NEW YORK – Joe Torre is out as manager of the New York Yankees, rejecting a substantial pay cut after the team failed to make it past the first round of the playoffs for the third straight year.

Torre turned down a $5 million, one-year contract Thursday – $2.5 million less than he made last season.

Rather than put up with the indignity of a salary slap coupled with a performance-based contract, the man who led the Yankees to playoff appearances in all 12 years he managed, walked.

“A difficult day,” general manager Brian Cashman said.

Bench coach Don Mattingly is the leading contender to replace Torre, who won four World Series championships with the Yanks but none since 2000. Yankees broadcaster Joe Girardi, the NL Manager of the Year with Florida in 2006, is another top contender.

Most Yankees fans could see this day coming.

After losing the first two playoff games to Cleveland, owner George Steinbrenner said he didn’t think Torre would be asked back if the Yankees didn’t advance.

The 67-year-old Torre, who took over the team to start the 1996 season, made his decision after traveling from New York to the team’s spring training complex in Tampa, Fla., and meeting with Steinbrenner, the owner’s sons and top executives for about an hour. He was accompanied by Cashman and chief operating officer Lonn Trost.

New York’s offer included $3 million in bonuses if the Yankees reached next year’s World Series and an $8 million option for 2009 that would have become guaranteed if New York won the AL pennant.

Torre just completed a $19.2 million, three-year contract. The Chicago Cubs’ Lou Piniella was the second-highest paid manager at $3.5 million.

“Under this offer, he would continue to be the highest-paid manager in major league baseball,” team president Randy Levine said. “We thought that we need to go to a performance-based model, having nothing to do with Joe Torre’s character, integrity or ability. We just think it’s important to motivate people.”

It appeared to be an offer designed to be rejected. Scott Boras, the agent for Yankees star Alex Rodriguez, said players would have interpreted an acceptance by Torre as weakness.

“It is difficult, near impossible, to accept a salary cut,” Boras said. “Successful people can afford their principles. They understand if they accept the position, there is a great risk the message to all under him is dissatisfaction. “