Bannister was 9-16 with a 5.76 ERA in 32 starts for the Royals last season. He was third in 2007 AL Rookie of the Year voting after going 12-9 with a 3.87 ERA in 27 starts.
Bannister earned $421,000 last year and asked for $2,025,000 in arbitration when he exchanged proposed salaries with the Royals last month. The team offered $1.45 million.
In addition to his salary, Bannister could earn $12,500 if he pitches 200 innings and $25,000 if he is an All-Star.