The deal includes a $25 million mutual option for 2020 with a $5 million buyout.
Bailey was the final major league player left in arbitration this year and reached the agreement a day before his scheduled hearing in Florida. He made $5.35 million last season and had asked for $11.6 million in arbitration. The Reds had offered $8.7 million, their biggest gap among their players in arbitration.
The 27-year-old Texan was coming off a season that included his second no-hitter.
Bailey gets salaries of $9 million this year, $10 million in 2015, $18 million in 2016, $19 million in 2017, $21 million in 2018 and $23 million in 2019. In an unusual twist, much of the annual salary will be deferred until the November after each season.
Bailey will be paid in-season amounts of $3 million this year, $4 million next year, $11 million in 2016, $12 million in 2017, $14 million in 2018 and $15 million in 2019.
If he is traded, his new team would have to pay all of the salary amounts during the season. Also, the $5 million buyout would be paid when either side decides not to exercise the option rather than having it deferred until November 2020.
The Reds planned to discuss the deal on Thursday. Bailey declined to comment on the agreement after a workout on Wednesday.
Teams won two of three cases that went to hearings, with the Indians beating pitchers Vinnie Pestano and Josh Tomlin and pitcher Andrew Cashner winning his case with San Diego. Owners have a 293-215 margin since arbitration began in 1974.
Bailey went a career-best 13-10 with a 3.68 ERA in 2012, completing his breakthrough season by throwing a no-hitter in Pittsburgh on Sept 28. He followed that with the 16th no-hitter in franchise history last June, a 3-0 win over San Francisco at Great American Ball Park.
Bailey went 11-12 with a 3.49 ERA last year, leaving him in line for a big salary increase in arbitration or a long-term deal. The Reds' rotation includes five players under the age of 30 — Johnny Cueto (28), Mat Latos (26), Bailey (27), Mike Leake (26) and left-hander Tony Cingrani (24).
AP Sports Writer Ronald Blum contributed to this report.
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