Paulino agreed on Thursday to a one-year, $1.75 million contract with performance bonuses that, based on games started and days of active service time, could increase his salary to $2 million.
The righty avoided salary arbitration. The Royals have two other players eligible for that process -- pitcher Luke Hochevar and second baseman Chris Getz.
Paulino made $1.9 million last season, which for him, was cut short by Tommy John elbow surgery.
"I'm pretty happy and I like to stay in Kansas City," Paulino said. "I think that the team is going in the right way for next year in making a stronger starting rotation."
Paulino hopes to join that rotation -- which has added Ervin Santana and Jeremy Guthrie with offseason deals -- sometime around the All-Star break. That would be a little over a year after Paulino's ulnar collateral ligament replacement surgery on July 3.
He has spent most of the offseason in Kansas City, rather than returning to his Houston home, in order to facilitate his rehabilitation process with workouts at Kauffman Stadium.
"Everything's good. I started playing catch this week on Monday, so everything is going like it's supposed to be," Paulino said. "I feel strong and I don't have any worries."
He had his second throwing session on Thursday, consisting of two 25-toss sessions of about 25 feet.
"Next week I'll throw twice again and we'll keep increasing it," he said. "Hopefully I'll be going back to Spring Training ready to go."
Paulino's goal is to begin pitching on a Minor League rehabilitation assignment by late May.
"Hopefully after 30 days in the Minor Leagues, I'll be ready to jump to the Major Leagues," he said.
Paulino was supposed to break camp this year as a rotation member, but instead started the season on the disabled list with a right forearm strain and missed the first 25 games. He returned to start seven games and was an impressive 3-1 with a 1.67 ERA.
However, Paulino left his seventh start -- on June 6 against Minnesota -- in the first inning with elbow problems that led to his surgery. He was the fourth Royals pitcher to undergo Tommy John surgery this year, joining relievers Joakim Soria and Blake Wood and fellow starter Danny Duffy.
Before his injury, Paulino beat the Yankees twice in May, not allowing them a run in 12 2/3 total innings.
Paulino, 29, was obtained from the Rockies for cash on May 26, 2011, and he made 20 starts in 21 games for the Royals. He finished 4-6 with a 4.11 ERA for Kansas City and struck out 119 in 124 2/3 innings. After the season, he toured Taiwan with a Major League All-Star team.
Paulino began his career with the Astros and has a Major League record of 13-32 and a 4.93 ERA in 93 games (61 starts).
Dick Kaegel is a reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.