CVS Caremark Corporation (CVS)

3. Recoupment

The Committee recognizes that incentive compensation provisions should be consistent with the Company’s goals of ensuring financial statement accuracy and ethical behavior. Accordingly, at its March 4, 2009, meeting, it approved recoupment provisions for all annual and long term incentive awards granted to executive officers, effective with performance cycles beginning on January 1, 2009. These provisions apply in the case of financial fraud, as determined by the Committee and confirmed by the Board, and apply to all executive officers as well as to any other employee determined by the Committee and confirmed by the Board to have engaged in financial fraud or other financial misconduct. Incorporating these provisions into the Company’s incentive programs and award agreements will provide the Committee and the Board with the right to recoup amounts paid or gains realized in cases of financial fraud or misconduct.

CVS Caremark has entered into employment agreements (the “Agreements”) with Messrs. Ryan, Rickard, Bodine, Merlo and Sgarro, which have been previously disclosed. Among other provisions, these Agreements specify payments to be made to the executives in the event of termination under various conditions. Details of payments made to the executives upon various termination scenarios may be found in Payments/(Forfeitures) Under Termination Scenarios, beginning on page 43.

In connection with the merger of CVS and Caremark, the Company also entered into a retention agreement with Mr. McLure. In exchange for Mr. McLure’s agreement to the cancellation of his prior Caremark employment agreement and his agreement to restrictive covenants in favor of the Company, the retention agreement establishes the basis of his continued employment and provides him with certain cash and equity-based retention incentives, which are set forth in the compensation tables below.

Our executive officers generally have long tenure with the Company and have provided the vision and leadership that have built CVS Caremark into the successful enterprise that it is today. The Committee believes that the interests of stockholders will be best served if the interests of our senior management are aligned with our stockholders. Providing change-in-control benefits should eliminate, or at least reduce, the reluctance of senior management to pursue potential change-in-control transactions that may be in stockholders’ best interests. The security of competitive change-in-control arrangements serves to eliminate distraction caused by uncertainty about personal financial circumstances during a period in which the Company requires focused and thoughtful leadership to ensure a successful outcome. Accordingly, CVS Caremark’s employment agreements provide certain specified “double trigger” severance benefits to the covered executives in the event of their termination under certain circumstances following a change in control. The Committee believes a “double trigger”, rather than a “single trigger”, severance benefit provision is more appropriate, as it provides an incentive for greater continuity in management following a change in control. Information regarding the provisions for the treatment of equity awards, the SERP and other benefits can be found in Payments/(Forfeitures) Under Termination Scenarios, beginning on page 43.

On July 30, 2008, CVS Caremark and Chris W. Bodine agreed on an amendment to Mr. Bodine’s employment agreement to reflect his previously announced transition to retirement in 2010. Under the amended agreement, through the end of 2008 Mr. Bodine continued to work full-time as Special Advisor to

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the CEO. In 2009, Mr. Bodine has reduced his schedule to a part-time basis until his retirement on his 55th birthday in June 2010. During this period he will work with the CEO on long-term corporate and health care services strategy. Under his amended employment agreement, Mr. Bodine will not receive any equity awards in 2009 or 2010 and his annual and long-term incentive awards will be reduced to reflect his transition to part-time status. In addition, upon his retirement, vesting of outstanding restricted stock units and stock options will occur in accordance with the respective equity award agreements. Mr. Bodine will be subject to non-compete and non-solicitation covenants for two years after his retirement.

The tables beginning on page 45 provide details on estimated payments that would be made to the executives whose employment terminates following a change in control.

The Committee reviews the severance benefits annually with the assistance of its external executive compensation consultant to evaluate both their effectiveness and competitiveness. The review in fiscal 2008 found the current level of benefits to be within competitive norms for design.

IRC Section 162(m) generally disallows a tax deduction to public companies for compensation over $1 million paid to a company’s chief executive officer and the three other most highly compensated executive officers at year end, other than the chief financial officer. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met.

The Committee’s policy is to generally preserve corporate tax deductions by qualifying as performance-based compensation that is over $1,000,000 and that is paid to executive officers specified in the tables. To this end, the Board adopted and stockholders approved the 1997 ICP and the 2007 Plan, which permit annual incentive awards and stock options (and certain other awards) to qualify as performance-based compensation not subject to the limitation on deductibility. However, maintaining tax deductibility is but one consideration among many – and is not the most important consideration – in the design of the compensation program for senior executives. The Committee considers the anticipated tax treatment both to the Company and the executive in its review and approval of compensation grants and awards. The deductibility of some types of compensation payments will be contingent upon the timing of an executive’s vesting or exercise of previously granted rights, and is also subject to amendment or modification based on changes to applicable tax law. The Committee may, from time to time, conclude that certain compensation arrangements are in the best interest of CVS Caremark and its stockholders and consistent with its stated compensation philosophy and strategy despite the fact that such arrangements might not, in whole or in part, qualify for tax deductibility. As a general practice the only elements of the multi-faceted CVS Caremark executive compensation program that currently do not comply with the deduction rules of IRC Section 162(m) are any base salaries above $1,000,000 (which presently applies only to Mr. Ryan) and certain time-vested restricted stock unit awards. However, most of these units have been voluntarily deferred to termination of service, which will preserve their deductibility under current federal tax regulations. The majority of the variable pay opportunities offered to the CVS Caremark executive team, including the annual incentive award, outstanding and future cycles of the LTIP and the annual stock option award, are performance-based and fully deductible.

Effective January 1, 2006, CVS Caremark was required to recognize compensation expense of all stock-based awards pursuant to the principles set forth in Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“FAS 123(R)”). Consequently, the Company began recording a compensation expense in its financial statements for stock options and other equity awards granted during fiscal 2006 and thereafter. Despite the accounting change, the Committee believes that stock options and other forms of equity compensation are an essential component of the Company’s equity strategy, and it intends to continue to offer options and restricted stock units as a major portion of its long-term incentives.

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