- Glorified indentured servitude - For three years a player must take whatever the team gives them. Most teams offer the league minimum, unsurprisingly.
- Arbitration - For three years a player can go to arbitration to increase their pay. The stated intention of arbitration in the collective bargaining agreement is to gradually increase a player's salary up to their anticipated open market value in free agency. The general rule of thumb is that a player earns 40% of what they are worth the first year, 60% the next year, and 80% in their final year.
- Free agency - This is where players finally go on a completely open market.
No other sport has a salary system like this. MLB's became this way largely thanks to a history filled with rampant, overt collusion that got challenged by an aggressive players union back in the late 1960s though the 1970s. It used to be that players had to take whatever the team handed them forever (in other words, phase 1 was the only phase for a player in their career). That changed when the reserve clause got challenged in court, and reinterpreted as binding a player to their team for only one year, instead of forever.
The reinterpretation forced the MLB and MLBPA to the bargaining table, as neither side really wanted all MLB players hitting the open market. Interestingly, MLBPA leader Marvin Miller was the one that suggested the modern system. He realized that limiting the free agent pool would create a more competitive open market, and figured MLB owners' desire for top free agents would trump their seemingly innate habit to collude and keep prices down. Miller turned out to be right, and I think even he would be surprised at the massive contracts doled out these days.
The current system, as odd as it is, more or less served its purpose for a long time. However, over the past decade, there are obvious signs that its time has come and gone. It's time to update the system again.