CVS Caremark Corporation (CVS)

3. Motivate high performance among executive officers in an entrepreneurial incentive-driven culture by delivering higher rewards for superior performance and reduced awards for underperformance.

The Committee has sought to create an integrated total compensation program structured to balance appropriately CVS Caremark’s short- and long-term business and financial strategic goals and to provide reward differentiation correlated to results measured against those goals. The executive team is encouraged and empowered to take prudent and well-informed risks to ensure the achievement of the Company’s business strategies. Accordingly, a significant amount of total compensation for executive officers is comprised of variable or at-risk pay to align executives’ interests with stockholder interests and directly tie compensation value to performance. Base salaries for CVS Caremark executive officers are designed to meet the criterion of competitive positioning but represent only a portion of overall total direct compensation, ensuring that the focus of the executive compensation structure is the multi-faceted variable pay program.

There are three primary components to CVS Caremark’s variable pay program, each of which will be discussed in greater detail below: the annual incentive, which is determined by yearly profit performance; the long-term incentive, which is based on earnings per share (“EPS”) growth over a three-year period; and various equity award programs, which deliver value based on share price appreciation. To foster alignment of objectives within the executive officer team, consistent financial and operational goals are applicable to all.

The range of opportunity provided by each of these variable pay programs is deliberately designed to track closely with results as measured against goals. In all cases, actual awards may be reduced to zero if Company or individual performance falls short of pre-established targets. Conversely, pursuant to the variable pay plan formulas, actual awards may be significantly higher than target levels in years in which performance exceeds pre-established targets.

3. Motivate high performance among executive officers in an entrepreneurial incentive-driven culture by delivering higher rewards for superior performance and reduced awards for underperformance.

The Committee has sought to create an integrated total compensation program structured to balance appropriately CVS’ short- and long-term business and financial strategic goals and to provide reward differentiation correlated to results measured against those goals. The executive team is encouraged and empowered to take prudent and well-informed risks to ensure the achievement of the Company’s business strategies. Accordingly, a significant amount of total compensation for executive officers is comprised of variable or at-risk pay to align executive interests with stockholder interests and directly tie compensation value to performance. Base salaries for CVS executive officers are designed to meet the criterion of

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competitive positioning but represent only a portion of overall total direct compensation, ensuring that the focus of the executive compensation structure is the multi-faceted variable pay program.

There are three primary components to CVS’ variable pay program, each of which will be discussed in greater detail below: the annual incentive, which is determined by yearly profit performance; the long-term incentive, which is based on earnings per share (“EPS”) growth over a three-year period; and various equity award programs, which deliver value based on share price. To foster alignment of objectives within the executive officer team, consistent financial and operational goals are applicable to all. For fiscal year 2006, the percentage of target total direct compensation represented by target at-risk pay (short- and long-term incentives) for CVS’ executive officers named in the Summary Compensation Table on page 37 (the “named executive officers”) averaged 84%; for the CEO, it was 91%, and for the CFO, 82%.

The range of opportunity provided by each of these variable pay programs is deliberately designed to track closely with results as measured against goals. In all cases, actual awards may be reduced to zero if Company or individual performance falls well short of pre-established targets. Conversely, pursuant to the variable pay plan formulas, actual awards may be significantly higher than target levels in years in which performance exceeds pre-established targets.