With January here and a few big name free agents still on the market, one of the popular stories of the week is how the new compensation system is affecting free agent pricing. I wrote about it yesterday, as did Jeff Passan, and this morning, C. Trent Rosencrans documented some comments Kyle Lohse made on the radio. He seems to have a pretty good understanding of what’s going on:

“It’s not exactly an open, free market when you attach such things on a guy like myself, but yet a guy like a Zack Greinke or Anibal Sanchez got a get-out-of-jail-free card because they got traded midseason, so the rules don’t pertain to them,” Lohse said. “I’m obviously a little biased, but the rules could use some tweaking.”

Of course, Greinke and Sanchez also have the advantage of being younger and better than Lohse, but their lack of draft pick compensation almost certainly helped drive up their price a little bit, so Lohse isn’t wrong here. But, rather than spend another day talking about the rules themselves, I want to talk about the actual change that teams appear to be making this winter – significantly inflating the valuation of a draft pick.

It’s not like draft pick compensation for signing a free agent is a new thing, after all. Last year, the Angels, Tigers, and Phillies all surrendered first round picks in order to sign Type A free agents. The year before, the White Sox, Tigers, Rangers, Red Sox, Yankees, and Phillies did the same. In 2010, it was the Mariners, Braves, Tigers, and Red Sox. Detroit clearly had no problem surrendering draft picks to sign a free agent, as they did it three years in a row, but between those three years, you have nearly a third of the teams in baseball punting a first round pick to sign a free agent. This wasn’t just limited to a small group of teams who valued veterans more than prospects. Punting a first round pick to sign a premium free agent has always been part of the deal.

But, of course, punting that pick now comes at a greater cost, as the new draft rules also lower a team’s bonus pool, making it impossible for a team to simply reallocate their budget to later picks in order to mitigate the loss of the high pick to some extent. And, by decreasing the pool of protected picks from the top 15 to the top 10, the rules also make it more difficult to for losing teams to sign a free agent while retaining their first selection. There’s no question that the combination of these changes makes the cost of signing a qualifying offer free agent higher than signing a Type A free agent used to be.

But, at the end of the day, the cost is still a draft selection. And mid-to-late first round draft picks aren’t any more likely to turn into future big leaguers now than they were under the old system. The reward for having that kind of pick hasn’t changed significantly, and there is perhaps no better example of diminishing returns in baseball than the expected production of players by draft position. Let me borrow a chart from this well done post at Baseball Analysts on the subject to illustrate the effect.

The first pick in any given draft is insanely valuable. The next few picks are pretty great too. It falls off in a hurry, though. When Sky Andrecheck (now with the Indians, by the way) did this analysis back in 2009, he had the #1 pick producing an average of +20 WAR, but the #10 pick was just at +6 WAR, while the #30 pick was only +4 WAR, and then every pick after that leveled off pretty substantially, to the point where it’s not clear that a fourth round pick is that much more valuable than an eighth round pick.

It’s probably not a coincidence that the CBA left the top 10 picks protected, because those regularly turn out to be franchise building block kinds of players. The middle to end of the first round, though? It’s all kind of a crapshoot, with scattered stars here and there and way more busts than successes. You don’t want to just give those picks away for no reason, but at the same time, we have to acknowledge that these picks aren’t nearly as valuable as the earlier selections, and teams are generally doing well if they get a league average player with a mid-to-late first round pick.

Just as an example, let’s take the 11th pick in the draft since the turn of the century. This is the best possible pick that can be surrendered as compensation for signing a free agent. From 2000 to 2012, those picks have been:

2000: Dave Krynzel

2001: Kenny Baugh

2002: Jeremy Hermida

2003: Michael Aubrey

2004: Neil Walker

2005: Andrew McCutchen

2006: Max Scherzer

2007: Phillippe Aumont

2008: Justin Smoak

2009: Tyler Matzek

2010: Deck Mcguire

2011: George Springer

2012: Addison Russell

McCutchen is a huge score for the Pirates, and Walker has turned out nicely for them as well, even though he took a while to become a useful player. Scherzer is another win for this slot. Addison Russell had a great debut and has prospecters excited, so he’s probably got a decent amount of trade value at the moment. George Springer might turn into something, maybe. But after that? Justin Smoak hasn’t developed as expected. Tyler Matzek is still trying to figure things out in A-ball. Phillippe Aumont might have a future as a bulpen guy. Yeah, try to contain your enthusiasm.

A one-in-ten shot at getting the next Andrew McCutchen is an asset worth having, especially if some of the consolation prizes are pretty decent too. But, let’s keep in mind that the changes to the draft rules haven’t changed the fact that teams are still drafting kids who aren’t anywhere close to the big leagues, and the path from draft pick to productive big leaguer is long and treacherous. Having draft picks is a good thing. Teams should value them. But they should know what that value is, and be willing to trade it in for an established Major League player when the price is right.

Simply looking at a guy like Kyle Lohse and saying “he’s not worth a first round pick” is just incorrect. He’s not worth a first round pick and the kind of contract he was probably looking for at the start of the winter. But if a few more weeks pass and no one is stepping up with any kind of multi-year offer, even Scott Boras will eventually bring the price tag down. As Lohse notes, he’s going to sign eventually. The key is to find the right number that makes it worthwhile for a team to give up that pick.

What’s the right number for a 34-year-old innings eater with peripherals that suggest he’s an average-ish starter? Well, if we think he’s a +2 to +3 win pitcher, that makes him worth something between $10 and $15 million per year. In a lot of ways, he’s the pitching version of Torii Hunter, who signed for 2/26 without any compensation attached. So, depending on what price a team puts on their draft pick, maybe the right price for Lohse is 2/20, or 3/24, or something in that range. After all, there is real value in having a guy who can throw 200 average innings, especially for a team with a weak rotation who has aspirations of contending in 2013.

The same goes for Michael Bourn and Rafael Soriano. Yeah, it’s a speed-and-defense guy heading into his 30s, and its a reliever with some history of arm problems, and yeah, they’ll cost you your first round pick if you sign them. But pricing the cost of that pick into the offer is different than just not offering a contract to begin with. There are teams out there who could use Michael Bourn and Rafael Soriano more than they could use a first round draft choice in the #11-#25 range.

Even a rebuilding team should see these guys as potential options at the right price, as they could theoretically sacrifice their first round pick to sign them to a deflated contract, then market them as trade chips this summer, when there aren’t as many ways to acquire talent and the loss of a draft pick is no longer in play. While MLB might frown upon sign-and-trades during the same winter, they have no capability of stopping a team from trading a player in July that they signed in January. Teams regularly sign players to short term deals, then flip them for prospects at the deadline. This isn’t a new strategy, it’s just a new twist on it.

In fact, if I’m Scott Boras, that might be exactly what I start pushing for pretty soon. I only half-jokingly suggested that Roy Oswalt ask for a “must trade clause” last winter, allowing him to spend the start of 2012 with a non-contender in a pitcher’s park who would then flip him to a contender at the deadline, so that he could be part of a pennant race and not have to spend his whole season on a losing team. Perhaps Boras should aim for something similar for Soriano, even if it’s not actually spelled out in the contract. Landing Soriano or Lohse in a pitcher-friendly environment for a few months, then having them traded at the deadline, might be the best possible outcome for both players, and a team could potentially get more in return for them in June or July than the expected value of the pick they gave up to sign them in the first place.

The changes to the draft have made specific picks more valuable, and the cost of giving them up more harmful, but there still needs to be a realistic valuation of that selection in relationship to having a quality Major League player on your team in 2013, even if that player might not finish the season on your roster. Lohse, Bourn, and Soriano are worth giving up a first round pick for. The key is to just find the right price, and the right landing spot, in order to make sure that everyone comes out ahead.