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This time of year, trade ideas are thrown around like so many flying fish in Seattle. Most will never happen – indeed, most could never happen – but it’s still fun. Let’s send this overpriced, skill-declining guy to this team for these seven top 100 prospects. I could totally do this GM thing!

Increasingly, however, pundits and bloggers are tossing some poo in the proverbial punch-bowl: draft pick compensation.

As they explain it, when considering trading a soon-to-be free agent veteran, one must also consider the fact that, if the team simply kept the player, they would totally get draft pick compensation for him at the end of the year. That’s pretty much how those folks leave the discussion – as if mana from heaven, the draft picks just float down upon the lucky team. Grrr! Don’t trade soon-to-be free agents!!!!1!!!1!!!!

But here’s the thing about draft pick compensation. It ain’t that simple. Or exclamation point-y. And for the 2010 Chicago Cubs, knowing the finer points of draft pick compensation is critical to understand the moves the Cubs make – and the ones they don’t.

In order to receive compensation picks for a lost free agent, four things have to happen: (1) the player must be designated as a “Type A” or “Type B” free agent; (2) the player must be offered a one-year contract via salary arbitration; (3) the player must decline the offer of a one-year contract via salary arbitration; and (4) another team must sign the player, knowing that they may be giving up a draft pick to do so. Each step in the process presents significant hurdles.

First, the player must be in the top 20 percent of players at his position (as designated by the Elias Sports Bureau) to qualify as a Type A free agent, or in the top 40 percent, but not the top 20, to qualify as a Type B free agent. The former designation yields the team that loses the player a first round pick (unless the signing team has one of the top 15 picks, in which case it becomes a second round pick) and a sandwich pick between the first and second rounds. The latter designation yields a sandwich pick.

Second, the player’s team must be willing to offer him a contract for the following season without knowing exactly what his salary is going to be. Far more importantly – and far too often overlooked – is the fact that player’s salaries do not decline in arbitration. In fact, by the Collective Bargaining Agreement, a player’s salary in arbitration can be reduced by only as much as 20%. Veterans in particular are treated very well by the arbitration system. And the team offering arbitration must be cognizant of the fact that the player might very well accept the offer of arbitration knowing that, although he’ll get only a one-year contract out of the deal, it will be for a much higher rate than he could procure on the open market.

The correlate to the second step is the third step: the player must actually decline the offer of arbitration. As discussed above, a one-year contract with a salary likely to be higher than the year before is a very attractive option for an aging veteran, particularly in the current economic climate. Are you telling me that if you’re Derrek Lee, you would turn down a guaranteed one-year $13 million contract on the hope that you can land a multi-year deal for comparable money somewhere else? Of course you wouldn’t – and neither would he.

Finally, some team out there – with full knowledge of this whole losing-a-draft-pick business – must sign the player. For most free agents, this is not a huge hurdle. But just two years ago, free agents Orlando Hudson and Juan Cruz went unsigned deep into the offseason because they were Type A free agents. For less expensive guys like that, the prospect of going unsigned until the draft pick compensation hurdle goes away is very real.

If the player is a Type A free agent, a prospective signing team is going to think long and hard about offering him a contract, knowing that doing so will cost them a first or second round pick. Time was, this was never even a consideration – in fact, you rarely heard about draft pick compensation when it came time for your favorite team to pepper the free agent landscape with contracts. But as draft scouting becomes more precise, and cost-controlled younger players more valued, careless signings without regard for losing draft picks has gone by the wayside.

That’s why, for virtually every tradeable piece on the Chicago Cubs, the team should be looking to make move now, rather than hope for free agent compensation when guys like Ted Lilly or Derrek Lee walk. Of the impending Cubs free agents, none are likely to make it through the four step process outlined above, which would be necessary to yield the Cubs draft picks for their departure:

Ted Lilly – Obviously he’s the most likely of the Cubs to be traded in the coming days, but should the Cubs balk at a return of anything less than two first-round-pick-caliber prospects? First things first, yes, Lilly is highly likely to be a Type A free agent. At last estimation, he was a borderline Type A before back-to-back excellent outings. Assuming he doesn’t fall off a cliff this year, he’ll remain a Type A.

But Lilly carries a $12 million salary, so offering arbitration would result in a very expensive 2011 contract if he accepts. Then again, he might well decline, as he’d be able to get a multi-year deal – but is Lilly the kind of front-end ace that is worth giving up a first rounder for the privilege of signing to a multi-year, $12+ million per year contract? I’m not convinced, and there remains the chance – however unlikely – that Lilly would view a one-year $13-14 million contract to stay in Chicago as not a bad deal. Not trading Lilly in the hope of getting draft pick compensation would be defensible, but is a risk that the Cubs should avoid if they can get a decent return for him before the deadline.

Derrek Lee – The case for Derrek Lee is probably simpler. Lee carries a very high salary ($13 million), he’s aging, his skills are unfortunately declining, and it’s almost impossible to imagine him getting a big money multi-year deal. In other words, there’s almost no chance he declines arbitration, which would guarantee him a salary next year well over $10 million. If the Cubs can trade Lee for anything more than a career minor leaguer, they should do so. That is true even if they want Lee back next year – there’s nothing stopping them from signing him as a free agent this winter (and to a deal much cheaper than they would get in arbitration).

Xavier Nady – In Nady’s case, his 2010 salary ($3.3 million) is in the right range, and given that he will be healthier next year, he might well decline arbitration on the hope that he can get a multi-year deal. But that’s all academic, as he’s not going to be a Type A or B free agent, having been on the shelf last year, and unproductive this year.

  • http://www.wrigleybound.com Matt S

    Nice write-up, Ace. I don’t see any way Lilly would accept arbitration, unless the market this offseason is just awful. This is probably his last chance at a multi-year deal, so I imagine he would take it.

    Another consideration when trading him is that if you do get 3 first rounders, at least one and possibly two will be cheap, slot picks to stay within a reasonable budget, meaning probably not “true first rounders” in talent. That makes one good prospect who is closer to the majors seem like a better deal.

    • bric

      The mets have a 1st/ 3rd base prospect named Nick Evans who they have no place for. Trade Lilly and Vitters for Ike Davis or Lilly and some other random minor leaguer for Nick Evans. Please don’t make us watch another six team journeymen like Lyle Overbay or Adam Dunn play first. Build a young core around Castro, Colvin, Lee, and Jackson.

  • Raymond Robert Koenig

    I agree that the Cubs should trade Lee. If they can’t, though, they should offer him arbitration with the 20% cut in salary. If he declines, the Cubs get player compensation when he signs elsewhere, which he would. If he accepts, it’s only a 1 year contract. And arbitration contracts, while guaranteed, don’t contain no-trade clauses.

  • BT

    I agree with your case for Lee, but Lilly will be offered a multi-year deal by SOMEBODY. Very good left handed starters are not going to be shunned because of draft pick compensation. I’d also add that the Cubs hardly come out on the wrong end of it, if they are somehow forced to sign Lilly to a one year deal, assuming he accepts arbitration. That would actually be a wonderful deal for the Cubs, as they only have to invest in a one year deal. Very little risk for them. If Lilly were an injury risk like Kerry Wood, that might give the Cubs pause, but I don’t think anyone would be worried about giving him a one year deal.

    One thing I think you failed to mention is that if a team like the Indians, or anyone else who finishes in the bottom 15 of the standings, offers him a deal, they DON’T give up a first round pick. That’s bad for the Cubs, as they would be stuck with a sandwich pick and (I think) the signing teams second round pick, but it further guarantees that someone will sign Lilly.

    Unless the rules changed and I missed it.

    • Ace

      The rules did not change, but you did miss it (that is to say, I mentioned it).

  • ed

    Lilly and a ptbnl for Girardi

  • Raymond Robert Koenig

    If I were the Cubs, I’d re-sign Lilly now. He actually produced after signing his contract. Keep him. Trade the underachievers. Send a message to the players. And the fans.

    • brian

      Sorry but i’d rather have the prospects for him plus Theriot and then resign him in the off season, if Hendry actually does that i’d be thrilled and love to watch Lilly retire a Cub and the benefits of what we could get for him

  • http://forums.bmwmoal.com/member.php?u=322 BMW guy

    Being a blogger is like being in charge of your own personal insane asylum.

  • Tanner

    The Cubs need to send a message to the players and the fans. After this season, the fans need to know that the ownership is dioing their best to win.

    • jstraw

      In 2011 I need to see the Cubs are doing their best to contend in 2012. I do not need to see a frantic struggle to put together a team to win 90 games in 2011. It would be a mistake. I want to see the kind of deliberate, thoughtful acquisitions that build the core of a team that can win for years. The moves they would make with an eye to to 2011 postseason are different than the moves they would make if the idea was to win about four divisional titles over the next decade. I’d prefer the latter.

  • Bric

    Exactly. After 102 years it’s not like the fans will walk away after another 80 win season. What might turn them off is if the new ownership pushes a win now, fill the seats, bring this guy in for a year kinda attitude instead of building a base around Castro and Colvin.

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