Free Agent compensation was introduced with the intent to protect small market clubs from losing their high-priced free agent talent to large market clubs. The thought was that the playing field would be leveled by compensating teams for their lost free agents in the form of draft picks. The result has been anything but that.

Teams, specifically the large market clubs, have found ways to game the system by acquiring soon-to-expire contracts. In fact, the two most recent compensation pick success stories belong to the Yankees ('06: Ian Kennedy and Joba Chamberlain) and Red Sox ('05: Jacoby Ellsbury, Clay Buchholz and Jed Lowrie). Kennedy and Chamberlain were compensation for the loss of Tom Gordon, while Ellsbury and Lowrie came from the 3 month rental of Orlando Cabrera.

Which brings me to the impetus for this post. Never before has the compensation system worked as poorly as in this off-season. The need for teams to closely monitor the bottom line in light of the current economy along with the desire to hold on to their first-round picks has led to compensation drastically lowering the value of second-tier free agents. Orlando Hudson had to sign for $3.5MM, while fellow Type A free agents Orlando Cabrera and Juan Cruz remained unsigned.

Follow me after the jump for a simple outline of what is wrong with the current system along with my own guidelines on how to fix it

What's Wrong with the Current System

• The Rankings -- The Elias Sports Bureau's rankings are a joke. They are derived from batting average and a variety of counting stats for offense and use fielding percentage as the lone defensive component. While the best players in baseball generally end up at the top of the list, poor players often rank highly by accumulating playing time, maintaining an empty high average and limiting errors. (Sound familiar, OCab?)

• Arbitrary Award of Compensation -- Take the White Sox and Orlando Cabrera, for instance. As Spring Training opened, it appeared as if only two teams (Dodgers and A's) were interested in signing the shortstop. The A's own the 13th pick in the '09 draft while the Dodgers have the 17th. Since the top 15 picks are protected, the Sox can not take the A's first rounder but could have taken the Dodgers. The resulting difference in compensation would have varied not by 4 picks but by about 50 picks.

  Observe:

  Cabrera signed by Dodgers: Sox get picks 17 (Dodger's first), 23 and 37 in the first round, plus thier own 2nd round pick (roughly pick 75).
  Cabrera Signed by A's: Sox get picks 23 and 37 in the First round, plus the A's second rounder (roughly 65) and their own second rounder (roughly 75).

• Loss of First Round Pick -- Both Orlando's and Juan Cruz clearly had their salaries suppressed by the weight of losing a first round pick by the signing team. Also, the Milwaukee Brewers will not even receive a first round pick from their loss of the best free agent pitcher.

  CC Sabathia ranked below Mark Teixeira in Elias' rankings. But since they were both signed by the Yankees, the Angels receive the Yankees first round pick, while the Brewers only get the Yankees second rounder (around 75) in addition to their supplemental round pick.

  This creates a bizarre diminishing return, diminishing deterrent scenario where each successive Type A free agent signed by the same team is less painful for the signing team and less rewarding for the team losing the free agent.

How to Fix the System

• Don't Entirely Abandon Compensation -- In select cases Type A designations have drastically reduced the salaries of players. As a result, MLBPA, who view anything that suppresses salaries as a problem, will be pushing for the complete removal of compensation in the next CBA. While I agree that the compensation system shouldn't make players drastically less desirable, compensation need not be abandoned entirely.
• Improve Ranking System -- Use metrics which better capture a player's value; VORP, Win Shares, WARP, WPA for relievers. There's no reason to have a batting average driven ranking system in the 21st century. The Rankings should be weighted over a 3-year period, thus mimicking the most basic of projection systems.
• Remove Penalty for Signing Players -- Instead of penalizing the signing teams and the free agents themselves by tying them directly to the signing teams draft picks, eliminate the tether completely. Teams would receive just 1 draft pick for lost free agents who were offered arbitration.
• Develop a Scaled Supplemental System -- With a new truer value-driven ranking system in place, baseball can implement a scaled system allowing compensation for a select number of players (say the top 25 free agents) or all free agents reaching a certain predetermined value. There would be no Type A or Tybe B free agents, just a list of each free agents 3-year value. These scaled supplemental draft picks would be interspersed with regular draft picks from 16-100, with their positions determined by their proportional value.

I know this has been discussed elsewhere -- I remember reading a headline at Tango's site -- but after thinking about it for a few minutes this afternoon, I wanted to see what I could come up with on my own.