With all of the player movement and flying paychecks, the offseason can sometimes be as exciting as the regular season. As we enter the final phase of the offseason of 2004-2005, salary arbitration hearings, it seems timely to examine what for many is the most confounding part of any baseball winter.

Salary arbitration had humble beginnings. The owners were exhausted by holdouts who refused to show up for spring training. The players were sick of having that refusal to play as their sole leverage in contract negotiations. With Flood v. Baseball failing to force a change in the reserve clause, arbitration seemed a reasonable solution.

Ed Fitzgerald, the Milwaukee Brewers Chairman and head of the owners' Player Relations Committee (PRC) in the early 1970s, embraced the idea as a way to neutralize the MLBPA's push for free agency. The Association's arguments against the owners would be weakened if the Lords showed a willingness to submit to binding and independent salary arbitration. Other owners, in particular the A's Charlie Finley and the Cardinals' Dick Meyer (who had experience with binding arbitration when he was labor chief of Anheuser-Busch), were suspicious, claiming that arbitration would drive salaries up. Which it would, compared to the status quo.

Thirty years on, the process endures. The onset of full free agency, in 1976, for veteran players would create three classes: those with no leverage, those with some leverage, and those with full leverage. Arbitration exists today largely to handle the second class.

How does salary arbitration work?

The process is what is known as "Final Offer Arbitration" (though in the world of alternative dispute resolution it is now becoming known simply as "Baseball Arbitration"). In mid-January, each side to the dispute submits a salary figure to a panel of independent arbitrators. After a few hours of hearings, held in early February, the arbitrators pick one figure or the other. The arbitrator cannot "split the baby" and settle on a salary in the middle of the spread between the club's figure and the player's. One side leaves the arbitration a winner and the other a loser, heightening risk and encouraging negotiation and settlement.

This is the critical element of baseball arbitration: it is designed to produce a settlement, not a verdict.

The rest of this article is restricted to Baseball Prospectus Subscribers. Not a subscriber? Click here for more information on Baseball Prospectus subscriptions or use the buttons to the right to subscribe and get access to the best baseball content on the web.

Cancel anytime. That's a 33% savings over the monthly price! That's a 33% savings over the monthly price! Already a subscriber? Click here and use the blue login bar to log in.