CVS Caremark Corporation (CVS)

    A. The Long-Term Incentive Plan

The LTIP is intended to encourage executives to focus on long-term financial progress with the ultimate objective of enhancing stockholder value, while simultaneously promoting executive retention by requiring an executive to forfeit his or her award if employment terminates under certain circumstances before the end of the performance period. The LTIP, introduced in 2002, consists of overlapping three-year performance cycles, with a new cycle commencing each year. The performance metric used in the LTIP is the compound annual growth rate of earnings per share (“EPS CAGR”). The executives participating in the LTIP are directly accountable to the stockholders for influencing earnings per share. A target EPS is also used as a goal in the Company’s long-term strategic plan.

For all cycles, the Committee determines an award opportunity for each participant at the beginning of the cycle. The award opportunity is denominated in dollars, and represents the award that will be earned if actual results over the three-year performance period equal the financial goal established by the Committee at the commencement of the period. The actual award will vary based on performance: if results exceed the goal by 25% or more, the award will increase up to a maximum of 200% of the target award opportunity; if results fall short of the goal by 20% or more, the award is reduced to zero. Payout levels between the minimum and maximum are linearly interpolated. The correlation between actual award and level of performance relative to the goal is formulaically prescribed at the beginning of the cycle; neither the Committee nor any member of management may exercise any discretion to modify the award once results are determined.

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LTIP awards are delivered 50% in cash and 50% in shares of CVS Caremark common stock. Although the stock is non-forfeitable when earned, effective with the cycle ending in 2007 the executive is prohibited from selling or trading the shares for two years following the payment date, which encourages stock ownership and further reinforces an alignment of executives’ interests with that of stockholders. All LTIP awards, whether cash or stock, must be paid by March 15 of the year following the last year of the performance cycle unless the executive has previously made a deferral election under the Company’s Deferred Compensation Plan or Deferred Stock Plan.

The process by which the Committee establishes the LTIP financial goal is similar to and concurrent with that used to determine the annual incentive target. Any permitted exclusions from actual results for purposes of calculating long-term incentive awards generally mirror those established for the annual incentive plan but will also include any specific adjustments pertinent to EPS, as necessary. Once established, the LTIP goal remains constant throughout the three-year performance cycle and is not subject to adjustment or modification. Should an event that qualifies as a permitted exclusion occur, results are adjusted to reflect the impact of that event and documented accordingly upon the conclusion of the cycle.

The performance goal for the cycle ending December 31, 2008 was an EPS CAGR of 13.6%. After the application of the permitted exclusions to the calculation of performance results (the same as those described above for the annual incentive plan), the actual result for the period was an EPS CAGR of 14.5%. Based on this level of performance, award payouts were 23.25% above target. All of the executive officers specified in the Summary Compensation Table except for Mr. McLure participated for the full duration of the cycle. The cash portion of the LTIP award for the cycle ending December 31, 2008 for each executive officer is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table on page 33. The corresponding stock portion of the LTIP award for the cycle ending December 31, 2008 for each executive officer is reported in the Stock Awards column of the Summary Compensation Table.

In 2007 and 2008, the Committee has established LTIP cycles with EPS CAGR goals for the three-year periods ending December 31, 2009 and December 31, 2010, respectively. The Committee and management believe that disclosure of an EPS growth target over a three-year prospective period would result in competitive harm to the Company, and, accordingly, have not disclosed the specific targets for these cycles. The Committee believes that the specific performance targets for these cycles is at least as challenging as the performance targets established for prior LTIP cycles and that the award opportunities established for these cycles have been calibrated accordingly. EPS CAGR targets for all cycles are in excess of 10%, and in the judgment of the Committee and management, will represent significant value creation for stockholders if achieved.

    A. The Long-Term Incentive Plan

The LTIP is intended to encourage executives to focus on long-term financial progress with the ultimate objective of enhancing shareholder value, while simultaneously promoting executive retention by requiring an executive to forfeit his or her award if employment terminates under certain circumstances before the end of the performance period. The LTIP, introduced in 2002, consists of overlapping three-year performance cycles, with a new cycle commencing each year. The performance metric used in the LTIP is the compound annual growth rate of earnings per share (“EPS CAGR”). The executives participating in the LTIP are directly accountable to the shareholders for influencing earnings per share. A target EPS is also used as a goal in the Company’s long-term strategic plan.

For all cycles, the Committee determines an award opportunity for each participant at the beginning of the cycle. The award opportunity is denominated in dollars, and represents the award that will be earned if actual results over the three-year performance period equal the financial goal established by the Committee at the commencement of the period. The actual award will vary based on performance: if results exceed the goal by 25% or more, the award will increase up to a maximum of 200% of the target award opportunity; if results fall short of the goal by 20% or more, the award is reduced to zero. Payout levels between the minimum and maximum are interpolated. The correlation between actual award and level of performance relative to the goal is formulaically prescribed at the beginning of the cycle; neither the Committee nor any member of management may exercise any discretion to modify the award once results are determined.

LTIP awards are delivered 50% in cash and 50% in shares of CVS Caremark common stock. Although the stock is non-forfeitable when earned, effective with the cycle ending in 2007 the executive is prohibited from selling or trading the shares for two years following the grant date, which encourages stock ownership and further reinforces an alignment of executives’ interests with that of stockholders. All LTIP awards, whether cash or stock, must be paid by March 15 of the year following the last year of the performance cycle unless the executive has previously made a deferral election under the CVS Deferred Compensation Plan or the CVS Deferred Stock Plan.

The process by which the Committee establishes the LTIP financial goal is similar to and concurrent with that used to determine the annual incentive target. Any permitted exclusions from actual results for purposes of calculating long-term incentive awards generally mirror those established for the annual incentive plan but will also include any specific adjustments pertinent to EPS, as necessary. Once established, the LTIP goal remains constant throughout the three-year performance cycle and is not subject to adjustment or modification. Should an event that qualifies as a permitted exclusion occur, results are adjusted to reflect the impact of that event and documented accordingly upon the conclusion of the cycle.

The performance goal for the cycle ending December 31, 2007 was an EPS CAGR of 16.0%. After the application of the permitted exclusions to the calculation of performance results (the same as those described above for the annual incentive plan), the actual result for the period was an EPS CAGR of 18.2%. Based on this level of performance, award payouts were 56% above target. All of the executive officers specified in the Summary Compensation Table except for Messrs. McLure and Spalding participated for the full duration of the cycle. The cash portion of the LTIP award for the cycle ending December 31, 2007 for each executive officer is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table on page 34. The corresponding stock portion of the LTIP award for the cycle ending December 31, 2007 for each executive officer is reported in the Stock Awards column of the Summary Compensation Table.

During or prior to 2007, the Committee has established LTIP cycles with EPS CAGR goals for the three-year periods ending December 31, 2008 and December 31, 2009. The Committee and management believe that disclosure of an EPS growth target over a three-year prospective period would result in competitive harm to the Company, and, accordingly, have not disclosed the specific targets for these cycles.

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The Committee believes that the specific performance targets for these cycles is at least as challenging as the performance targets established for prior LTIP cycles and that the award opportunities established for these cycles have been calibrated accordingly. EPS CAGR targets for all cycles are in excess of 10%, and in the judgment of the Committee and management, will represent significant value creation for shareholders if achieved.

The Long-Term Incentive Plan

The Long-Term Incentive Plan, or LTIP, is intended to encourage executives to focus on long-term financial progress with the ultimate objective of enhancing shareholder value, while simultaneously promoting executive retention through its termination of employment provisions that require award forfeiture if employment terminates for any reason other than death, disability, or retirement before the end of the performance period. The LTIP, which commenced in 2002, consists of three-year performance cycles, with a new cycle commencing each year. The performance metric used in the LTIP is an internal measure of success:

For all cycles, the Committee determines an award opportunity for each participant at cycle commencement as described above. The award opportunity is denominated in dollars, and represents the award that will be earned if actual results over the three-year performance period equal the financial goal established by the Committee at the commencement of the period. The actual award will vary based on performance: if results exceed the goal, the award may increase up to a maximum of 200% of the target award opportunity; if results fall short of the goal, the award is reduced, potentially to zero. The correlation between actual award and level of performance relative to the goal is formulaically prescribed at the beginning of the cycle; neither the Committee nor any member of management may exercise any discretion to modify the award once results are determined.

LTIP awards are delivered 50% in cash and 50% in shares of CVS common stock. Although the stock is nonforfeitable when earned, effective with the cycle ending in 2007, the executive is prohibited from selling or trading the shares for two years following the grant date. All LTIP awards, whether cash or stock, must be paid by March 15 of the year following the performance year unless the executive has previously made a deferral election under the CVS Deferred Compensation Plan or the CVS Deferred Stock Plan.

The process by which the Committee establishes the LTIP financial goal is similar to and concurrent with that used to determine the annual incentive target. Any permitted exclusions from actual results for purposes of calculating long-term incentive payments generally mirror those established for the annual incentive plan but will also include any specific adjustments pertinent to EPS, as necessary. Once established, the LTIP goal remains constant throughout the three-year performance cycle and is not subject to adjustment or modification. Should an event that qualifies as a permitted exclusion occur, results are adjusted to reflect the impact of that event and documented accordingly upon the conclusion of the cycle.

The specific goal established by the Committee for the LTIP cycle concluding December 31, 2005, was ROIC of 9.50%; actual results for the period were 9.61%. All of the named executive officers (Messrs. Ryan, Rickard, Merlo, Bodine and Sgarro) participated for the full duration of the cycle. As results exceeded the financial goal, awards were slightly increased (by 2.4%) above target levels. Specific award levels for each of the named executive officers are reported in footnote 4 to the Summary Compensation Table on page 37.

The performance goal for the cycle ending December 31, 2006, was ROIC of 9.31%; actual results for the period were 9.41%. Permitted exclusions to the calculation of performance results were the same as those described above for the annual incentive plan, plus the impact of the release of certain tax reserves. After adjusting for these permitted exclusions, actual awards were 2.2% above target levels. All of the named executive officers participated for the full duration of the cycle. The LTIP award for the cycle ending December 31, 2006 for each of the named executive officers is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table on page 37.

The Committee has established LTIP cycles with EPS goals for the three-year periods ending December 31, 2007, December 31, 2008 and December 31, 2009. The Committee and management believe

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that disclosure of an EPS growth target over a three-year prospective period would result in competitive harm to the Company, so they have decided not to disclose the specific target for these cycles until after the conclusion of the cycle and payment of any awards earned. The Committee believes that the specific performance target for these cycles is at least as challenging as the performance targets established for prior LTIP cycles and that the award opportunities established for these cycles are calibrated accordingly.