An Explanation of Arbitration, Free Agency, The Rule 5 Draft and...

Arbitration
Arbitration is visible in two stages; for players eligible for free agency and for players with between three years of service but less than six.

Any player without a multi-year contract through 2013 or beyond and has at least three years of service time -- but less than six years -- is arbitration-eligible.

Also, players with at least two but less than three years of service are eligible for salary arbitration if he has accumulated at least 86 days of service during the previous season (2011 in this case) AND he ranks in the top 22 percent in total service among the players who have at least two but less than three years of service, and the 86 days of service in 2011. These types are referred to as a Super Two.

Where some get confused is when others start talking about clubs offering arbitration to their free agents. Don't get the two mixed together, it's a completely different issue.

Free agents can be offered arbitration, too, but while the process is the same, the terms are different. A club can offer their free agents arbitration in order to buy more time to work out a new multi-year contract in order to retain the player's services, or to earn draft-pick compensation should that player sign with another team. The latest CBA, however, has altered that. Now for clubs to receive draft-pick compensation, they simply have to make a qualifying one-year contract offer. The qualifier is "a guaranteed one-year contract with a salary equal to the average salary of the 125-highest paid Players from the prior season."

If the club fails to offer that free agent such a deal they forfeit the right to compensation.

Service Time
Players accrue Major League service for every day they spend on the active 25-man roster, including time spent on the disabled or suspension list, as long as they were on the roster prior to being placed on the DL or suspended. A total of 172 days of service constitutes one year of service. A player may not be credited with more than 172 days or one year of service time during any season.

Players optioned to the minors for less than 20 days are credited with big-lague service time for those days spent in the minors.

Options
Each player can be optioned to the minors during three different seasons after first being placed on the 40-man roster. In special cases, like that of Wladimir Balentien, a player can be optioned a fourth time if one of his first four seasons, which forced the club to place him on the 40-man to avoid being exposed to the Rule 5 Draft, was played at a short-season level.

Once a player is out of options, they must clear waivers before being sent to the minor leagues, and can refuse such an assignment if they have been through the same process before.

Rule 5 Draft
Any player that was under the age of 19 on June 5 during the year he signed his first pro contract must be placed on the 40-man roster within five years, or will be exposed to the Rule 5 Draft. Any player that was 19 years of age or older on June 5 during the year he signed his first pro contract has to be placed on the 40-man roster within four years, or be exposed to the Rule 5 Draft.

The draft itself takes place on the final day of the winter meetings, typically held during the first week or two of December. Any player chosen in the Major League portion of the draft has to remain on the active roster for the entire season, or be offered back his former club.

Teams are charged $50,000 for selecting players in the Rule 5 Draft, and when offering a player back to his former club, will receive $25,000 if that club chooses to retrieve the player in question.

The draft order is the same as the Rule 4 Draft - reverse order of record during the previous season.

Clubs are allowed to withdraw an exposed player for every one of their players chosen.

Their are two phases of the Minor League portion of the draft, both Triple-A and Double-A. Players chosen in the Triple-A and Double-A phases must be kept at that level for the entire season, or, like the big-league phase, be offered back to his former club.

Each Triple-A selection costs $12,000 with the Double-A phase costing $4,000. Only players unprotected that spent the previous season in Class AA or A (both low and advanced) are eligible.

Notable Rule 5 Draft selections include Johan Santana, Dan Uggla, Joakim Soria, Josh Hamilton, Darrell Evans, Bobby Bonilla and George Bell.