One of the more confusing rules in baseball has to be the way teams are compensated when losing a draft pick. If you already know these rules, you can scroll down to the fourth paragraph.
Depending on how good a certain player is, he is given the label of a Type A, B, or outright free agent. If a team signs a Type A free agent, that team loses either their first, or second round draft pick in the next amateur draft. If the team who signs that pick finishes in the worst 15 teams in the league, their first round pick is protected. The other 15 teams have to lose their first round pick if they make a Type A signing.
Type B, or outright free agents don't cost the team who signs them any picks. However, a team who loses a Type B free agent receives a sandwich pick between the first and second rounds. Outright free agent receive no compensation to the team that loses them. All of this hinges on the team offering the free agent arbitration. Some players aren't offered arbitration because of the fear that the player will accept.
This system has been flawed for quite some time now. This season, Jason Kendall is a Type B free agent, while being one of the worst position players who plays everyday in baseball. Last season, the Brewers failed to get the Yankees first round pick because Mark Teixeira was rated as a better player. If Ben Sheets would have been healthy he could have landed in New York and the Brewers would have received a third rounder as compensation for Sheets' being a Type A. However, I think the two players who were hurt the most last offseason were Mark Grudzielanek and Juan Cruz.
Surprisingly, Grudzielanek and Cruz were labeled Type A free agents after last season. This is one of the worst things you can hear if you are a player. A Type A free agent is so much less attractive to sign because they cost a high draft pick. Subsequently, the value that the player had drops significantly. Cruz ended up signing with the Royals for two years/$ 6 million. This was well below market value and entirely because of his free agent status. No one would touch Grudzielanek and he remained a free agent until after the draft when it wouldn't cost that team anything for him.
The one good thing about this system is it is going to help the Brewers this season. The Brewers have soon to be free agent closer Trevor Hoffman. Hoffman will be a Type A free agent this season. Because of this, Hoffman is much less likely to garner the interest that he would if he wasn't a Type A. The Brewers are certainly going to offer his arbitration this offseason and I would be surprised if another team paid more than the offer to get an aging closer, while losing one of their top picks.
Another interesting case is Cubs starter Rich Harden. Harden's injury problems have been well documented. Harden has been injured at least once each of the last five seasons. When healthy, he is one of the best pitchers in baseball. The Cubs are actively trying to trade Harden before today's deadline with the Twins. They are reluctant to offer him arbitration because of his injury problems. I can't see a more perfect scenario for the Cubs. A one year deal for Harden is ideal because of how little they are risking. If a serious arm injury happens, he is off the books after this season. I still am unable to figure out why the Cubs wouldn't keep him and offer him arbitration this offseason.
Although the current system may be flawed, it is the only thing stopping large market teams from completely dominating the free agent market. Cheap options remain a possibility for small market teams. When they do lose a player, they can try and replace him via the draft. All the more proof of how incredibly important young, cheap players are in major league baseball.