Hershey Foods (HSY)

Have there been any other actions with respect to executive compensation since the end of 2008?

In anticipation of increases in our cost structure caused by continuing volatility in commodities and the uncertainties in the broader global economy in 2009, Mr. West and the executives reporting directly to him, collectively recommended to the Committee that they be given no merit increases for 2009. On February 16, 2009, the Committee concurred with this recommendation and approved no salary increase for Messrs. Alfonso, Bilbrey and Snyder or Ms. Buck for 2009. On February 17, 2009, based upon the recommendation of the Committee, the independent directors of the Board approved continuing Mr. West’s 2009 base salary at the same level as 2008.

Based upon the recommendation of the Committee, the independent directors of the Board approved no changes to the annual and long-term incentive award targets for Mr. West. The Committee approved no changes in annual and long-term incentive award targets for the other named executive officers.

Based upon the actions described above, base salaries and annual and long-term incentive targets (each as a percentage of base salary) for our named executive officers are as follows:

In February 2009, the Committee approved changes to the design of the 2009 short-term incentive program for all employees globally, with the exception of Mr. West, under the terms of the Annual Incentive Program of the Equity and Incentive Compensation Plan. Under this program, the One Hershey Incentive Program, a portion of all employees’ incentive award payments is based upon achievement of the Company financial metrics. For executive officers, the weighting of Company financial performance metrics will account for 75% of their target award under the One Hershey Incentive Program. The remaining 25% of the target award will be based upon achievement of up to five strategic bonus goals. The Committee recommended and the independent directors approved no changes to the structure of Mr. West’s 2009 short-term incentive target award, believing that it should continue to be based entirely upon achievement of Company financial results. The Committee determined that at the end of 2009, the funds allocated for payment of the component of short-term incentive program awards for 2009 for all employees excluding Mr. West, that are based upon the Company’s financial performance metrics may be increased or decreased up to 30% based upon the Committee’s discretion. Based upon the recommendation of the Committee, the independent directors of the Board agreed that at the end of 2009, funds allocated for payment of Mr. West’s bonus could be increased or decreased up to 30% based upon the discretion of the independent directors of the Board.

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During 2008, we renewed our Company values to ensure alignment with our mission and strategy. In February 2009, the Committee approved the inclusion of a values modifier in the One Hershey Incentive Program award calculations for executive officers, excluding Mr. West. One Hershey Incentive Program award payments for 2009, if any, will be decreased by 10% for executive officers reporting to Mr. West who do not practice and model Hershey’s values. Management recommended, and the Committee agreed to add the values modifier to the One Hershey Incentive Program to reinforce their expectation that our executive officers consistently demonstrate Hershey’s values. The Company values upon which all employees, including our executive officers, will be evaluated are “Open to Possibilities, Growing Together, Making a Difference and One Hershey” which support our mission of “Bringing sweet moments of Hershey happiness to the world every day.”

Also in February 2009, the Committee approved financial performance measures for the 2009 One Hershey Incentive Program. The financial performance metrics and weighting for the 2009 One Hershey Incentive Program are 40% based on net sales, 40% based on diluted EPS from operations and 20% based on operating cash flow. Operating cash flow is defined as cash from operations less pension contributions and commodities hedging transactions. The One Hershey Incentive Program targets for 2009 are centered around the Company’s publicly-announced financial expectations for 2009: net sales growth of 2% to 3%, diluted EPS from operations that will increase, but grow at a rate below our long-term objective of 6% to 8%, and operating cash flow generated by performance consistent with these expectations.

The Committee also approved a modified design for the 2009-2011 PSU performance cycle based upon Mercer’s recommendations. Awards for the 2009-2011 performance cycle will be based upon the following metrics: three-year relative total stockholder return, or TSR, versus the financial peer group (50% of the target award); three-year compound annual growth in diluted EPS from operations measured against an internal target (12.5% of the target award); and annual growth in diluted EPS from operations measured against an internal target for each year of the three-year performance cycle (12.5% of the target award per year). The metrics approved by the Committee for TSR provide target-level awards for achieving performance at the median of the financial peer group. Targets for our three-year and 2009 annual growth rate in diluted EPS from operations are in line with our publicly-announced financial expectations. Payment, if any, for awards will be made in shares of the Company’s Common Stock at the conclusion of the three-year performance cycle. The Committee will approve the targets for the annual diluted EPS from operations metrics at the beginning of each of the three years in the performance cycle. The annual setting of targets for a portion of the performance cycle award payment provides a stronger link between performance and payout in that the Committee can set performance targets for a portion of the award that reflect current business conditions at the start of each year. The maximum award for any participant in the 2009-2011 PSU performance cycle is 250% of the contingent target award.

The Committee approved contingent target awards of PSUs, effective February 17, 2009, under the Incentive Plan for the 2009-2011 performance cycle for the executive officers with the exception of Mr. West. On February 17, 2009, the independent directors as a group approved the Committee’s recommendation for a contingent target award of PSUs for the 2009-2011 performance cycle for Mr. West consistent with the targets recommended by the Committee, as described above.

On February 17, 2009, stock option awards were approved for Mr. West and the other executive officers representing approximately 50% of their individual long-term incentive targets. Effective February 17, 2009, the Committee also approved a special recognition grant of 2,500 RSUs to Mr. Bilbrey to be paid in shares upon vesting. The RSUs will vest in equal increments over the next four years.

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In December 2008, the Committee determined that in the future all newly hired or newly promoted PSU-eligible employees will be required to sign a new Executive Confidentiality and Restrictive Covenant Agreement, or ECRCA, as a condition of their employment. Current PSU-eligible employees, excluding Mr. West, also will be required to sign the new ECRCA as a condition to receiving the contingent target PSU award for the 2009-2011 performance cycle and all future PSU performance cycles. Mr. West was not required to sign the ECRCA because he continues to be bound by non-disclosure, non-competition, non-solicitation and non-disparagement provisions under his employment agreement. The new ECRCA prohibits the executive from: disclosing the Company’s confidential information; competing with the Company in any geographic area in which the Company does business in the domestic or worldwide chocolate, confectionery, confectionery-related snack or chocolate-related businesses at any time during the executive’s employment with the Company and for a period of 12 months following termination of the executive’s employment; recruiting or soliciting the Company’s employees for a period of 12 months following termination of the executive’s employment; or disparaging the Company’s reputation in any way. The new ECRCA replaces the existing Long-Term Incentive Program Participation Agreement but does not supersede the agreement signed with respect to the 2008-2009 PSU cycle as described on page 47.

Have there been any other actions with respect to executive compensation since the end of 2007?

The independent directors of the Board approved Mr. West’s 2008 base salary of $1 million and AIP target of 100% of base salary and long-term incentive award target of 300% of base salary in October 2007 in connection with his promotion to President. The Committee approved Mr. Bilbrey’s 2008 base salary of $475,000 and AIP target of 65% and long-term incentive award target of 170% of base salary at its December 2007 meeting in conjunction with his promotion to his current position.

On February 12, 2008, the Committee approved 2008 base salaries and incentive target levels for Mr. Alfonso and Mr. Snyder. Mr. Alfonso’s 2008 base salary was set at $500,000. His AIP target continues at 70% of base salary and his long-term incentive award target was set at 190% of base salary. The Committee approved a 2008 base salary of $485,000 for Mr. Snyder, an AIP target of 60% of base salary, and a long-term incentive target of 135% of base pay.

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These compensation levels were set to align the executives’ base pay and “pay at risk” to competitive market levels based upon input from Towers Perrin.

In January 2008, the Committee approved changes to the performance measures for the 2008 AIP to include a measure related to free cash flow. The performance metrics and weighting for the 2008 AIP are 40% based on net sales, 40% based on diluted EPS from operations and 20% based on free cash flow. Free cash flow, defined as cash from operations, excluding cash flows associated with derivative instruments, less capital expenditures and dividends, replaced EBIT as a metric. The Committee determined that in light of continued emphasis on working capital improvements and cash required for capital investments in 2008, including those associated with the global supply chain transformation program, attaining planned free cash flow is an important financial measure for the Company for 2008.

The AIP targets for 2008 are centered around the Company’s publicly-announced financial expectations for 2008: net sales growth of 3% to 4%, diluted EPS from operations of $1.85 to $1.90 and free cash flow generated by performance consistent with these expectations and capital additions in the range of $300 to $325 million.

On February 12, 2008, the Committee also approved contingent target awards of PSUs under the Incentive Plan for the 2008-2010 performance cycle for the executive officers with the exception of Mr. West. On February 13, stock option awards were approved for Mr. West and the other executive officers representing approximately 50% of their individual long-term incentive targets. The independent directors as a group, also approved the Committee’s recommendation for a contingent target grant of PSUs for the 2008-2010 performance cycle for Mr. West consistent with the targets established in October 2007, as discussed above. Metrics approved by the Committee for the 2008-2010 performance cycle are consistent with those of the 2007-2009 performance cycle: absolute growth in diluted EPS from operations measured against an internal target, and the Company’s TSR measured against the TSR of the high-performing financial peer group.

In February 2008, the Committee, or independent directors in the case of Mr. West, approved additional contingent target PSU awards in a two-year performance cycle, a 2008-2009 performance cycle. Awards were approved for all executives participating in the 2007-2009 performance cycle, including Messrs. West, Alfonso, Bilbrey and Snyder. The special awards were made to aid in retention of these executive officers as the potential retention value of the 2007-2009 PSUs were diminished in light of the Company’s 2007 financial performance. The 2008-2009 performance cycle target awards are based on achieving two-year compound annual growth in diluted EPS from operations in line with our publicly-announced financial expectations for 2008 coupled with improvement in 2009. The maximum payout from the cycle is 150% of target. To prevent possible duplication, any PSUs earned under the original 2007-2009 performance cycle will reduce the total PSUs earned under the 2008-2009 award.

As a condition to receiving the additional contingent target PSU award for the 2008-2009 performance cycle, executive officers including Messrs. Alfonso, Bilbrey and Snyder are required to sign an Executive Confidentiality and Restrictive Covenant Agreement, or ECRCA, prohibiting the executive from: disclosing the Company’s confidential information; competing with the Company in any geographic area in which the Company does business in the domestic and worldwide confectionery, snack, better-for-you, balanced nutrition and chocolate-related grocery products businesses at any time during the executive’s employment with the Company and for a period of 12 months following termination of the executive’s employment; and recruiting or soliciting the Company’s employees, or disparaging the Company’s reputation in any way. Mr. West was not required to sign the ECRCA because he continues to be bound by similar non-disclosure, non-competition, non-solicitation and non-disparagement provisions under his employment agreement.

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In February 2008, the Board also approved an amendment to the EBPP applicable to our executive officers that would reduce the lump-sum severance amount payable to an eligible participant whose employment with the Company is terminated as the result of a change in control from three-times the sum of annual base salary and annual incentive pay to two-times the sum of annual base salary and annual incentive pay. The Board and Mr. West agreed to amend his employment agreement to conform the agreement to the changes made to the EBPP. For more information about payments to our executive officers upon a change in control, see the discussion regarding Discharge Not for Cause or Resignation for Good Reason after Change in Control, beginning on page 75.

Have there been any other actions with respect to executive compensation since the end of 2006?

As described in Proposal No. 3, the Board has presented an amendment and restatement of our Incentive Plan for stockholder approval. If the amended plan, renamed the “Equity and Incentive Compensation Plan,” is approved, among other things, all of our incentive programs will be consolidated under one plan and the exercise price for all options granted to our named executive officers in 2007 will be equal to the closing price on the grant date.

On February 12, 2007, the Committee approved 2007 base salaries, 2007 AIP target levels, and contingent target grants of PSUs under the Incentive Plan for the 2007-2009 performance cycle for our executive officers other than Mr. Lenny. On February 13, 2007, the Committee made a recommendation to the independent directors as a group regarding Mr. Lenny’s 2007 base salary, a contingent target maximum grant for the 2007 AIP, and a contingent target grant of PSUs under the Incentive Plan for the 2007-2009 performance cycle. The independent directors as a group approved the Committee’s recommendation on February 13, 2007.

For 2007, the base salaries for Mr. Lenny, Ms. Arline and Mr. Hernquist were not increased above their 2006 levels in light of the Company’s 2006 financial performance. Mr. Bilbrey’s base salary for 2007 was increased to $400,000 to close the gap between his former base salary and the 50^th and 75^th percentile of the size-adjusted primary peer group and in comparison to other executive officers. Annual and long-term incentive targets for Mr. Lenny, Ms. Arline, Mr. Bilbrey and Mr. Hernquist were not increased for 2007. Mr. West’s salary, bonus and long-term targets were adjusted in connection with his promotion to Executive Vice President, Chief Operating Officer of the Company, as discussed below.

In establishing the 2007 AIP, the Committee determined that the final AIP award earned by Mr. Lenny and our other named executive officers will be based in full upon achievement of corporate financial objectives. Achievement of individual performance objectives will not be a factor in determining these AIP payments. We made this change to focus our executive officers’ efforts on achievement of quantifiable corporate performance measures in keeping with our “pay-for-performance” compensation philosophy.

The performance measures and weighting for the 2007 AIP are the same as the 2006 AIP: 40% based on growth in net sales, 40% based on growth in EPS and 20% based on improvement in EBIT margin. The targets for 2007 are centered around the Company’s publicly-announced financial expectations for 2007: net sales growth of 3% to 4% per year, minimal improvement in EBIT margin and a 7% to 9% increase in EPS.

The Committee also made changes with respect to the performance objectives applicable to the 2007-2009 PSU award. The performance objectives for the 2007-2009 performance cycle are (i) the Company’s three-year compound annual growth in EPS measured against an internal target based on the Company’s long-term financial goal of 9% to 11% annual growth and (ii) the Company’s total stockholder return, or TSR, over the three-year period measured against the TSR of the high-performing financial peer group. In making the change to add TSR as a performance measure, the Committee’s intent is to more directly align the long-term incentive compensation attributable to this PSU award to the returns obtained by our stockholders over the performance period.

The Committee customarily grants stock options to executive officers and various other management and professional employees in February of each year, two to three weeks after the release of fourth quarter and full-year results that occurs in late January. In February 2007, the Committee elected to delay the grant of stock options until after the 2007 annual meeting of

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stockholders, when stockholders will be asked to vote on the amended and restated Incentive Plan. It is anticipated that the 2007 stock option grant will be made shortly after the annual meeting and that in 2008, the Company will return to making stock option grants in February.