Thursday, August 23, 2007
About a week ago was the deadline to sign this year’s draft picks. Many clubs went against MLB recommendation paying signing bonuses greater than a 10% reduction over last year. This is just the opposite of what MLB should be encouraging.
MLB on Park Ave. should be encouraging the financially disadvantaged clubs to draft and sign the best talent. In the long-run, it makes economic sense when the other options are to venture into the professional free agent or the amateur international market for players. In these arenas, they do not have sole negotiating rights thereby decreasing the club’s leverage and increasing acquisition costs. Drafting the best players and even paying above slot bonuses is a bargain in most cases relative to the alternative.
For example, Jeff Cirillo is getting paid $1.5 million this year to be a backup corner infielder. He was signed by the Twins, so it is safe to say that Cirillo is not being overpaid (I am not saying the Twins are cheap - just that it does not make economic sense in most cases for them to pay above the market or average price for players given their revenue streams). Assuming Will Middlebrooks is a top 100 talent, he stands about a 41% chance of making it to the Show, according to BP. At worse, Middlebrooks has a 41% shot at being Cirillo or a backup corner infielder in five years.
After accounting for inflation, the time value of money, and the 59% of the time high school draftees never make it, the net present value or today’s cost for Middlebrooks is $3.53 million over his first three years of service, when he will be making essentially the league minimum. The net present value for a Cirillo over those same three years is $4.33 million.
The Sox is saving at least $.80 million by going over slot for Middlebrooks and with the possibility that he will be better than a backup corner infielder. And if he is, they will not only save more in his first three years of service, but also in the next three when he is eligible for arbitration. This strategy not only makes fiscal sense for the Red Sox, MFY, and Tigers but for all clubs.
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