The decision came after there was no decision during several meetings by the team’s executives this week about Torre's future.
MLB.com reported the contract would have paid him a base salary of $5 million, with $1 million bonuses for each level of the post-season the Yankees reached next season.
Club president Randy Levine claimed in a conference call with reporters the bonuses would have meant Torre could have earned as much as $8 million next season.
"It is now time for the New York Yankees to move forward," Levine said. "We felt we needed to go to a performance-based mode.
"We thought the offer was very fair and it clearly was at the top of the market."
Torre, 67, led the Yankees to four World Series titles and 12 consecutive playoff appearances, and won more post-season games than any skipper in major league history.