Under the latest collective bargaining agreement, a new form of free agent compensation went into effect that did away with the old Type A, Type B free agent system. In its place is the “qualifying offer” and here is how it works.

When a team loses a player to free agency, they must have made a qualifying offer to that player, which the player rejected, in order to receive compensation from the team that signs that player. The value of the qualifying offer is calculated each year by averaging the top 125 salaries in MLB. In 2012 that figure was $13.3M, in 2013 it is $14.1M.

So, for a real-world example, an MLB team (SF Giants) must extend a qualifying offer (1YR/$14.1M) to a player that has reached free agency (Tim Lincecum) and that player must reject that offer and sign a major league contract elsewhere to trigger a compensation pick in the first or second round for the team losing the player (the Giants). The team that signs the player gives up it’s first-round pick, unless it is in the top 10. In that case, the pick surrendered will be the next-highest pick the signing club owns.

It’s a risk for any of the parties involved in that the original club may extend the offer just to get the compensation pick, then the player could accept the offer which may or may not have been what the club thought he was worth.

Likewise, if the player rejects the qualifying offer, he is surely expecting to command more than the $14.1M annual salary on the free agent market, which may not come to pass. With the player rejecting the offer, he then hits the market with the burden of a compensation pick attached to his signing. RHP Kyle Lohse, famously, had a difficult path to a new club after rejecting a qualifying offer from St. Louis after the 2012 season. He didn’t sign with the Brewers until March of 2013 and, rather than the 1YR/$13.3M deal he was offered, he signed for 3YRS/$33M. And the Brewers coughed up the 17th overall pick as compensation.

The deadline for teams to make a qualifying offer to any of its qualifying free agents is 5 p.m. ET on the fifth day after the World Series ends. Players have until 5 p.m. ET on the seventh day after receiving the offer to decide if they will accept it or hit free agency. Players who accept the qualifying offer stay with their current clubs.