The Dons will officially finish the season in ninth place.
After two days locked in talks at AFL House, AFL Commission chairman Mike Fitzpatrick announced the punishments on Tuesday.
The Dons have been banned from the first two rounds of this year's NAB AFL Draft. They will also lose picks in the first two rounds of the 2014 draft for their part in bringing the game into disrepute for the supplements scandal that has overshadowed this season.
However, the Bombers will get an end of round one selection in the 2014 draft, and can trade back into both the 2013 and 2014 drafts.
It is the heftiest financial penalty ever imposed on a club, surpassing the $931,000 fine handed to Carlton in 2002 for breaching the salary cap.
Bomber coach James Hird has been suspended for 12 months effective last Sunday, while football manager Danny Corcoran has been suspended for six months, with two months of that withheld at this stage.
Essendon senior assistant coach Mark Thompson has been fined $30,000.
Club doctor Bruce Reid has decided to contest his charge and will face the AFL at 10am on Thursday.
Hird also launched court action against the AFL.
But since those heated public statements, the AFL and club had been working on a "package" penalty, which Little said on Saturday night the club was trying to get agreed.
Chairmen and presidents from rival clubs had also urged Essendon to reach a resolution as soon as possible.
All were at the hearing on Monday and Tuesday as the parties tried to reach a resolution with the commission under immense media scrutiny at AFL headquarters.
In February, the Bombers called on the AFL and ASADA to investigate the supplements used at the club from the end of 2011 and through 2012.
ASADA's interim report was handed to the AFL early this month, and later the league's general counsel Andrew Dillon stated "there is no specific anti-doping rule violation attributed to any individual player" and that no infraction notices would be issued, but that it was an on-going investigation.
On August 13, Dillon announced charges against Essendon, Hird, Reid, Corcoran and Thompson in relation to the saga.
Each party was charged with engaging in conduct that is "unbecoming or likely to prejudice the interests or reputation of the Australian Football League or to bring the game of football into disrepute, contrary to rule 1.6".
There have already been casualties at the club as a result of the scandal.
Chairman David Evans and chief executive Ian Robson have resigned, former high performance manager Dean Robinson was stood down before also resigning.
Paul Hamilton, who was the club's football manager through 2012, also quit the club at the end of last season.
