Free Agent Arbitration Primer

What does it mean when we say a free agent was offered arbitration?  When a team offers arbitration to one of its own free agents, it is offering the player a 2012 contract at a to-be-determined salary.  Last year, out of 35 such offers, only two players (Frank Francisco and Jason Frasor) accepted.

One reason "offering arbitration" to free agents is confusing is that the actual process of arbitration rarely comes into play.  Even with Francisco and Frasor last year, the sides agreed on 2010 salaries without arbitration hearings.  In an arbitration hearing, a third-party panel must choose between one salary figure submitted by the team and another submitted by the player.  These hearings only take place if the sides cannot agree on a salary.  Clearing up a common error: if a free agent accepts arbitration, the team and the player can submit any salary figure they want.

If most free agents turn down arbitration offers, why do we care?  Turning down an arbitration offer makes draft pick compensation possible for the team losing the free agent.  Free agents can be classified as Type A, B, or nothing.  Check our list to see the current designations, and click here to see the stats the Elias Sports Bureau uses to assign them.

Prince Fielder will be our example of a Type A free agent.  Say the Brewers offer him arbitration, and he turns it down, knowing that he can do better than a one-year contract if he hits the open market.  Say also that the Dodgers sign Fielder, and do not sign any other Type A free agents.  In this case, the Brewers are given Los Angeles' #18 pick in the June 2012 draft as well as a pick in a supplemental round that takes place after the first round.  It's important to note that the supplemental pick is squeezed into the draft but it does not come from the Dodgers.  Therefore, the Dodgers only surrendered one pick to sign Fielder, even though the Brewers receive two.

In the Fielder example, the Brewers were given the Dodgers' first-round draft pick.  With Type A free agent draft pick compensation, only first-round picks outside of the top 15 (plus holdovers from the previous year) are eligible to be taken by another team.  In cases where the first-round pick is protected, the team gives up its second-round pick.  For example, if the Cubs sign Fielder, the Brewers get their second-round pick rather than their protected first-round (#6) pick.

Now, if one team signs multiple Type As from other teams, draft pick compensation gets muddier.  Click here to read up on that.

We'll use left-hander Bruce Chen as our Type B example.  Say the Royals offer him arbitration and he turns it down in search of a better contract.  Say also that the Orioles sign Chen.  The Orioles do not give a draft pick to the Royals.  The Royals do gain a draft pick – it is squeezed into the supplemental round.  Therefore, signing a Type A free agent who was offered and turned down arbitration costs one draft pick, but signing such a Type B does not.  Players who were not offered arbitration do not have draft pick compensation.  Same goes for players who were designated neither A nor B.

Another cause for confusion: we have a different concept that also uses the word "arbitration."  When we say Clayton Kershaw is arbitration-eligible, we mean that he has between two-plus and five-plus years of service time, and therefore has some say in his salary.  Kershaw is under the Dodgers' control.  The only question is what they will pay him next year, and that's the one similarity with free agent compensation.  Kershaw and the Dodgers each submit salary figures, and if they can't agree an arbitration panel must choose one.

Upcoming deadlines: on November 23rd (by 11pm CST), we'll learn whether teams offer arbitration to their free agents.  By December 7th, those players must choose whether to accept.  Expect only a handful to accept.  Those who accept are no longer free agents.

The non-tender deadline is December 12th.  That is when teams decide whether to tender a contract to arbitration-eligible players.  These players have fewer than six years of service time, and are under team control for 2012 if the team wants them.  If not, the players are non-tendered and become free agents.  We'll be adding many names to the free agent list on December 12th.

This is a modified version of a post by Tim Dierkes from December, 2009.


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