Transactions Explained:What's a Qualifying Offer?

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 $15.3 million for the 2015 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, 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 after the first round of the amateur draft in June. The extra 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. Take, for example, third baseman Pablo Sandoval, one of the stars of the Giants' World Series run. He's a free agent. The Giants made him a qualifying offer. Sandoval will reject it, figuring, correctly, that he'll be able to get both more years and more dollars per year than a one-year, $15.3 million deal. If he signs with another team, that team will forfeit its first-round pick, unless it's one of the ten worst teams in baseball last year: the Diamondbacks, Rockies, Rangers, Twins, Astros, Red Sox, Cubs, Phillies, White Sox, and Reds. Those teams will forfeit their second-highest draft pick instead. (If you're thinking, "That's a windfall for the Red Sox, a high-payroll team likely to pursue big-name free agents, because they won't have to give up their first draft pick," you're right.) If a team signs more than one player who rejected a qualifying offer, it'll give up its next-highest draft pick. 

How onerous is that penalty? It depends on the player. The Mariners didn't think about the penalty when they signed Robinson Cano, the best player in last year's free agent class. Losing a draft pick won't stop a team from pursuing Sandoval, or Tigers pitcher Max Scherzer, or Dodgers shortstop Hanley Ramirez. At the lower end of players receiving qualifying offers, though, relinquishing a draft pick can result in teams being unwilling to sign a player. Last year, 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). It seems pretty clear that two other players who rejected qualifying offers, former Royals starter Ervin Santana and former Rangers outfielder Nelson Cruz, who signed with Atlanta and Baltimore, respectively, had problems getting a contract due to the draft pick they cost their new teams.

Why is there a penalty? Because baseball wants to compensate teams that lose star players to free agency. This isn't a new idea. 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 the 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 decided to go with the qualifying offer system, which is more market-based.

How did they come up with the $15.3 million figure? It's the average salary of the 125 highest-paid players in baseball. It gets recalculated every year. Last year it was $14.1 million, the year before $13.3 million.

Are there problems with the system? CJ Nitkowski wrote a nice piece describing them. The most glaring are how they screw players at the bottom of the spectrum, like Drew and Morales and Santana and Cruz last year. 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. The two most prominent free agent pitchers this year are Detroit's Max Scherzer and Oakland's Jon Lester. Scherzer spent all of last year with the Tigers, so the Tigers made him a qualifying offer. If he signs with another team, the Tigers will get a supplemental draft pick and the team signing him will lose its first pick. Lester was traded from the Red Sox to the A's at the trade deadline, so Oakland couldn't extend him a qualifying offer and won't receive an extra pick if they lose him. The team signing him won't lose its draft pick. Nitkowski describes some other issues as well.

How often do players accept qualifying offers? It hasn't happened yet. Every player who's received a qualifying offer has rejected it since the system was implemented in 2012. That could change this year, based on the experience of Drew and Morales last year. A lot of folks think Rockies outfielder Michael Cuddyer, who turns 36 next March and played only 49 games last year due to injuries, may become the first player to accept a qualifying offer.

Who's received qualifying offers? Twelve players: Detroit's Scherzer and DH Victor Martinez, Pittsburgh's catcher Russell Martin and pitcher Francisco Liriano, Kansas City's James Shields, the Yankees' David Robertson, the Blue Jays' Melky Cabrera, the Dodgers' Ramirez, the Giants' Sandoval, the Rockies' Cuddyer, and, for the second year in a row the Orioles' Cruz and the Braves' Santana. 

When do the players have to let the team know? The players who received qualifying offers were notified Monday and they have a week to respond. So by the end of business on Monday, November 10, 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. The examples last year of Drew and Morales, and to a lesser degree Santana and Cruz, illustrate some of the problems of the system, as is the loophole that will enable the team signing Lester to avoid any penalty. Expect these and other issues to be modified the next time the players and owners negotiate their collective bargaining agreement. The current CBA runs through December 1, 2016.