Why the Indians Should Sign Kyle Lohse

Last week, ESPN’s Buster Olney published an article in which he discussed the possibility of a sign-and-trade agreement that has been discussed in some front offices. The idea of a sign-and-trade agreement is based on the idea that although teams normally can’t trade a newly signed free agent until after June 15th of the following season, a trade can be completed if the player gives his written consent. Despite this loophole in the rules many voiced concerns that MLB would block the deal because its against the spirit of the rules or it would somehow be viewed as collusion.

Olney refers back to the offseason of 2009, when relief pitcher Juan Cruz was unable to find a team willing to sign him because of the compensation attached to him. It appears as if the MLB Players Association and the Commissioners Office were both on board with the sign-and-trade if Cruz’s former team (Diamondbacks) were able to get suitable compensation in the deal. It wasn’t until after Spring Training began (February 28, 2009) that Cruz found a GM in Dayton Moore who was willing to give up the necessary draft compensation and signed the reliever to a two-year, $5.5 million deal.

Back in 2009, teams had to worry about giving up their first round pick for signing free agents with compensation attached (those designated as Type A) but under the terms of the new Collective Bargaining Agreement (CBA) teams could offer any of its soon-to-be free agents a one-year contract worth $13.5 million. If the player in question refused the offer and signed a contract to play elsewhere, the player’s original team is awarded a supplemental first-round draft pick and the signing team forfeits its first-round draft pick to the player’s former employer.

The first 10 picks in the draft are protected and those teams forfeit their second-round pick (as the Indians did when they signed Nick Swisher) and if a team should sign multiple free agents they lose their next-highest pick. The loss of a draft pick has a double-whammy effect as teams draft pools are a fixed amount based on a dollar amount attached to each pick (2012 values here). For instance, if the Seattle Mariners had signed Swisher, they would have lost their first round pick (No. 12 overall); based on last year’s draft allotment their total available funds for signing bonuses would have been reduced by $2.55 million.

The amount of money teams can spend on the draft is of great importance because the penalty for overspending on the draft is severe.  The penalty teams will have to pay for overspending on their draft pool is severe. If a team exceeds its bonus pool by up to five percent it must pay a 75 percent tax on the overage—and the penalty escalates from there. For up to a 10 percent overage it’s a 75 percent tax and the loss of a future first-round pick. Top 10 percent and you pay a 100 percent tax and lose your first two picks the next year. And dare to exceed your limit by 15 percent and you pay a 100 percent tax and lose two future first-rounders.

That’s why Olney suggested that the Indians could be potential facilitators of a sign-and-trade scheme since they would have to surrender only their third-round pick for signing any of the remaining free agents tied to compensation.

The loss of a draft pick and losing up to half of a team’s draft spending pool has severely impacted the movement of free agents such as Kyle Lohse, Rafael Soriano, Michael Bourn, and Adam LaRoche. It should come as no surprise that three of the four (Lohse, Soriano, and Bourn) are clients of Scott Boras, who likes to seek pillow contracts: “Basically, you lay down, it’s comfortable, it’s soft, it’s there. But it’s not with you all the time. That’s a one-year contract. Your pillow … you leave it, you come back, it’s there. Short-term, you use it for a little bit, then you move on.”

Last season, Boras convinced Edwin Jackson to turn down a reported three-year, $30M offer from the Pittsburgh Pirates and to instead sign a one-year, $11 million pillow contract with the Washington Nationals. The gamble paid off for Jackson, as he hit the market again this year and got $52 million from the Chicago Cubs. (Unfortunately, Boras won’t be joining in the celebration—Jackson fired him in July.)

Now that forfeiting a draft pick and losing the corresponding draft value are in play, it is unlikely that any of the remaining free agents who are tied to compensation will find a pillow contract particularly easy to find unless with their original teams. The negotiations of a long-term free agent contract are difficult enough without the added variable of finding compensation for a third team to facilitate the transaction.

So rather than be a sign-and-trade partner for a player such as Kyle Lohse, might it be easier for the Cleveland Indians to sign him to a one-year pillow deal? It probably wouldn’t be easy. Unlike Jackson, who was 28 years old when he took a one-year pillow contract, Lohse is 34 years old and may not find the idea of entering the free agent market again at age 35 any more appealing than what he is experiencing this offseason. To appeal to Lohse, the deal would have to approach or exceed the $13 million qualifying offer that he turned down with the St.Louis Cardinals, which would certainly push the Indians’ payroll into an uncomfortable area.

But on a one-year deal Lohse would provide the Indians with everything they are looking for. Over the past two seasons he has made 63 starts, logged 399.1 innings, and gone 30-11 with a 3.11 ERA.  His veteran presence could take some of the pressure off Ubaldo Jimenez and Justin Masterson, would allow for healthy competition for the last two spots in the rotation, and would give Trevor Bauer the room to grow in Triple-A if it appears that he isn’t quite ready in Spring Training.

Some may ask as why the Indians would surrender their third-round draft pick, the associated draft pick money, and valuable payroll space for a pitcher in his mid-30’s. The primary reason is to add a valuable arm to a rotation in need of leadership and quality innings. The other reason goes back to something that I strongly believe in: the talent equation. The Indians could almost certainly retrieve more talent in by trading Lohse over the summer than what they could acquire with the third-round pick.

As for managing the payroll, this is where creativity comes into play. The first part of the contract is a lower base salary of around $8 million, with incentives for games started that drive the value of the contract up to $13 million with the bulk of the bonus money coming after start No. 20. Additionally, there would be a trade compensation bonus added to the contract for $2 million.

If he were to make 30 starts in Cleveland he would make $13 million and if he were dealt midseason and made 30 starts he could earn up to $15 million. The big boost for Lohse is if he is traded midseason the team that acquires him could not make him a qualifying offer, so he would be available again as a free agent again next winter without the cost of a draft pick.

Or maybe the Indians could find themselves smack in the middle of a pennant or wild card run this year. If this were to be the case the Indians may want to take their investment long and pay the full $13 million. If he is performing well and the team is not a serious threat to the division or wild card they’d have a great trade chip beginning June 15th (or sooner, with Lohse’s permission). In the lattter scenario the total risk could be as little as $4-5 million, depending on how many starts he makes prior to the trade.

The Indians are in a position where adding talent through trades is going to be a big part of builing the foundation for the future. Not exploring the attempt at signing any of the remaining free agents to a one-year deal (structuring the bulk of bonus money to the back half of contract) would be negligent on their part. The question is whether or not Kyle Lohse and the Indians want to take the gamble and are creative enough to make something happen.