Monday, February 18, 2013

Talent Markets in Sports – The value of the Franchise tag

The following is adapted and expanded from my exceptionally and exasperatingly long read on the NFL Draft Value Chart - I'm not sure anyone has made it to the end so I am excerpting key parts when I am too lazy to write a new post.

After seeing Andrew Brandt (a must-follow on Twitter @adbrandt) refer to an article he wrote last summer on the Franchise tag, I thought I would dust off a portion of my NFL Draft behemoth and jump on the bandwagon. 
Each of the three major American sports leagues (with apologies to the Raptors and Blue Jays, and hockey) has a particular way of dealing with their markets for talent. By looking at the comparison we can see some of the sources of value for players and owners - and the massive negotiating advantage that is the Franchise tag.

Baseball – Good for veterans

Baseball allocates the first six years of a player’s Major League career to the team. Arbitration means that the player has some leverage to improve their situation – particularly in later years – but they still receive a salary below their market rate during this period. Once they have completed their first six seasons a player is a free agent in the truest sense. Any team can offer him a contract for any amount or length of seasons. The result of this structure is that the Winner’s Curse tends to play out for in-demand free agents and surplus value to the team is not likely to be found in players outside of their arbitration years.

Basketball – Good for the middle class

In the NBA, draft picks receive a contract specific to their slot with no negotiation. These contracts run for two years with two additional years of team options. For exceptional talents like Dwyane Wade or Chris Bosh, the options are exercised and the drafting team receives four years of production at a below-market rate. Once the player reaches free agency there are more controls than in baseball, although it would be difficult to have fewer. The team holding the player’s rights can, in most situations, offer them an additional year on their contract and slightly higher increases in all of the contract years, although a player is still free to make a decision to leave. This alone does not help the team capture surplus value, but the salaries for individual players are capped depending on tenure in the league so the salary for a player of Wade or Bosh’s caliber will remain below their actual value in terms of production. Additionally there are a few situations in which a player can be granted restricted free agency, at which point their team will have a right to match any offer they sign with another team.

The NBA system rewards players who are almost stars with max contracts and players who ride the bench with the highest average salary of any American sports league while stars are forced to toil for less than they otherwise would make.

Football – Good for owners

One of the biggest changes of the 2011 lockout and subsequent collective bargaining agreement was to set an individual salary cap for draft picks much closer to the way the NBA does (and in a way that MLB Commissioner Bud Selig only dreams about). The value allocated to each pick is set by the CBA – allocated on a team-by-team basis based on which picks they ended up with in that year’s draft – and teams’ flexibility to give additional money in signing bonuses, roster bonuses and various other methods by which they increased contracts in the past was cut off. Picks are given a disincentive to hold out because there is nothing more to be gained with the maximum salary and number of years known before the draft. The only drama in the summer of 2011, post-lockout, was the number of guaranteed years in the bottom half of the first round. Teams had believed that the top 16 picks would get four years guaranteed while the remaining first rounders would get only three. After Tampa Bay gave Adrian Clayborn a full four year guarantee at pick 20, the entire bottom half of the first round and the 17-19 picks in particular were locked in a staring contest with their respective front offices. The outcome was that 17-19 and 21 took 3.5 years guaranteed while 22+ ended up with 3 year guarantees.
Restricted free agency is a feature of the NFL for players with three or fewer seasons of accrued service and whose contracts have expired, with teams tendering a contract at a value that corresponds to a round in the draft. If another team attempts to sign the player, the first team will have the right to match. If they choose not to match then they receive the signing team’s draft choice in the round of the tender. With draft pick compensation much more manageable in the new CBA, it has been very rare for teams to sign another team’s restricted free agent. The other, bigger, weapon for NFL teams to use is the Franchise tag. The tag denies the player the right to sign with another team. In compensation for this the salary for the one-year offer is relatively high (average of the top five salaries at a player’s position for the franchise and average of the top ten for the rarely-used transition tag).

Because it is a call option at the discretion of the owners - i.e., they will only use it if the Franchise price is lower than the market price - the Franchise system is extremely unpopular when used. Players’ desire to avoid being “franchised” grants significant bargaining power to the teams in contract negotiations. A team can effectively prevent a talented player from leaving the team indefinitely. In practice it typically leads to a long-term deal with the player in question. By agreeing to these deals in advance, a team can even reserve the once-per-season franchise tag for leverage with other players. Given this structure teams effectively have an option on the entire career of elite players that they draft - at least until their skill declines.

Things aren’t much better for the non-elite players. First, those considered non-elite coming out of college and thus drafted later are now barred from renegotiating their contracts until after their third season (sorry Colin Kaepernick). Second, those who fail to live up to their contracts are simply cut. The NFL does not have guaranteed contracts so the signing bonus is the only number a player knows they will get – absent any other language in the contract.

All of these factors conspire to help the league stay competitive – less dead money than baseball or basketball– while still supporting some dynasty-building via the franchise tag and the threat of its use.

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