Green Mountain Coffee Roasters (GMCR)

Long-Term Incentives

We provide long-term equity compensation opportunities to our named executive officers as part of their compensation to provide a link between compensation and increased shareholder value. Our long-term equity compensation provides a valuable retention component to our compensation program as the executive typically forfeits any unvested portion of the long-term equity component when they depart from the Company. It is the Company’s policy that equity awards are granted on the date of the annual shareholders meeting with an exercise price equal to the market price at close of business on that date. In fiscal 2008 all of our long-term incentive awards to our named executive officers were made in the form of option grants under our shareholder approved 2006 equity incentive plan.

The Committee approves all long-term incentive awards to named executive officers. The amount of each option grant is based on a target percentage of base salary developed by the Committee after a review of Mercer’s market data and the duties and responsibilities of each named executive officer. The target percentage in fiscal 2008 was set to provide value approximately at the median level of long-term compensation opportunity. The Committee determined these targets appropriately provided more incentive opportunity through long term incentives, as opposed to short-term incentives. For fiscal 2008, the target levels for each of the named executive officers, except for Mr. Stiller, were: Mr. Blanford 150%; Ms. Rathke 80%; Mr. McCreary 80%; Ms. Brooks 60%, Mr. Sabol 50%, Mr. Lazaris 60%.

The Committee does not use a formula for determining whether long term incentive award grants will be paid at the targeted levels. It is not guaranteed that executives will receive their option grants, but the Committee expects that the executive officers will typically receive these grants provided that their performance is in line with the Committee’s overall expectations. In determining whether options are paid out at the targeted level, the chief executive officer, Mr. Blanford, provides recommendations for all named executive officers other than himself, based on a review of the bulleted factors under the heading “Compensation Overview.” These recommendations are then reviewed, discussed and approved by the Committee. The Committee evaluates Mr. Blanford performance without his participation. In fiscal 2008, the primary factors that were used in determining that grants should be paid at targeted levels were the Company’s overall performance and financial condition and each executive’s contribution to these metrics. For the named executive officers, other than Mr. Stiller, grants of stock options were made on March 12, 2008 at the targeted levels. Mr. Stiller did not have a targeted level and is discussed separately below.

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In fiscal 2008, Mr. Stiller received an option grant of 7,400 shares in recognition of his continued contributions to the Company including his continued focus on board excellence and corporate governance. In making this grant, the Committee took into account that Mr. Stiller did not receive an option grant as a director in fiscal 2008. On January 5, 2009, the Committee granted Mr. Stiller a one-time option of 20,429 shares in recognition of his accomplishment in locating an individual with the requisite talent and experience to serve as a successor chief executive officer and executing a successful transition. The Committee also recognized Mr. Stiller’s unique importance as our founder and work his work during the year as representative on behalf of the Company. The Committee expects that Mr. Stiller will only receive standard option grants that are paid to all directors in the future, consistent with its view that Mr. Stiller has completed his transition to chairman of the board.

During fiscal 2008 and in prior years the Committee has considered utilizing a more balanced mix of awards under the equity incentive plan, including restricted stock, the use of which has, according to Mercer, increased over the past three years in the market generally. The rationale behind the use of stock options at this time is the Committee’s belief that stock options have the most direct link between rewarding executives for increasing total return to shareholders. The Committee will continue to consider the use of alternate awards.

Long-Term Incentives

We provide long-term equity compensation opportunities to our named executive officers as part of their compensation to provide a link between compensation and increased shareholder value. Our long-term equity compensation provides a valuable retention component to our compensation program as the executive typically forfeits any unearned portion of the long-term equity component when they depart from the Company. In fiscal 2007 and preceding years, all of our long-term equity awards were made in the form of option grants under our shareholder approved equity plans with the exception of two inducement grants, one made to Mr. Blanford in 2007 and one made to Mr. Lazaris in 2006. The Compensation and Organizational Development Committee and vice president of human resources and organizational development discussed the use of alternative forms of equity for grant in 2007, specifically restricted stock units, and decided to continue with the use of stock options in lieu of other forms of equity. The rationale behind the continued use of stock options was the belief that stock options had the most direct link between rewarding executives for increasing total return to shareholders.

The Compensation and Organizational Development Committee approved all long-term incentive awards to named executive officers. The amount of each option grant to our named executive officers under the plan is determined based on the benchmarking analysis of the competitive equity value provided in the Mercer report and the desire by the Compensation and Organizational Development Committee to have a greater portion of incentive compensation provided through the long-term incentive program. From the Mercer analysis, we developed target percentages of base salary to be delivered as a long-term incentive award. The target percentage was determined to provide value approximately at the median level of long-term compensation opportunity but we have adjusted the percentages based on comparative internal fairness considerations. For the named executive officers, other than Mr. Stiller who is discussed separately below, grants of stock options were at the targeted levels. The chief executive officer, Mr. Blanford, provided recommendations on the level of equity grants for all named executive officers other than himself, based on a review of the bulleted factors under the subheading “Determining Compensation.” These recommendations were then reviewed, discussed and approved by the Compensation and Organizational Development Committee. In 2007, the primary factors that were used in determining the actual long-term incentive awards were the overall Company performance and financial condition and the executive’s anticipated future performance and impact on the success of our business. We do not have a formula for rating each of these considerations but look at them as a whole when we make compensation decisions with respect to annual incentive payments.

In the second quarter of fiscal 2007, we granted Mr. Stiller an option to purchase 75,000 shares which will vest in four equal annual installments beginning on the first anniversary of the grant date. This grant is reduced from the grant he received in fiscal year 2006 and was made at the same time that equity awards were granted to the external directors. The timing of the grant was consistent with previous grants and was made on a discretionary basis by the Compensation and Organizational Development Committee. In making this grant, the Committee recognized Mr. Stiller’s substantial contributions to the process of locating a new chief executive officer and his leadership which resulted in the Company being the first ever to be ranked number one on the Business Ethics magazine’s list of “100 Best Corporate Citizens” for two consecutive years in a row.

In connection with Mr. Blanford’s hire as our new president and chief executive officer and the arm’s length negotiation of his employment agreement, we granted Mr. Blanford on May 4, 2007 an option to purchase 210,000 shares. The stock options will vest in 20% installments on each of the first five anniversaries of the date of the grant, provided that Mr. Blanford remains employed with the Company on each vesting date. The five-year vesting schedule corresponds with Mr. Blanford’s five-year employment contract. The Compensation and Organizational Development Committee determined the level of the grant based on Mr. Blanford’s current total compensation package and data provided by Mercer on Chief Executive Officers’ total compensation and equity ownership levels, and determined that paying Mr. Blanford a lower base salary coupled with higher incentive opportunity (both short- and long-term incentive) was appropriate.

The Board has adopted a policy that equity awards under this program will be granted on the date of the annual shareholders meeting and the exercise price will be the market price at close of business on that date.

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Grants to named officers were delayed in fiscal 2007 pending the results and analysis of the Mercer Compensation project to ensure that appropriate amounts were allocated under the plan.

During fiscal 2007 and in prior years the Compensation and Organizational Development Committee considered implementing a long-term incentive plan as a way to increase overall compensation in a way that is consistent with the Company’s compensation philosophy by linking additional compensation to long-term success of the Company. The Compensation and Organizational Development Committee has further considered that a long-term incentive plan is consistent with market practice, according to data supplied by Mercer. The Compensation and Organizational Development Committee has also considered that a long-term incentive plan could utilize a more balanced mix of awards including restricted stock, the use of which has, according to Mercer, increased over the past three years in the market generally.

In the third quarter of fiscal 2007, in connection with the foregoing considerations and arm’s length negotiation of Mr. Blanford’s employment agreement, the Compensation and Organizational Development Committee determined that instituting a long-term incentive plan was necessary to attract and retain Mr. Blanford and keep the Company’s compensation package consistent with market practices. The Compensation and Organizational Development Committee intends to implement a long-term incentive plan in fiscal 2008, subject to the availability of shares. Under Mr. Blanford’s employment agreement, the Company has agreed that he that he will be eligible for a bonus in the gross amount equivalent to approximately one hundred fifty percent (150%) of his base salary in 2008 under the long-term incentive plan. As with the Mr. Blanford’s base salary and annual incentive target, this amount reflects the arm’s length negotiation of Mr. Blanford’s employment agreement.