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Ok, simply put, after four years in the majors when the team sets a player's salary, a player has three arbitration eligible years before he can be a free agent.
In the process, the player decides how much he wants to make the next year, and the owner decides how much they want to give him.
They then go to an arbitrator, where each side presents a case as to why they should get what they are asking for. After this, the arbitrator chooses which of the two numbers will be the salary.
Of course, the team and player can go ahead and agree on their own contracts, whether it's a one year deal to put off arbitration, or a long term deal like Pujols just got.
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