Pavano can make another $5.3 million in performance bonuses, based on starts from 18-35 and innings from 130-235.
"Carl was very impressed with everything when he visited Cleveland,'' agent Tom O'Connell said. "He's excited to be there and he feels like this is a tremendous opportunity.''
Indians general manager Mark Shapiro said that Pavano, who turns 33 on Thursday, is guaranteed a spot in Cleveland's rotation as long as he's healthy following spring training.
Pavano is looking to rehabilitate his career after suffering numerous injuries in four seasons with the Yankees. He posted a 9-8 record in 26 starts after signing a four-year, $39.95 million contract with New York in December 2004.
"I feel like we're getting him at the right time," Shapiro said. "He's very strong, in good shape now and extremely motivated. We thought he would benefit from a fresh start. It was a tough situation in New York and he was trying to justify the contract that he had."
Pavano became a popular target for frustrated New York fans who were disgusted that the money-is-no-object Yankees missed the playoffs last season for the first time since 1993 despite a $223 million payroll. The Yankees in November declined their $13 million option for 2009 on Pavano, who got a $1.95 million buyout.
Shapiro said the Indians put Pavano through a thorough medical exam, similar to the one they gave free-agent closer Kerry Wood before signing him. The Indians were impressed with Pavano's strength and were encouraged by his final seven starts for the Yankees last season, when he went 4-2.
The Florida Marlins had also been mentioned in speculation as a potential landing spot for Pavano. The Toronto Blue Jays expressed an interest in Pavano earlier this offseason but never followed through.
The Washington Nationals, another potential destination, filled two voids in their rotation this offseason by trading for Scott Olsen and signing free agent Daniel Cabrera. The St. Louis Cardinals, also in the market for a starter, have not expressed interest in Pavano.
Cleveland's rotation currently consists of Cy Young Award winner Cliff Lee and Fausto Carmona in the No. 1 and 2 spots. Jake Westbrook, who underwent elbow reconstruction surgery last June, could be ready to return by the middle of the season.
The Indians, who finished third in the AL Central with an 81-81 record, have made a major push to upgrade their bullpen this offseason with the signing of Wood and the acquisition of set-up man Joe Smith in a trade with the New York Mets.
Pavano is 66-66 with a 4.23 ERA in 175 career starts for Montreal, Florida and New York. He had his best season in 2004, when he went 18-8 for the Marlins.
In his first season with New York, Pavano pitched only 100 innings after injuring his right shoulder. He missed the entire 2006 season and his work ethic and willingness to get back were questioned by some teammates. During his rehab, Pavano broke two ribs in a car accident but initially neglected to inform the Yankees.
He started just two games in 2007 before hurting his elbow and having elbow ligament replacement surgery.
Shapiro said Pavano will not be under any restrictions during spring training.
"He's in good shape and he's strong," the GM said.
To make room for Pavano, the Indians designated infielder Michael Aubrey for assignment.
In other news, Indians designated hitter Travis Hafner was cleared by Dr. James Andrews to start pre-hitting activities this week. Hafner is expected to begin hitting in mid-January.
Andrews performed arthroscopic surgery to clean out Hafner's right shoulder joint on Oct. 14 in Alabama.
Jerry Crasnick covers Major League Baseball for ESPN.com. Information from The Associated Press was used in this report.