The deal avoids arbitration. Bailey, who made $465,000 last year, asked for $4.7 million; the team offered $3.35 million.
Bailey was acquired from the Oakland Athletics this winter. The 27-year-old right-hander converted 24 of 26 save opportunities with a 3.24 ERA for the A's in 2011. The Red Sox shipped outfielder Josh Reddick, infield prospect Miles Head and minor league pitcher Raul Alcantara to Oakland for the All-Star closer and outfielder Ryan Sweeney.
Bailey can earn an additional $100,000 in performance bonuses: $50,000 each for 50 and 55 games finished.