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The Free agent compensation draft was a short-lived system through which teams losing a Type A player through free agency would receive compensation in the form of a player of major league caliber.

Background
Following the Seitz decision, which declared Andy Messersmith and Dave McNally free agents following the season, the only compensation offered to teams losing a free agent was an additional pick in the next June's amateur draft. Given the vagaries of the draft, this was considered by the owners to be too scant, and they pressed for a system in which the signing team would give up a player of comparable value to the one they just signed, a system similar to what was prevalent in the National Football League and National Hockey League at the time. The players, seeing that such compensation had gutted the impact of free agency on the other two sports refused to budge. The issue of free agent compensation was at the heart of the 1981 Major League Baseball strike.

The compromise that was reached following the strike was to set up a free agent compensation draft, through which a team losing a top-notch free agent would get to pick a player from a pool of players made available by the other Major League teams. Free agents were divided into three classes, based on playing time and performance over the previous two seasons: in descending order, these were Type A, Type B and Type C. Only losing a Type A player would activate the compensation draft; Type B players would continue to be compensated with draft choices, and Type C's would not trigger any compensation.

All teams could protect 26 players in their organization from the draft, except for teams who signed a Type A free agent that year, who would protect 24 players. Teams could opt out of the right to sign Type A free agents and therefore not have to place any names into the pool. As a result, the team losing a player could be sure to pick a player who would help immediately if that was their wish (although some lower-level prospects would also be available). The draft took place once a year, in January or February, between the end of the free agent signing season and the opening of spring training.

History of the draft
The Free Agent Compensation Draft was first held after the season, with the Chicago White Sox picking catcher Joel Skinner from the Pittsburgh Pirates as compensation for relief pitcher Ed Farmer signing with the Philadelphia Phillies. Skinner was a good prospect, but not much different from an amateur draft pick (he would not become a regular until 1986). The next year, the Chicago White Sox made the only pick again, after losing outfielder Steve Kemp to the New York Yankees. They first chose pitcher Rudy May of the Yankees, but the pick was voided a few days later because, as the holder of a no-trade contract, May should have automatically been placed on the Yankees' protected list. The White Sox then chose Steve Mura, who had been a member of the St. Louis Cardinals' starting rotation in 1982, but was not used once in the post-season. However, Mura spent almost all of 1983 in the minor leagues before being released the next year. In the other pick that year, the Seattle Mariners selected minor league infielder Danny Tartabull from the Cincinnati Reds after losing pitcher Floyd Bannister to the White Sox; Tartabull would eventually become a feared slugger, but did not play regularly until the 1986 season. So far, neither of the players chosen had made an impact, while the players triggering compensation were not the Reggie Jacksons of the world either (although the young hard-throwing lefty Bannister had been much sought after).

The 1984 draft provided a bit more excitement, as the White Sox, picking this time after losing pitcher Dennis Lamp to the Toronto Blue Jays, chose future Hall of Fame pitcher Tom Seaver from the New York Mets. The Mets had left Seaver exposed, thinking that his large contract and poor won-loss record the previous season would protect him; the White Sox saw that Seaver's other statistics were still excellent, and got two very productive seasons out of Seaver. For their part, Mets fans were appalled at seeing their team's front office once again lose control of its greatest player ever.

The Demise of the system
The end of the system came after its fourth and last installment in 1985. The Cardinals had just lost relief ace Bruce Sutter to the Atlanta Braves. They picked shortstop Angel Salazar, from the Montreal Expos, in compensation. Salazar was coming off a terrible season with Montreal, and never played a game with St. Louis, being involved in a minor league trade with the New York Mets before the end of spring training; pretty slight compensation for the greatest relief pitcher of his generation ! In another pick that year, the California Angels chose relief pitcher Donnie Moore from the Atlanta Braves, after losing outfielder Fred Lynn to the Baltimore Orioles. Leaving Moore available was clearly a mistake by the Braves, as he had been steadily improving over the previous three seasons and would continue to shine for the Angels. Another pick was made by the Toronto Blue Jays, who had lost designated hitter Cliff Johnson to the Texas Rangers; they chose minor league relief pitcher Tom Henke, also from the Rangers, who would prove to be incomparably more valuable than Johnson over the next decade as the team's closer. In fact, the Blue Jays reacquired Johnson before the year was over in a trade for two unheralded minor leaguers, leaving the Rangers completely empty-handed.

The nail in the coffin came when the Oakland Athletics, who had lost marginal pitcher Tom Underwood to the Orioles, selected pitcher Tim Belcher from the Yankees. Belcher had been the number one pick in the 1984 amateur draft, and, after failing to sign with the Minnesota Twins, had re-entered the draft in January 1985 and just signed a contract with the Yankees, in what was a major coup for the Bronx Bombers. However the team had failed to place him on their compensation list - the deadline for adding players had passed - and suddenly the Athletics had swiped the top pitching prospect in the country. Yankees owner George Steinbrenner was furious and vowed to eliminate the compensation draft. The draft found no defenders - the players had never liked it - and it was indeed a victim of the next round of collective bargaining. Amateur draft pick compensation was reintroduced for all free agent signings, as remains the case today.