Sunday, March 11, 2012

Thoughts on the NFL Draft Value Chart

Edit - Take a look at my expanded thoughts on the NFL Draft Value Chart - and a proposal for revising the Chart - in this post from November 2012.

Let’s say, hypothetically, that you had just traded the best player on your team (one of the best in the league) for a whole mess of draft picks. If you had just done this, wouldn’t you want to convince people of the wisdom of your choice? Wouldn’t the best way to do that be to convince everyone that draft picks, particularly of the type you received, were highly valuable assets? I am not suggesting in that the Herschel Walker trade was anything short of brilliant for the Cowboys (this was not a hypothetical), but in order to convince people of the wisdom of the trade it certainly helped to establish a baseline valuation for draft picks that made the Cowboys’ haul look even better before those picks even had a chance to play out.

Since that time the Draft Value Chart developed by Jimmy Johnson’s organization in Dallas has become the gospel for a great number of NFL teams. At various times much of the NFL has used the chart and reports suggest that a number of teams still do. At a minimum it is still the go-to for reporters speculating on potential trades. Once the chart became widely accepted, draft picks became easily exchangeable as teams agreed on the value and constructed trades accordingly.

Guaranteed Money

A funny thing happened, however, along the way. The salaries awarded to NFL draft picks skyrocketed, in particular those at the top of the draft. The figure below shows the guaranteed money promised to the first pick in the draft from Troy Aikman signing with the Cowboys in 1989 for 6 years and $11.2 million with a $2 million bonus through Sam Bradford’s $50 million monstrosity with St. Louis in 2010.

Nominal value of guaranteed money

Agents and teams, in trying to find a point of reference between them on which to base contract talks, found that a very easy formula was to take last year’s contract and add a bit. The result of this strategy was that the guaranteed money to the first pick grew at 17% per year in this 21 year stretch. For comparison the NFL salary cap grew from $35 million to $123 million between 1994 and 2009 (2010 was uncapped). The growth rate over that period is roughly 9% while the guaranteed money to the first pick grew from Dan Wilkinson’s $5 million to Matthew Stafford’s $42 million at a CAGR of 15.2%. The gap between these two growth rates represents the value by which the top picks in the draft eroded every year. As demonstrated below, this gap was relatively small and nearly cleared completely from 1994 through 2001 before exploding through 2009, when Matthew Stafford's contract was worth 2.35 times more as a percentage of the cap than Big Daddy Dan Wilkinson's.

Guaranteed money (red) and salary cap (blue) 1994=100

As an aside, this difference became one of the main reasons to address the situation. All else equal a reduction in the amount of money going to rookies results in more money going to veterans. The union being comprised of players who are already in the league, a measure to redistribute money from future union members to themselves was relatively popular ("relatively" because the union is wary of anything proposed by management, particularly in a contentious period such as now). The salary floor in the new CBA offers assurance for the players that owners won’t pocket the savings.

As picks became more and more costly, teams were stuck between the necessity of signing the pick and the reality of the salary cap constraint that the pick represented. Looking back at the period in question there are no cases of the player not signing, so it seems clear which side continued winning. Some teams responded to this by attempting to pre-negotiate deals with top players, buying off the possibility of a holdout in exchange for picking a player first. This resulted in a notable decrease in the rate of increase (think about it) of salary for those players, but salaries kept on going. The graph below shows year over year change in guaranteed compensation to the top pick, with those who agreed to a deal prior to the draft highlighted in green.

Year over year change in guaranteed compensation for the number one overall pick (green columns represent deals negotiated before the draft)

Careful readers (and what other kind are there who get to this point in the post) will note that not only are the green bars much lower than the blue ones (9.8% vs 23%) but that the only things keeping the green bars as high as they are are the increases won by Carson Palmer (+29%) and Matthew Stafford (+39%) in the years following another pre-draft contract agreement (David Carr and Jake Long). This anecdotal evidence suggests that negotiating a deal early was helpful, but not a cure-all for the inflation in guaranteed money. Through the uncapped year of 2010 (Sam Bradford, +20%) salaries continued their upward trajectory.

Latest CBA

One of the biggest changes of the most recent collective bargaining agreement was to set an individual salary cap for draft picks in the manner of the NBA (and in a way that Bud Selig dreams about). The value allocated to each pick is set by the CBA – actually it’s a range but seeing what the data above demonstrate about leverage of picks versus teams, it’s a given that top picks will max out the range – and picks are given a disincentive to hold out because there is nothing for which to hold out. The maximum salary and years are known and, for top picks, they could be written before the draft. The only drama last year was the number of guaranteed years in the bottom half of the first round. After Tampa Bay gave Adrian Clayborn a full four year guarantee at pick 20 when most people expected picks in the bottom half of the first round to get only three years guaranteed, picks 17-19 and 21+ were in a staring contest with their respective front offices. The outcome was that 17-19 and 21 took 3.5 years guaranteed while 22-32 somehow found solace in a three year guarantee.

Going back to my previous aside, the structure of the rookie salary distribution ensures that gains in league revenue, which drive increases in the salary cap, will flow disproportionately to veterans and away from rookies. The rookie cap matches the salary cap up to a 5% gain in a given year, then takes only 50% of any further increase above 5%. As an example, if the salary cap increases 9% then the total rookie compensation pool and the year-one rookie compensation pool will increase by 7% (i.e., 5% plus 50% of the additional 4%).

The draft value chart remains in use by several teams, if reports are to be believed. For a look at why it was so wrong in recent years, check out the following chart. It shows the year over year change in value for a draft slot between the 2009 and 2010 drafts. Relative value is calculated by dividing 2009 Guarantee by 2010 Guarantee and subtracting 1. For example, if the tenth pick received 12 million in 2009 and 18 million in 2010 its value went down by a third - the same player could have been had the previous year for 2/3 of the price.

Change in value of first round picks, 2009 to 2010

Every single first round pick in the 2010 draft cost more than the same position in 2009. Not only did each slot get more expensive, but the effect was most prominent in the top ten picks, where each slot lost 14% of its value. Picks 11-20 and 21-32 lost 10% of their value in the same time frame. So the worst teams in the league, those who most needed the draft as a way to regain competitiveness on the field, were the ones most punished by the structure of the draft. The draft value chart remained the same, taking no note of the relative decrease in the value of top picks as compared to other first rounders.

Looking at the graph below to see the change from 2010 to the first use of the new CBA in 2011, every single pick in the draft became more valuable. 

Change in value of first round picks, 2010 to 2011

Not only did every single pick become more valuable, the top ten gained an average of 83% relative to the 2010 draft while 11-20 and 21-32 followed with 37% and 30%, respectively. The draft value chart, at least as reported, continued to remain the same.

These values are not adjusted for % of the salary cap because there was no salary cap in 2010, so no baseline for the middle year. If we look at the 2009-2011 change in value scaled to the salary cap, it looks a little like the graph below (it looks exactly like the graph below).

Change in value of first round picks, 2009 to 2011 normalized for salary cap changes

The change in value from 2009 to 2011 is a still-impressive 52% improvement for the top ten (85% for the number one pick) with improvements of 20% and 14% for 11-20 and 21-32, respectively.


Peter King made an excellent point about the 2012 draft and the value of the 2ndpick. The draft value chart is out the window when you are talking about specific players because you’re no longer trading for a percentage shot at a great player. Given that background it is not surprising to see that St. Louis wrested three number ones and a number two from the Redskins. Time will tell whether the Redskins overpaid, but it is essentially a levered bet on the value of Robert Griffin III in that if things go right they will go very right but if they go wrong they will go very wrong.

If he turns out to be the star that Washington hopes (believes?) he will be, then next year’s number one may still be a good pick, but not as good as the number six they are surrendering in 2012. The 2014 number one should be even worse, getting into the 21-32 range where playoff teams draft. In the event that RGIII turns out to be Akili Smith II, then the Redskins will have surrendered three very high picks – picks that have been made even more valuable by Robert's hypothetical struggles – with nothing to show for it. Basically, in the event that he is terrible and the team needs help the deal will look worse on both ends by giving more and getting less, but if he is good they will have gotten more and given less in what is surely their preferred alternative.

For a fuller explanation of how this kind of massive trade haul happens, see the post on the Winner’s Curse that I will eventually finish – I promise, it’s good. 

Final Thoughts 

The point here is not to pile on the draft value chart. As I mentioned above, it was developed for a certain time and place and may have been right for that point in time. The point is that what draft picks are worth is a moving target. Teams that take a proactive view to this and capitalize on the relative changes in value can gain a competitive advantage, potentially a very large one, in a very competitive league.

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