Normally, salary leagues use auctions to set the value for each player based on an open market--just like in real baseball.
Your league has a problem... you want to keep your rosters but have to assign salaries for the first time. You have to use something other than the market, in this case some publication's or web site's 2005 dollar values.
The first thing you have to realize, is that in using salaries, if no two teams in your league are allowed to own the same player, you probably have to use an auction. Otherwise, there isn't a fair way to decide which team gets Albert Pujols at $35. If one is willing to go all the way up to $42 on Pujols, and the other only $38, if the second team can't perfectly read the first team and drive him up to $42, the first team will get him for $39.
I guess you could draft players who have dollar values assigned to them already, or assign dollar values to draft rounds, but that is really complicated and fails to do what the auction does... simulate real free agency.
In the original Rotisserie rules, a player won at auction keeps his salary for three years. Inbetween the 2nd and 3rd year of a player's contract, teams can sign him to an extention for up to 3 years at a $5 increase for each additional year. So, if you grabbed Felix Hernandez at $20 this season, and wanted to keep him for as long as you could, you'd have to pay:
2005 - $20
2006 - $20
2007 - $20
2008 - $25
2009 - $30
2010 - $35
If Hernadez is the stud he is hyped to be, he could give you $35 value in 2010. If he settles into a #2 fantasy starter type, he'll be overpriced in 2009 and 2010. That makes for an interesting decision for the team that owns him between 2006 and 2007. They will need to forecast correctly and properly weigh the risks and rewards involved.
The structure does two things:
1. For the first three years it rewards teams that find players before they breakout. For the foils that got Albert Pujols for $5 in 2001, they were rewarded again in 2002 and 2003 for their phenominal find, and rightly so... knowing about a player before anyone else does should pay off big. And if a player is as underpriced as Pujols at $5, it rewards that team for six years. $20 for Pujols in 2006 is still a steal.
2. By setting a limit on how long a player has until they are a free agent and/or escalating a player's salary over time, the league ensures that the free agent pool will see a steady trickle of good players, just like in real baseball--players become free agents after 5-6 years in the majors. The free agent pool only includes a fraction of the total talent pool, but big names do pass through. If the team that got Pujols at $5 in 2001 could keep him at $5, he would never become a free agent. Pretty much every breakout player would remain with their original fantasy team forever. This doesn't mimic real baseball and it would negatively impact league parity, as well as making for boring drafts filled with only over-the-hill veterans and rookies. Carlos Beltran, Alex Rodriguez, Manny Ramirez, and other elite players do hit the free agent market after they acumulate enough service time to pass through arbitration.
The automatic raise makes sense because for young players their salaries do increase via arbitration. And, it forces a team to decide if a player is worth returning to the free agent pool... they have to make a decision instead of just waiting for a contract to expire--just like non-tendering an arbitration eligble player.
Set contracts and set contract extentions make sense because in baseball, players and teams do not renegotiate contracts every season on a one year basis.
Rocco Baldelli just signed a 6-year, $33 million contract extention. If he does better than expected, Baldelli won't get paid more than $5.6 million in 2007. If he doesn't do as well as expected, to be fair, the Devil Rays can't lower his salary either. The Devil Rays and baldelli have agreed on a salary together for the next six years and both must honor their agreement.
The same holds true for auction leagues. You reward teams that hand out smart contracts, and punish teams that overpay.
The Mariners won't get a break in overpaying for Beltre just because he flopped last season. Neither should the owner in your league that paid $32 for him at auction. Don't let him off the hook and lower Beltre's salary down to $19. Other teams showed restraint in bidding on Beltre where that owner did not. They should be rewarded and the aforementioned owner punished.