The deal was announced Thursday by chancellor Beverly Davenport.
Fulmer will receive $300,000 in annual base compensation plus $600,000 in supplemental pay for personal appearances and media services. He also gets a $100,000 retention bonus each year the contract remains in effect through the end of the deal, which could enable him to end up making $1 million annually.
"I am very grateful to Chancellor Davenport for the opportunity to continue to serve our outstanding university and its proud legacy," Fulmer said in a statement. "The positive momentum established by our talented student-athletes, dedicated coaches, excellent staff, our great alumni and fans has united us all."
Fulmer, 67, took over as Tennessee's athletic director Dec. 1 during a tumultuous football coaching search. Fulmer hired Alabama defensive coordinator Jeremy Pruitt as football coach six days later.
The Dec. 1 letter announcing Fulmer's hiring said he would make $575,000 annually and that his appointment has "no definite term." This contract boosts Fulmer's pay while also specifying the length of his deal.
Fulmer replaced John Currie, who was suspended and placed on paid administrative leave as Tennessee's football coaching search went awry. Currie reached a $2.5 million settlement with Tennessee last month.
Documents obtained last month through a public records request showed Davenport and other school officials couldn't reach Currie for about six hours on Nov. 30 and were unaware that he was in California meeting with Washington State's Mike Leach about Tennessee's coaching vacancy. That happened less than a week after Currie and Greg Schiano signed a memorandum of understanding to make the Ohio State defensive coordinator the new Volunteers football coach before the deal fell apart amid a public backlash .
Currie was removed the day after his meeting with Leach.
Fulmer graduated from Tennessee, coached the Volunteers' football team to the 1998 national title and is a member of the College Football Hall of Fame.
Not only has he brought Pruitt to Knoxville, Fulmer also has hired former North Carolina assistant Eve Rackham as women's volleyball coach and has signed women's soccer coach Brian Pensky to an extension.
"Phillip has been connected to the University of Tennessee and its athletics program for more than 40 years and he understands the expectations we have for our athletics department," Davenport said. "He is surrounded by a very knowledgeable staff that is deeply committed to the success of our student-athletes. I look forward to our continued partnership."