The $5.75 million matches how much Alvarez made last year while playing for the Pittsburgh Pirates, who elected not to give him a contract after last season.
Alvarez could earn an additional $1.25 million in performance bonuses based on plate appearances: $200,000 each for 350, 400, 450, 500 and 550, and $250,000 for 600.
Alvarez, who had an MLB-high 23 errors in his first full season at first base last season, is expected to serve as a designated hitter for the Orioles.
His arrival probably means Mark Trumbo will play right field.
He finished 10th in the National League with 27 home runs last season and tied for the NL lead with 36 home runs in 2013, when he was an All-Star. However, the Pirates balked at having to pay a projected $8.1 million in salary for 2016.
Alvarez has 131 homers in six major league seasons. Besides his 27 homers, he hit .243 with 77 RBIs and 131 strikeouts last season.
The left-handed-hitting Alvarez, who turned 29 on Feb. 6, was the second overall pick in the 2008 draft.
To make room for Alvarez on the 40-man roster, Baltimore released right-handed pitcher Andrew Triggs.
ESPN MLB Insider Jim Bowden and The Associated Press contributed to this report.