CVS Caremark Corporation (CVS)

4. Fixed versus Variable Compensation

As a general practice for middle-level through senior management positions at CVS Caremark, variable compensation has an increasingly important role as the scope and span of business responsibilities increase. Each manager is held accountable for objective financial and operational goals that are defined, established and measured for his or her specific position. Target rewards for achievement of these goals are associated with either the annual or long-term compensation programs, as appropriate. Actual awards will vary substantially from year to year, and from manager to manager, based on actual performance against these goals. For the executive management team, this emphasis on variable compensation is enforced through the annual incentive program, the LTIP, and the service-based equity award program, which ties a significant amount of additional variable compensation to the executive’s continued employment (subject to the vesting and forfeiture provisions of the stockholder-approved incentive plan and their equity grant agreements) and the performance of CVS Caremark common stock over the vesting and option exercise periods. The performance metrics for the annual incentive and LTIP and the range of opportunity relative to target are consistent for the entire group of executive officers, including the CEO; however, in determining individual awards the Committee considered the appropriate individual target incentive opportunity.

For fiscal year 2008, the percentage of target total direct compensation represented by at-risk pay (short- and long-term incentives) for CVS Caremark’s executive officers specified in the Summary Compensation Table was as follows:

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The Committee views the executive compensation process at CVS Caremark as an ongoing and iterative responsibility with several key milestone events. In the first quarter of the year following the performance year, CVS Caremark’s finance department prepares and presents numerous schedules to the Committee to provide a comprehensive overview of the Company’s performance relative to the annual and long-term incentive plan periods just concluded. This presentation includes remarks by the CEO and CFO to provide context and background to the financial results. It also includes an annual and multi-year comparison of CVS Caremark’s performance versus that of the companies in its peer group. Key financial metrics, including total stockholder return, growth in revenue and operating profit, and stock price performance, are discussed, with a focus on the Company’s relative ranking within the peer group and against other relevant performance indices.

Early in January of the year following the performance year, the CEO meets with the independent directors of the Board to present a self-assessment of his performance against the strategic, operational and financial goals of the Company that were approved by the Board at the beginning of the performance year. The independent directors meet privately to discuss and assess the overall performance of the CEO during the performance year. Each Committee member and all other independent directors participate in this assessment, which is facilitated by the Lead Director and the Committee Chair, who later discuss the directors’ perspective with the CEO.

The Committee members incorporate the assessments of the independent directors into their consideration of the CEO’s total compensation and the determination of his annual incentive compensation award and equity compensation grants. The Committee may also apply negative discretion, as it deems appropriate and as described below, in the determination of the final annual incentive awards and equity compensation grants for the other executive officers.

During the same time period, the CEO discusses with the Committee the performance and contribution of each of the executive officers, with specific attention to progress toward specific strategic, operational and financial goals assigned at the beginning of the year. His assessment includes a review of each officer’s strengths and areas of opportunity, potential future assignments, development strategies, and role in the Company’s management succession plan. The Committee and the Board also have the opportunity to meet with each of the executive officers at various times during the year, which allows them to form their own assessment of each individual’s performance.

The architecture of CVS Caremark’s executive compensation program consists of individual elements that fulfill the dual purpose of specifically addressing one or more core principles of the program while simultaneously complementing other elements. The individual elements are: base salary; an annual incentive opportunity, payable in cash; the three-pillar long-term incentive structure (options, restricted stock units and LTIP); supplemental executive retirement plans; and other benefits, including limited perquisites. Each of these elements and its treatment during the 2008 performance year is described in detail below.

4. Fixed versus Variable Compensation

As a general practice for middle-level through senior management positions at CVS Caremark, variable compensation has an increasingly important role as the scope and span of business responsibilities increase. Each manager is held accountable for objective financial and operational goals that are defined, established and measured for his or her specific position. Target rewards for achievement of these goals are associated with either the annual or long-term compensation programs, as appropriate. Actual awards will vary substantially from year to year, and from manager to manager, based on actual performance against these goals. For the executive management team, this emphasis on variable compensation is enforced through the annual incentive program, the LTIP, and the service-based equity award program, which ties a significant amount of additional variable compensation to the executive’s continued employment (subject to the vesting and forfeiture provisions of the stockholder-approved incentive plan) and the performance of CVS Caremark common stock over the vesting and option life periods. The performance metrics for the annual incentive and LTIP and the range of opportunity relative to target are consistent for the entire group of executive officers, including the CEO; however, in determining individual awards the Committee considered the appropriate individual target incentive opportunity.

For fiscal year 2007, the percentage of target total direct compensation represented by at-risk pay (short- and long-term incentives) for CVS Caremark’s executive officers specified in the Summary Compensation Table on page 34 was as follows:

The Committee views the executive compensation process at CVS Caremark as an ongoing and iterative responsibility with several key milestone events. In the first quarter of the year following the performance year, CVS Caremark’s finance department prepares and presents numerous schedules to the Committee to provide a comprehensive overview of the Company’s performance relative to the annual and long-term incentive plan periods just concluded. This presentation includes remarks by the CEO and CFO to provide context and background to the financial results. It also contemplates an annual and multi-year comparison of CVS Caremark’s performance versus that of the companies in its peer group. Key financial metrics, including total shareholder return, growth in revenue and operating profit, and stock price performance, are discussed, with a focus on the Company’s relative ranking within the peer group and against other relevant performance indices.

Early in January of the year following the performance year, the CEO meets with the independent directors of the Board to present a self-assessment of his performance against the strategic, operational and financial goals of the Company that were approved by the Board at the beginning of the performance year. The independent directors meet privately to discuss and assess the overall performance of the CEO during the performance year. Each Committee member and all other independent directors participate in this discussion, which is facilitated by the Lead Director and the Committee Chair.

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The Committee members incorporate the assessments of the independent directors into their consideration of the CEO’s total compensation, particularly in the potential application of negative discretion to the determination of his annual incentive compensation award and equity compensation grants. The Committee may also apply negative discretion, as it deems appropriate and as described below, in the determination of the final annual incentive awards and equity compensation grants for the other executive officers.

During the same time period, the CEO discusses with the Committee the performance and contribution of each of the executive officers, with specific attention to progress toward specific strategic, operational and financial goals assigned at the beginning of the year. His assessment includes a review of each officer’s strengths and areas of opportunity, potential future assignments, development strategies, and role in the Company’s management succession plan. The Committee and the Board also have the opportunity to meet with each of the executive officers at various times during the year, which allows them to form their own assessment of each individual’s performance.

The architecture of CVS Caremark’s executive compensation program consists of individual elements that fulfill the dual purpose of specifically addressing one or more core principles of the program while simultaneously complementing other elements. The individual elements are: base salary; an annual incentive opportunity, payable in cash; a three-pillar long-term incentive structure including stock options, restricted stock units and the LTIP, payable in cash and restricted stock units; supplemental executive retirement plans; and other benefits, including limited perquisites. Each of these elements and its treatment during the 2007 performance year is described in detail below.

4. Fixed versus Variable Compensation

As a general practice for middle-level through senior management positions at CVS, variable compensation has an increasingly important role as the scope and span of business responsibilities increase. Each manager is held accountable for objective financial and operational goals that are defined, established and measured for his or her specific position. Target rewards for achievement of these goals are associated

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with either the annual or long-term compensation programs, as appropriate. Actual awards will vary substantially from year to year, and from manager to manager, based on actual performance against these goals. For the executive management team, this emphasis on variable compensation is enforced through the annual incentive program, the LTIP, and the service-based equity award program, which ties a significant amount of additional variable compensation to the executive’s continued employment (subject to the vesting and forfeiture provisions of the stockholder-approved incentive plan) and the performance of CVS common stock over the vesting and option life periods.

The Committee views the executive compensation process at CVS as an ongoing and iterative responsibility with several key milestone events, as follows:

1. Update on Trends and Practices in Executive Compensation: During the third quarter of each year, the external compensation consultant presents to the Committee an overview of recent trends and developments in large public company executive compensation practices. This overview may include, but is not limited to, a discussion of the intent and impact of regulatory, disclosure and compliance changes, a summary of competitive practice changes and their significance, and highlights of recent accounting or taxation guidelines that impact executive compensation. The consultant also provides an overview of key outcomes of the CVS executive compensation programs, including overall competitive positioning and the ratios of annual to total compensation, cash to non-cash pay, and fixed versus variable pay. The Committee and the consultant engage in a dialogue to ensure clear and comprehensive understanding of the current compensation environment as well as the impact of any recent regulatory, market or accounting changes on the CVS programs.

2. Peer Company Review and Approval: In the fourth quarter of each year, the Committee considers the list of peer companies against which performance and compensation for executives will be compared. The external compensation consultant presents financial and other data for the peer companies, and suggests modifications to the group utilizing an objective methodology based on revenue size and industry segment as the key criteria. The consultant also provides guidance around peer company candidate corporate structure (public versus private ownership) and compensation practices to ensure a good fit with CVS. The Committee assesses the information provided and determines whether to retain or amend the existing peer group for compensation and performance comparison purposes for the coming fiscal year.

3. Establishment of Annual and Long-term Financial Performance Goals: In the first quarter of each fiscal year, the Committee determines the financial performance goals applicable to the variable pay performance cycles that commence that year. These goals are determined at the conclusion of the annual budget exercise conducted by management and approved in conjunction with the presentation of CVS’ financial targets to the full Board. In its assessment of the financial performance goals for the compensation plans, the Committee considers the previous year’s results, the current competitive and business environment, CVS’ overall strategic, financial and operational goals and objectives, and other relative economic factors. Concurrent with its approval of performance targets, the Committee determines the relative payout levels to be correlated with performance above or below the established goal.

In January of each year, the CEO and the independent directors of the Board discuss and agree on the annual strategic and operational objectives necessary to advance the short- and long-term imperatives of the Company.

Once approved, the performance goals may not be changed or restated for the duration of the performance cycle. Actual financial results as measured against these goals must be as reported in the books and records of the Company, except for permitted adjustments for specific events as pre-defined by the Committee at the time the goals are established, including but not limited to mergers, acquisitions or divestitures, and extraordinary or one-time accounting events. Once approved by the Committee, the variable pay program goals are communicated to the executive officers to ensure their complete understanding of the Committee’s expectations.

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4. Review and Approval of Base Salaries, Variable Pay Target Awards, and Equity Compensation Opportunity Ranges: In the first quarter of each year, the Committee reviews competitive information provided by the external compensation consultant to assist it in its assessment of the competitive sufficiency of both the various components of the executive pay program as well as the program in aggregate. Utilizing the companies comprising the approved peer group, the Committee examines the 25^th, median and 75^th percentiles of reported compensation paid during the prior year for base salary, annual incentives, long term incentives, equity awards, and total direct compensation. It then reviews base salaries, variable pay targets and equity compensation targets and ranges for CVS’ executive officers. In its review the Committee considers not only the economic value that these compensation programs may deliver but also the mix of cash and equity or other non-cash elements, the ratio of annual to long-term pay, the proportion of fixed to variable compensation, and the interrelationship of the three elements of the long-term incentive compensation program (stock options, time-vested restricted stock units and the LTIP). It considers recommendations from the CEO for adjustments to base salaries and variable and equity pay targets for the CFO, members of the BPC and other Section 16(b) officers, and develops similar recommendations for presentation to and approval by the full Board for the CEO. In recent years, base salaries for executive officers have increased modestly each year, absent any substantive change in the incumbent’s core functional responsibilities. Variable and equity pay targets and ranges generally are not changed on an annual basis, but are adjusted periodically as market practice dictates. Final adjustments to base salaries and variable and equity pay targets and range of opportunity for executive officers are ultimately determined and approved by the Committee based on its assessment of the competitive landscape, the challenge represented by the financial performance targets in CVS’ various short- and long-term incentive plans, and the stated principles and philosophy of the CVS executive compensation program, as outlined above.

5. Review and Certification of Financial Performance Against Goals: In the first quarter of the year following the performance year, CVS’ finance department prepares and presents numerous schedules to the Committee that provide a comprehensive overview of the Company’s performance relative to the annual and long-term incentive plan periods just concluded. This presentation includes remarks by the CEO and CFO to provide context and background to the financial results, and also contemplates an annual and multi-year comparison of CVS’ performance versus that of the companies in its peer group. Results are calibrated against the established performance targets, and the prescribed, formulaic level of award is calculated and approved.

6. Assessment of Executive Officer Performance: Early in January in the year following the performance year, the CEO meets with the independent directors of the Board to present a self-assessment of his performance against the strategic, operational and financial goals of the Company. The independent directors then meet privately to discuss and assess the overall performance of the CEO during the performance year, referencing the specific strategic, operational and financial goals and objectives set for him at the beginning of the cycle. All of the Committee members and all other independent directors participate in this discussion, which is facilitated by the Committee Chair.

The Committee members incorporate the assessments of the independent directors into their consideration of the CEO’s overall compensation, particularly in the application of negative discretion to the annual incentive compensation award and the determination of the equity compensation grants. The Committee may also apply negative discretion, as it may deem appropriate and as described below in the section on Annual Incentive Awards, in the determination of the final annual incentive awards for the other executive officers.

During the same time period, the CEO discusses with the Committee the performance and contribution of each of the executive officers, with specific attention to progress made against specific strategic, operational and financial goals assigned during the year. His assessment includes a review of each officer’s strengths and areas of opportunity, potential future assignments, development strategies, and role in the Company’s management succession plan. The Committee also has the opportunity to meet with each of the executive officers at various times during the year, which allows the Committee to form its own assessment of each individual’s performance.

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7. Determination of Equity Awards: Concurrent with the review and approval of the awards granted pursuant to the annual and long-term performance-based incentive plans, the Committee considers and agrees upon stock option and time-vested restricted stock unit grants for the executive officers. The CEO recommends the amounts of these grants for the other executive officers based on established minimum, target and maximum opportunities and according to his assessment of each executive’s performance, contribution, and current and future value to the Company. The Committee reviews, discusses, and approves or amends the CEO’s recommendations, and, in consultation with the other independent directors, determines the equity grant awards for the CEO, subject to final approval by the independent members of the Board.

The architecture of CVS’ executive compensation program comprises individual elements that fulfill the dual purposes of specifically addressing one or more core principles of the program while simultaneously complementing other elements. The individual elements are: base salary; an annual incentive opportunity, payable in cash; a three-pillar long-term incentive structure including stock options, restricted stock units and the LTIP; a Supplemental Executive Retirement Plan (a “SERP”); and other benefits, including limited perquisites. Each of these elements and its treatment during the 2006 performance year is described in detail below.