From BR Bullpen
Salary arbitration is a process by which an independent person decides what salary a player should be paid for the upcoming season.
Arbitration was introduced in 1974 as a result of the 1972 strike. It applies to players who have a certain number of years of experience in Major League Baseball but who are not yet eligible for free agency. The minimum service time for a player to be eligible for salary arbitration is usually three years, but it is two for the 17% of players with the longest service time among two-year players (they are known as the "super twos"). Arbitration can also be chosen by a player as an alternative to free agency.
When a player files for arbitration, both the player and the team submit salary figures for the coming year, based on the salaries of similar players with the same amount of experience. The arbitrator can only chose one of the two salary figures, and not determine an amount in between. This is designed to encourage both players and teams to submit reasonable figures based on current salary levels in Major League Baseball. The arbitrator makes his decision after a hearing in which both the team and the player (or his representative) have a chance to present their case and respond to the other side's arguments. Only a small minority of arbitration filings proceed to a hearing however; most cases are settled before they reach that stage.
The issue of salary arbitration has been a contentious one over the years, being at the center of a number of labor stoppages in the 1970s and early 1980s. It has now become an accepted part of baseball's business landscape, allowing teams to control players for up to six years at predictable salary levels, while guaranteeing players that they will be paid at a fair market rate after they have established themselves as major leaguers.
 Further Reading
- Bill Gilbert: "Salary Arbitration: Burden or Benefit?", in The Baseball Research Journal, Society for American Baseball Research, Cleveland, OH, # 35 (2007), pp. 60-62.