In a former life, this was a little pajama top of mine 40 some years ago. Ellie wore it not long after we brought her home. I stored it away carefully for Trixie, but when I pulled it out, the matching pants and the back of the top were horribly stained. No amount of soaking took it out(where on earth do those mystery stains come from?). It sat in my sewing room for a few years until I came up with a solution that didn't detract from all the beautiful work in the shirt.
I carefully removed the stitching that attached the front and back shirt panels (cutting through the sleeve at the top) and then appliqued the front to a matching piece of kona cotton in pink. (Edgestitching worked just fine for that.) The bottom of the sleeve was folded in on itself to give a nicer line at the side - I didn't want the sleeve to jut out too much from the body of the pillow.
Once that was done, I cut out around the top with a large seam allowance. That piece was put face down on another piece of pink cotton. Using the edgestitching from the applique as a guide (so the backing cotton was on the bottom as I sewed), I stitched around the entire piece leaving an opening on the bottom for turning and stuffing. Once stuffed, I just slipstiched the opening and was done.
I know this idea's been used for teeshirt pillows for ages, but it seems like a cute way to enjoy a favorite baby shirt if you aren't brave enough to cut it into pieces for a quilt or if it has great details like this one.