Salary arbitration, a system of contract negotiation for veteran players, has been a part of major league baseball since 1974.

The salary arbitration system, the key issue in the players strike that began yesterday, was the first innovation to give players leverage in contract bargaining. In early 1973, before free agency gave players the right to market their services, an unprecedented agreement was reached under which players with two or more years major league service could submit salary disputes with management to a professional arbitrator.

In 1974, because of the hearings mandated by salary arbitraton, the salaries of players became public for the first time. The average salary for a major league player was $38,000 a year, with about 40 players making over $100,000 a year.

Then, in December 1975, an arbitrator named Peter Seitz made a ruling that changed baseball. He ruled that pitchers Andy Messersmith and Dave McNally were free agents after playing out option years because they had played without contracts. Two courts upheld the ruling, and the era of free agency began in 1976. Now, after six years with a team, a player can play out an option year and become a free agent.

The average major league salary this season is $363,000, but the owners group says that is more because of salary arbitration than free agency. The owners contend that the arbitration system should be changed because it was created before free agency existed.

"We feel strongly about salary arbitration," said Lee MacPhail, the owners' chief negotiator. "The clubs feel the system is not working. It's getting further out of whack each year."

Under the current system, a player with more than two years experience can file for salary arbitration. An arbitrator makes a choice between two figures: one submitted by the player and one submitted by his team. Because a player's salary may not be reduced by more than 20 percent in a year, there is little risk for the player, and, in fact, reductions are rare.

Even if a player does not go to arbitration, its existence is an additional bargaining tool. Last year, 97 players filed for arbitration, but 84 settled with their team beforehand. Of the 13 who did not, the arbitrator ruled in favor of the club seven times. The Boston Red Sox submitted a figure of $675,000 for Wade Boggs, but he asked for $1 million, and the arbitrator ruled in his favor. The Montreal Expos made a $1 million offer to Tim Raines, but the arbitrator gave Raines the largest award of the year, his requested $1.2 million.

In contract negotiations, the owners have asked that the eligibility requirement be increased from two to three years, and that the amount of the award be limited to 100 percent more than the previous year's salary.

Salary arbitration emerged as the central issue of the strike earlier this week when each side offered a compromise on the other major issue -- the owners' contribution to the pension fund -- but refused to budge on salary arbitration.