Free agent signings and trades are the sexy pieces of off-season strategy, but arbitration decisions have an important impact on the final roster.  As the Reds begin to shape their 2012 roster, it’s important to know how the arbitration process works and to look at the arbitration decisions now confronting the organization.

Who is Eligible for Arbitration?

Two categories of players are eligible for the arbitration process – players under team control and impending free agents.

For the first six years of a player’s major league career they are under “team control” of the organization that drafts them.  After six seasons they become free agents and can work for any organization they choose.  For the last three years of the team control, arbitration can play an important role in determining the player’s salary.

For the first three years, the typical major league player earns the league minimum salary (2011: $414,000) after which they become “arbitration-eligible” for the remainder of the team control period.  In their fourth, fifth and sixth seasons, if the player cannot reach agreement with the organization on their salary, they are entitled to enter a process of arbitration.

A small number of players qualify for arbitration after two years of major league service, those players are referred to as “Super Twos.”  Super Twos are still under team control for six years, but are entitled to four years of arbitration-eligibility.  They are the players who are called up from the minor leagues the earliest in a given season.  Budget conscious teams try to avoid creating Super Twos because their arbitration awards are much higher than league minimums.

Players who are departing free agents may also be offered arbitration by the organization, regardless of their number of years playing in the majors.  If the impending free agent accepts the offer of arbitration, the player returns to the team roster.  For the 2012 Reds, the players who fall into that category are Ramon Hernandez, Dontrelle Willis and Edgar Renteria.

The deadline for the club to offer arbitration to team-controlled players is December 12 and December 1 for free agents.

The Arbitration Process

In January, both the team and the player submit a salary figure to a three-person panel of professional arbitrators.  The arbitrators generally are lawyers and judges who have experience in this field.  They are selected mutually by MLB and the MLBPA.  An arbitrator who consistently rules for one side or the other will find themselves blocked in subsequent years.

Hearings are held during February, where each side has one hour to make their case and 30 minutes to rebut the other side.  The hearings are held in neutral cities, usually in hotel conference rooms.  Generally both sides are represented by labor lawyers who specialize in this field.  The player must attend the hearing.  The decision is reached within 24 hours after the hearing concludes.

The panel considers factors such as the player’s performance and awards, injury history, past compensation, the club’s record and attendance, and comparable players’ salaries.  But there are no rules for how they must decide and they do not publish opinions or explanations.

The Outcome: One winner, one loser

The arbitration panel has to choose the offer of one side or the other.  The panel cannot split the difference or come up with their own figure.  Therefore, an utterly ridiculous offer by one side doesn’t push the final outcome in their direction, instead it makes the panel more likely to choose the other side’s offer.  So each side will seek to make an offer more reasonable than the other side.

The high risk nature of this process for both sides creates a strong incentive to reach a negotiated solution before the panel issues a final ruling.  Often, the club tries to reach an agreement before the hearing to avoid the bad feelings that may be caused by the organization’s criticism of the player in the hearing.

The salary determined by the panel comes in the form of a one-year, non-guaranteed contract.  If the player is cut in spring training, they receive 30 or 45 days termination pay, depending on how close the cut occurs to Opening Day.

The 2012 Reds

Several of the organization’s young players – Jay Bruce, Johnny Cueto, Aroldis Chapman and Joey Votto – already have guaranteed contracts that pre-empt their arbitration eligibility for 2012 and beyond.  Others, such as Drew Stubbs, Chris Heisey and Mike Leake, haven’t reached their arbitration years yet and will be working for the league minimum.

But a few Reds players do fall into the arbitration-eligible category.  Jose Arredondo, Homer Bailey and Paul Janish have all reached their first arbitration year.  Edinson Volquez, Jared Burton and Bill Bray are entering their second year.  And Nick Masset enters his third arbitration year.

The Reds have a decision to make on each of these players.  They can offer (“tender”) the arbitration process, or decline it, at which point the players essentially become free agents. The organization also has the option of reaching an agreement prior to arbitration, and that’s common.

An article at MLBTR estimates the arbitration awards for each player:

Arredondo ($1 million), Bailey ($1.8 million), Janish ($800,000), Volquez ($2.3 million), Burton ($900,000), Bray (no estimate) and Masset ($2.4 million).

At those amounts, Arredondo, Bailey, Bray and Masset would be relatively obvious tenders.  The price is right on Paul Janish, but the Reds have to decide if he’s in their plans.  The Reds could decide to cut ties with Burton, who is 30 and been unable to stay healthy.

Even if the Reds don’t have concrete plans for Volquez, they may still tender him to include in a trade offer.  He may not end up being one of our top five starting pitchers, but he sure would be for a number of teams.

Regarding impending free agents, if certain ones are offered arbitration by the club and the player turns it down to enter free agency, the club may be entitled to compensatory draft picks.  There has been some discussion of tendering Ramon Hernandez, on the assumption he will decline.  If the organization feels Devin Mesoraco is ready, tendering Ramon is a risk. Ramon might accept the tender, saddling the Reds with his 2012 arbitration-determined contract.