Note 22.
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great way for clubs to close the deal with these players, rather than risk losing them. It benefitted
the player by speeding up the arbitration/free agency process, as well as shielded them from the
Rule 5 Draft.
Under the new system, this would be a loophole. Because only a few players would be
worthy of such a contract, clubs at the top of the draft would be given an unfair advantage. They
already have a larger bonus pool as it is. The availability of a major league contract essentially
creates an even greater bonus pool. Clubs would use the contract as leverage to keep a players
signing bonus artificially low. This would save them a substantial amount of the money from that
particular slot, which they would use to sign their remaining draft selections. This keeps them
from overspending and drawing a penalty. In addition, the new rule also enforces the idea that
baseball is a game of merit. Players will reach the majors based on their professional production
and development, rather than what they did at the amateur level, holding these roster positions
open for veterans who have paid their dues.
The last major change to the draft was moving the signing deadline up to mid-July.
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The
purpose is to get players signed and on the field more quickly. With the new signing bonus
system in place, there is no need for prolonged negotiations that last deep into August.

IMPACT ON STRATEGY
There has only been one draft since the new rules were put in place, so there isnt much
data yet as to the impact of these rules. However, we can reasonably speculate ways which it will
affect strategy. These include scouting/drafting, free agency, and a clubs approach to trading.
Scouting and Drafting

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Perhaps the most logical change in strategy occurs in a clubs approach to scouting and
drafting players. They not only have to scout ability, but now there is an increased importance
placed on signability. Although signability has always been an important factor, now it is crucial
due to the penalties for overspending. This gives clubs and players an opportunity to leverage
themselves for mutual benefit.
Scouting is one of the most important factors in determining which players to draft.
Important attributes include age, height, weight, speed, fielding ability, throwing ability, bat
speed, and the ability to hit for average and power. However, the new rules place extreme
importance on a clubs ability to scout a players signability (the likely dollar amount it will take
for a player to sign). As stated previously, if a player does not sign, the club cannot reallocate
that money. However, if they can get the player to sign for below slot value, it allows them to
reallocate that money into signing more expensive draft selections.
Clubs need to perform their due diligence on what players are willing to sign for. For
example, Mark Appel was widely regarded as the best player available in the 2012 draft. Being a
Scott Boras client, there were serious concerns about his signability. This resulted in him
dropping to the Pittsburgh Pirates at the eighth selection.
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In the end, Appel didnt sign with the
Pirates and is draft eligible again this season. While the Pirates will receive a compensatory
selection this season, the experience has set them back at least one year in developing their club.
With the top selection, the Houston Astros instead decided to select a young Puerto Rican
shortstop named Carlos Correa.
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Correa was not considered the best player available, but he
expressed to the Astros his willingness to sign for less. He ultimately signed for $2.4 million

55
Bryan Macpherson, New money rules change way teams look at draft, Providence Journal (Mar 5, 2013),
http://www.providencejournal.com/sports/red-sox/content/20130305-new-money-rules-change-way-teams-look-at-
draft.ece?utm_source=Today+in+Sports++March+6%2C++2013&utm_campaign=Jan+23++2013&utm_medium=e
mail.
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Id.
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below slot value, allowing the Astros to use that savings on some of their other high round
selections.
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When clubs save money on players like Correa, it gives them the flexibility and
leverage needed to sign players who have other options. For example, they could use it to lure a
high school player who has communicated his intent to attend an NCAA school.
Correa serves as a great model for players on how to maneuver for position atop the draft
board. Players should actively communicate with clubs, selling the club on their playing ability
and signing ability. It will often benefit a player to accept a deal below slot value. Financially
speaking, taking a discount as the first overall pick will still net the player a higher bonus than if
he was the third overall pick.
Likewise, the Houston Astros effectively showed how to use a high draft selection as a
strategic weapon in signing a larger percentage of their draft class. My guess is that Correa
communicated a lower bonus expectation than Appel. The Astros determined that they could not
accomplish their draft goals if they selected Appel. This is a sound strategy when there is not a
clear-cut decision on which player to draft. If a club has multiple players that they like for a pick,
signability will be the deciding factor. They should use this leverage to draft the player that saves
them the most money.
Free Agency
It is important to enter free agency with a plan that takes the draft into consideration.
There are two relevant classes of clubs in this instance: Those looking to build their roster with
free agents and those looking to compete for their own free agents.
For clubs who are wondering if they should compete to retain their own free agent, they
need to consider what type of compensation they would receive if the player leaves. First, they
must have given the player a qualifying offer. If they have, the dilemma occurs in the decision to

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engage in a bidding war to retain the player. It depends on where the clubs stands internally and
in relation to its competitors. If the club is a contender, losing that player may hurt more (unless
they have a capable replacement) and might not be worth the additional draft pick. For instance,
losing Josh Hamilton will mean more to the Texas Rangers than it might if he played for the
Miami Marlins.
For middle of the road and rebuilding clubs, losing the player will sting as well.
However, if they draft correctly, losing the player will provide them with the future talent
(potentially multiple players) they need to build for the future. Even if the club doesnt get the
best player on their draft board, they can draft a quality prospect and sign him at a reasonable
price. If the player is signed for below slot value, the club can reallocate that money toward
signing other talented but more expensive draft picks. If this were to happen, theyve turned a
negative (losing a qualified free agent) into a positive (signing multiple draft picks with the
enlarged bonus pool). They improve their organizational depth and could potentially have
selected their next franchise player.
For clubs deciding whether to pursue a qualified free agent, they need to determine
whether it will be worth giving up their first round pick. Not only do they forfeit the potential of
adding organizational depth, losing the slot value attached to the selection can be devastating
because the club will have less flexibility when signing their other picks. Because signability is
now much more important, it will force them to be more conservative with their selections. The
club may not be financially able to select the players they truly want, which might affect their
success in the long run.
It is the classic dilemma of wagering the future for success right now. When making this
decision, relevant factors to consider are a clubs market size, payroll, depth, farm system depth,
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and proximity to title contention. Perhaps the most important is the clubs proximity to title
contention. Clubs like the Yankees have maintained a championship roster without high draft
selections. The financial return they receive from contention and postseason success has made it
possible to afford more high value free agents like Mark Texiera and C.C. Sabathia, as well as
keep their own free agents like Derek Jeter. The danger is that your club starts to rely heavily on
free agency and you do not create an efficient and cost effective mix of talent. This is especially
true for the Yankees. The end result of this reliance will be a rising payroll and a higher cost per
win.
Trades
The new draft rules will also play a role in a clubs approach to trading players. This is
mostly because of the new rules for compensatory draft selections. As I mentioned previously, a
club cannot receive compensation for losing a free agent if that player has not been on the roster
for a full season. There are two kinds of trade participants, those in contention and middle-of-
the-road/rebuilding clubs.
For clubs who are in contention, it makes more sense to trade for an upcoming free agent
than it does for a rebuilding club. There is a win now mentality that could turn into big money
if the club has postseason success. This includes trade deadline deals to acquire that missing
piece. In many sports, deadline deals can provide that final push toward championship
contention. If the player being traded for is an upcoming free agent, the club needs to weigh the
value of a compensatory pick plus the cost of acquiring the player against the benefits the player
will provide along with the potential of a contract extension. If the club reasonably believes that
the player can lead them to a championship or is willing to sign a contract extension, the return
should outweigh the risk.
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For clubs that are rebuilding, it is a tough decision on whether to trade an upcoming free
agent. They need to consider the compensation (draft selection and enlarged bonus pool) that the
players departure through free agency will bring them. If the club feels they can get a better
value through trade, execute the deal. If they cant, hang on to the upcoming free agent. The club
can even use the compensatory pick as leverage in trade negotiations. This is even more
important if the club has to give up their own selection as compensation for signing another
player. Holding onto the player for compensation purposes might be necessary to create some
flexibility in the draft. In most situations, unless the club is given a trade offer they cant refuse,
failing to trade and re-sign an upcoming qualified free agent can be a tremendous asset.

CONCLUSION
Only time will reveal the true impact that the new MLB Draft rules will have on strategy.
However, it is safe to assume that things will change. Gone are the days of ten figure signing
bonuses. Players and clubs need to use signability as a method of reaching a mutually beneficial
outcome. Gone are the days of trading for a short-term rental and receiving compensation when
they leave. Clubs need to strongly analyze the importance of holding extra draft picks when
determining whether to sign or trade a player. To be successful, clubs will have to adjust their
strategy with regard to scouting, drafting, trading, and free agency. Failure to adopt these new
strategies will be devastating.