CVS Caremark Corporation (CVS)

    B. Stock Option and Restricted Stock Unit Grants

In 2008, the Committee continued its general policy of making annual stock option grants to executives and other key employees. For CVS Caremark executive officers and other members of management, stock options comprise a major component of the Company’s long-term incentive program. As in prior years, the Committee awarded stock options to full-time pharmacists and store managers, a critical employee population for CVS Caremark, with the objective of fostering retention with the Company while offering a long-term compensation opportunity that would differentiate CVS Caremark as an employer of choice.

In 2008, CVS Caremark granted stock options to three groups: the annual executive grant on April 1, 2008, which awarded 12,123,882 options to 2,306 selected executives and other key employees, including the executive officers; the annual key store employee grant on August 15, 2008, which awarded 1,322,508 options, representing slightly less than 10% of all options granted in 2008, to 10,019 full-time pharmacists and store managers with at least three years of service with the Company; and new hire grants, comprising 247,980 options awarded over the course of 2008 to 14 key new colleagues. As part of the annual executive grant on April 1, 2008, 111 of the executives and key employees received 449,927 restricted stock units.

All CVS Caremark stock options are nonqualified stock options granted and administered under the provisions of the 1997 ICP and the 2004 Caremark Rx, Inc. Stock Incentive Plan. Since 2004, the

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contractual term of all CVS Caremark options has been fixed at seven years. Authority to grant stock options and any other form of equity compensation to CVS Caremark executives and employees is limited to the Committee or a designated individual member of the Committee; no member of management or any other Company employee may authorize any equity compensation or amend the terms and conditions of any previous equity grants. The Committee has consistently approved annual equity grants, including stock options, in the first quarter of each year and has made such awards without regard to the timing of the release of the Company’s financial results for the year or the timing of the release of any other material non-public information.

In March 2007, the Board adopted a Stock Option Policy providing that any stock option granted to a recipient will have an exercise price equal to the closing price of the Company’s underlying stock on the date that the option is granted (the “grant date”). The grant date in a given fiscal year will be established in advance of the grant and will generally be based on the Company’s customary and normal grant cycle. When a grant to an existing employee is made outside the annual grant cycle, the grant date will not be coordinated with the release of material non-public information that has been or will be disclosed within thirty days on either side of any such grant date. When an executive is hired after a fiscal year has begun, the grant date will be the later of the hire date and the date the Committee approves the award.

Total long-term compensation opportunity for each executive officer, including the equity components, is considered and determined early in the year as part of the overall process of establishing performance goals and the correlating compensation framework to support the achievement of those goals. This long-term compensation opportunity is expressed as a target value with a minimum and maximum range, denominated in dollars, for each of the three components of long-term pay. At its January meeting, the Committee reviews current competitive market information supplied by the external compensation consultant and considers peer company performance results to date. In February of each year, CVS Caremark releases its prior year earnings and financial statements; at that time, the Committee assesses the Company’s performance against short- and long-term goals. The CEO presents to the Committee his recommendations for stock option and restricted stock unit awards for the other executive officers, outlining his assessment of each officer’s performance, contribution and anticipated future role within the Company. In addition, the Committee members consult with other independent directors to determine the appropriate award for the CEO within the competitive range established earlier.

In accordance with the sequence described above, at its meeting on February 12, 2008, the Committee took a number of actions:

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In July 2008, the grant date and terms and conditions for the pharmacist and store manager stock option grant were finalized. Eligibility in the program was tenure-based with an altered vesting schedule (detailed below) to promote retention. Terms and conditions mirrored those of the executive stock option grant.

The Committee established the vesting schedule for the 2008 equity awards as follows:

The number of options awarded on April 1, 2008, as part of the executive grant was determined by dividing the dollar value of options approved by the Committee at its February meeting by $8.6719, which was the value of each option as of April 1, 2008 calculated under the Black-Scholes pricing model. A similar process was followed for the pharmacist and store manager grant in August 2008. The number of restricted stock units awarded as part of the executive grant was determined by dividing the dollar value of restricted stock units approved by the Committee at its February meeting by $41.17, which was the closing price of CVS Caremark common stock on April 1, 2008.

At its March 2008 meeting, the Committee also approved restricted stock unit retention awards with a fair market value at grant of $5 million each for Messrs. Merlo and McLure, Executive Vice Presidents and Presidents of CVS/pharmacy – Retail and Caremark Pharmacy Services, respectively. These awards will vest in equal installments on the third and fifth anniversaries of the grant date, contingent upon continued employment. The Committee granted these awards in recognition of the critical importance of maintaining the strategic and tactical leadership of these executives, to ensure that the Company meets its short and long-term financial and operational goals.

The 2008 expense associated with the stock options and restricted stock units granted to Messrs. Ryan, Rickard, Bodine, McLure, Merlo and, Sgarro during fiscal 2008 and prior years is shown in the Summary Compensation Table on page 33. Additional information about the 2008 awards, including stock option exercise price, the number of shares subject to each award and the grant date fair value, is shown in the Grants of Plan-Based Awards Table on page 35.

    B. Stock Option and Restricted Stock Unit Grants

In 2007, the Committee continued its general policy of making annual stock option grants to executives and other key employees. For CVS Caremark executive officers and other members of management, stock options comprise a major component of the Company’s long-term incentive program. As in prior years, the Committee awarded stock options to full-time pharmacists and store managers, a critical employee population for CVS Caremark, with the objective of fostering retention with the Company while offering a long-term compensation opportunity that would differentiate CVS Caremark as an employer of choice.

In 2007, CVS Caremark granted stock options to three groups: the annual executive grant on April 2, 2007, which awarded 11,482,618 options to 2,126 selected executives and other key employees, including the executive officers; the annual key store employee grant on August 15, 2007, which awarded 1,345,331 options, representing slightly more than 10% of all options granted in 2007, to 10,872 full-time pharmacists and store managers with at least three years of service with the Company; and new hire grants, comprising 117,590 options awarded over the course of 2007 to 16 key new colleagues. As part of the annual executive grant on April 2, 2007, 61 of the executives and key employees received 247,588 restricted stock units.

All CVS Caremark stock options are nonqualified stock options granted and administered under the provisions of the 1997 ICP and the 2004 Caremark Rx, Inc. Stock Incentive Plan. Since 2004, the contractual term of all CVS Caremark options has been fixed at seven years. Authority to grant stock options and any other form of equity compensation to CVS Caremark executives and employees is limited to the Committee or a designated individual member of the Committee; no member of management or any other Company employee may authorize any equity compensation or amend the terms and conditions of any previous equity grants. The Committee has consistently approved annual equity grants, including stock options, in the first quarter of each year and has made such awards without regard to the timing of the release of the Company’s financial results for the year or the timing of the release of any other material non-public information.

In March 2007, the Board adopted a Stock Option Policy providing that any stock option granted to a recipient will have an exercise price equal to the closing price of the Company’s underlying stock on the date that the option is granted (the “grant date”), with a grant date in a given fiscal year to be established generally based on the Company’s customary and normal grant cycle. When a grant to an existing employee is outside the annual grant cycle, the grant date will not be coordinated with the release of material non-public information that has been or will be disclosed within thirty days on either side of any such grant date. When an executive is hired after a fiscal year has begun, the grant date will be the later of the hire date and the date the Committee approves the award.

Total long-term compensation opportunity for each executive officer, including the equity components, is considered and determined early in the year as part of the overall process of establishing performance goals and the correlating compensation framework to support the achievement of those goals. This long-term compensation opportunity is expressed as a target value with a minimum and maximum range, denominated in dollars, for each of the three components of long-term pay. At its January meeting, the Committee reviews current competitive market information supplied by the external compensation consultant and considers peer company performance results to date. In February of each year, CVS Caremark releases its prior year earnings and financial statements; at that time, the Committee assesses the Company’s performance against short- and long-term goals. The CEO presents to the Committee his recommendations for stock option and restricted stock unit awards for the other executive officers, outlining his assessment of each officer’s performance, contribution and anticipated future role within the Company.

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In addition, the Committee members consult with other independent directors to determine the appropriate award for the CEO within the competitive range established earlier.

In accordance with the sequence described above, at its meeting on February 12, 2007, the Committee took a number of actions:

Mr. McLure’s stock option award was recommended by the CEO and approved by the Committee in March 2007, after the consummation of the merger. Consistent with standing Caremark practice, the value of his 2007 award was delivered fully in stock options. It is the intent of management and the Committee that his future annual equity awards will be comprised of both options and restricted stock units in the same proportion as other executive officers.

In July 2007, the grant date and terms and conditions for the pharmacist and store manager stock option grant were finalized. Eligibility in the program was tenure-based with an altered vesting schedule (detailed below) to promote retention. Terms and conditions mirrored those of the executive stock option grant.

The Committee established the vesting schedule for the 2007 equity awards as follows:

The number of options awarded on April 2, 2007, as part of the executive grant was determined by dividing the dollar value of options approved by the Committee at its February meeting by $9.92, which was the value of each option as of April 2, 2007 calculated under the Black-Scholes pricing model. A similar

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process was followed for the pharmacist and store manager grant in August 2007. The number of restricted stock units awarded as part of the executive grant was determined by dividing the dollar value of restricted stock units approved by the Committee at its February meeting by $34.42, which was the closing price of CVS Caremark common stock on April 2, 2007.

The fair market value of the restricted stock units granted on March 22, 2007 to Mr. McLure in connection with his retention agreement (described in Section VIII – Agreements with Executive Officers, below) was $34.31 per unit. The retention award fully vests on the third anniversary of the date of grant.

The 2007 expense associated with the stock options and restricted stock units granted to Messrs. Ryan, Rickard, Bodine, McLure, Merlo, Sgarro and Spalding during fiscal 2007 and prior years is shown in the Summary Compensation Table on page 34. Additional information about the 2007 awards, including stock option exercise price, the number of shares subject to each award and the grant date fair value, is shown in the Grants of Plan-Based Awards Table on page 37.

Stock Option and Restricted Stock Unit Grants

In 2006, the Committee continued its general policy of making annual stock option grants to executives and other key employees. For CVS executive officers and other members of management, stock options comprise the major component of the Company’s long-term incentive program; for selected other managers and key store employees including store managers and pharmacists, they represent the sole element of long-term compensation. In 2006, the Committee also reinstated a prior practice (utilized from 2000 through 2003) of awarding stock options to pharmacists and store managers, a critical employee population for CVS, with the objective of fostering retention with CVS while offering a long-term compensation opportunity that would differentiate CVS as an employer of choice when compared to other drugstore chains.

In 2006, CVS granted stock options to three groups: the annual executive grant on April 3, 2006, which awarded 5,287,552 options to 1,440 selected executives and other key employees, including the executive officers; the annual key store employee grant on August 15, 2006, which awarded 1,951,373 options, representing 27% of all options granted in 2006, to 13,667 full-time pharmacists and store managers with at least three years of service with the Company; and new hire grants, comprising 90,783 options awarded over the course of 2006 to 14 key new colleagues.

All CVS stock options are non-qualified stock options granted and administered under the provisions of the 1997 ICP. Authority to grant stock options and any other form of equity compensation to CVS directors, executives and other employees is limited to the Committee or a designated individual member of the Committee; no member of CVS executive management or any other CVS employee may authorize any equity compensation or amend the terms and conditions of any previous equity grants. The Committee has consistently made grants of equity awards, including stock options, in the first quarter of each year and has made such awards without regard to the timing of the release of the Company’s financial results for the year or the timing of the release of any other material non-public information. The Committee’s practice has been to set the exercise price of CVS stock options at the fair market value (defined in the 1997 ICP as the average of the high and low trading price) of CVS common stock on the last trading day prior to the grant date. The Committee believes that this is a reasonable practice common for large public companies that is understood and accepted by stockholders. However, in light of the recent modifications to proxy disclosure requirements, the Committee has determined that the exercise price for all stock option grants made in 2007 and beyond will be set at the closing price of CVS stock on the grant date. Since 2004, the contractual term of all CVS options has been fixed at seven years.

In March 2007, the Board adopted a Stock Option Policy providing that:

1. Stock options shall be granted to executives and members of the Board at an exercise price equal to the closing price of the underlying stock on the date that the option is granted (the “grant date”), with grant dates in a given fiscal year to be established generally based on the Company’s customary and normal grant cycle. Where a grant to an existing employee is outside the annual grant cycle, the grant date will not be coordinated with the release of material non-public information that has been or will be disclosed within thirty days on either side of any such grant date.

2. In hiring an executive after a fiscal year has begun, the grant date will be the later of the hire date and the date the Committee approves the award.

3. If options are granted below the closing price on the grant date, the exercise price of unexercised options shall be increased to the closing price on the grant date; with respect to any exercised options, the affected executive or director shall compensate CVS for the value of any benefit that was received by using a date other than the actual grant date for determining the exercise price.

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4. The Committee will be responsible for oversight of this policy on stock option grants.

Prior to 2004, the Committee exclusively utilized stock options for annual equity compensation for CVS officers. For the last three years, beginning with grants made in January 2004, it has adopted a practice of granting restricted stock units to replace a portion of the annual stock options on a basis intended to provide comparable value to the executive officers and other CVS officers. The Committee believes that these combined grants provide a better balance for executive officers between risk and potential reward than a grant of only stock options, thus serving as more effective incentives for them to remain with the Company. During the restriction periods, the officers holding restricted stock units are not entitled to vote the shares but do receive dividend equivalents on the units if and when declared by the Board, in each case on the same basis as the Company’s stockholders.

Effective January 1, 2006, CVS adopted Statement of Financial Accounting Standards No. 123 (revised), Share-based Payment (“FAS 123(R)”), and began to recognize the expense associated with stock option grants in the financial statements of the Company in compliance with this standard. As part of the Company’s adoption of FAS 123(R), a comprehensive review of our option granting practices was undertaken to ensure that our practices did not result in any unintended accounting consequences. As a result, the sequence of events leading to the review and approval of the 2006 annual executive, store-based and new hire grants was amended from prior practice to ensure continued compliance and desired accounting treatment. Total long-term compensation opportunity for each executive officer, including the equity components, was considered and determined early in 2005 as part of the overall process of establishing performance goals and the correlating compensation framework to support the achievement of those goals. This long-term compensation opportunity was expressed as a target value with a minimum and maximum range, denominated in dollars, for each of the three components of long-term pay. In early 2006, the Committee reviewed current competitive market information supplied by the compensation consultant and considered peer company performance results to date. In February 2006, CVS released its 2005 earnings and financial statements; at that time, the Committee assessed the Company’s performance against short- and long-term goals. The CEO presented to the Committee his recommendations for stock option and restricted stock unit awards for the other executive officers, outlining his assessment of each officer’s performance, contribution and anticipated future role within the Company. The Committee members consulted with other independent directors to determine the appropriate award for the CEO within the competitive range established earlier.

Having carefully considered all of the information, at its meeting on February 16, 2006, the Committee took a number of actions:

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In June 2006, the grant date and terms and conditions for the pharmacist and store manager stock option grant were approved. Other than an altered vesting schedule (detailed below) to promote retention, these terms and conditions mirrored those of the executive stock option grant.

The Committee established the vesting schedule for the 2006 equity awards as follows:

The number of options awarded on April 3, 2006, as part of the executive grant was determined by dividing the dollar value of options approved by the Committee at its February meeting by $8.1341, which was the value of each option as of March 31, 2006 as calculated under the Black-Scholes pricing model. A similar process was followed for the pharmacist and store manager grant in August 2006. The number of restricted stock units awarded as part of the executive grant was determined by dividing the dollar value of restricted stock units approved by the Committee at its February meeting by $30.035, which was the average of the high and low trading prices of CVS common stock on March 31, 2006.

The 2006 expense associated with the stock options and restricted stock units granted to Messrs. Ryan, Rickard, Merlo, Bodine and Sgarro during fiscal 2006 and prior years is shown in the Summary Compensation Table on page 37. Additional information on the 2006 awards, including stock option exercise price, the number of shares subject to each award and the grant date’s fair value, is shown in the Grants of Plan-Based Awards Table on page 39.